The Complete Guide to Rentvesting in Australia

Rentvesting is an investment strategy for homeowners who can't yet afford their dream home but want to benefit from the growth in property market value.

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by
Erin Howell

Rentvesting is an investment strategy for homeowners who can't yet afford their dream home but want to benefit from the growth in property market value.

As property prices outstrip wages growth in many parts of Australia, many who hope to benefit from the security of homeownership, without having to sacrifice lifestyle or location are considering alternatives to buying and living in the same home. 

In this guide, we explore how rentventing works, how to weigh the pros and cons, and what you need to be aware of before you purchase a property.

Read our guides on rent-to-own, low-deposit options, guarantor loans and LMI to learn about other methods of homeownership in Australia that don’t require significant deposit savings upfront.

What is rentvesting, and how does it work?

The rentvesting investment strategy allows you to buy in an area you can afford and rent in the area you want to live in. 

Rentvesting ideally gives you the best of both worlds. You can rent a property where you want to live (close to work, family or even lifestyle choices like the country or beach) and buy an investment property with strong rental income and great growth potential.

Many opt to rentvest as a result of their financial situation—it may be too expensive or competitive to purchase in a highly-desirable suburb, yet possible to purchase in an up-and-coming suburb that’s more affordable.

The aim for rentvesting in the short-term is that an investment property pay for itself through rental income and tax return benefits. The long-term goal for rentvesting is that an investment property also grows in value— capital growth—producing equity to help you build wealth to purchase another home in the future.

If you're a millennial or just starting and want to climb onto the property ladder  in Australia, rentvesting may be a great option. Property prices have increased by an average for 6% over the last 25 years - accounting for a $60K increase on a million dollar home this year alone. Rentvesting, when done well, can help ensure you’re not locked out of the property market, and can grow your wealth. 

Why should you rentvest?

People typically discover rentvesting when they start to look at buying their first home and realise how expensive real estate is in Australia.

These people usually:

  • Don't have equity from another property that they can leverage.
  • Are struggling to save a deposit and feel like the market is growing faster than they can save.
  • Want to live in an expensive metro area to be close to their career, lifestyle, friends and family but can't afford it due to a lower deposit or income.

A property, particularly an investment, usually has two income streams: rental income, tax deductions, and tax benefits, including depreciation and negative gearing.

Owner occupiers and first home buyers get government support when buying their first property, including government schemes like the first homeowner's grant and stamp duty exemptions; these are benefits that property investors don't receive.

People who rentvest benefit from potentially earlier entry into the property market, better affordability and income from their rental property. Rentvesting can also support you in setting up a property portfolio that can benefit you financially in the long run.

For example, if you are buying the home of your dreams, your mortgage repayments may end up at $5000 a month.

If you rent a home in the same area, it may cost $2600 a month, leaving you with $2400 a month to invest in a property you buy.

Rent-to-own is an emerging trend globally and we are pioneering the charge at OwnHome. 

Here is what to expect with rent-to-own:

  • An initial 3% payment upon sale closure. It covers a 2% starter payment and a 1% initial deposit into your purchase offset. 
  • Fortnightly repayments (like you have as a renter) with about 35% of this payment contributing to your purchase offset. 

You can read more about how rent-to-own works on our blog, alongside rent-to-own vs a mortgage and rent-to-own vs rentvesting. 

Pros of rentvesting

You can live the lifestyle you want in the area you love

If the rental prices allow, you can live in an area you want to live in and not have to compromise on location or features.

This allows you to be close to your local amenities and places of interest, close to work, close to family and friends or in a bigger home than you may be able to buy.

You can enter the property market sooner.

Rentvesting allows you to enter the property market sooner, purchasing a home with a deposit you can afford and a home loan that doesn't stretch you as far as your dream home may. This strategy means you don't need to delay your home-buying plan for years while you save your deposit or grow your income. Buying in regional areas is a much more accessible entry point than the CBD and surrounds in Sydney, Brisbane and Melbourne - this strategy might help you enter the market sooner.

You can take the time to save a larger deposit.

Buying an investment allows you to take the time to save for your dream home. Another benefit is that an asset is forced savings as rentvestors will need to ensure they are making repayments on their property.

You have greater flexibility.

When you rent, you can quickly move homes or upgrade or downgrade, depending on the circumstances. You don't have the high costs associated with selling if you were to need to do so. You can mix it up and try new things, including locations, types of properties and lifestyle choices.

When you own your home, you have high seller fees and stamp duty costs that make the buying/selling process much more costly.

Building your nest egg

Because of the flexibility and the joys of rental yields, you can make your money work hard for you and allow your investment to build up wealth that can support you later in life.

Tax benefits

A variety of tax benefits are associated with owning an investment property. Things like your interest payments and the gap between your rental returns and mortgage payments can be claimed as a capital loss, also known as negative gearing.

Choose where you invest.

When you purchase a property for investment, you are able to be far more flexible with the property condition, location, layout, amenity than you are when you’re considering buying for yourself. Factors that typically drive decision-making when you purchase for yourself - commute to work, bedroom numbers, finishes and fittings - are less relevant for an investment property. You are able to be far more objective when buying an investment property: the growth profile of the suburb, typical renter needs, capital investment, expected return profile. Ultimately, you’re able to choose the location based on what works best for your cash flow and the capital growth potential in an area.

Cons of rentvesting

You are open to the uncertainty of the rental market.

The trade-off of living in the area you love is that the rent may be higher then a suburb that is affordable to buy in. Rent is higher in more affluent metro suburbs. Rising interest rates also come with increasing rent costs, which can mean that your rental payments could be comparable to mortgage repayments in a similar area. You will offset some of this with the rentvesting strategy, as your home's rent will likely increase. 

You will miss out on government grants and incentives.

If you don't have the right strategy or meet the requirements of first home buyers grants, you may miss out on the available incentives. Knowing your options and weighing the pros and cons to see what works best for you are essential.There are many different government grants across the country, check out the latest grants you may be eligible for in our blog.

You don't own your own home.

As much as you love your rental property or the area you live in, it is essential to remember that it isn't your home. This can be difficult when you form an emotional attachment to the home or see it as somewhere you want to live for a long time because, unfortunately, the homeowner can ask you to move at the end of your lease period.

Unless you’re using OwnHome, you also generally can't paint walls, hang paintings or renovate the home to make it suit your lifestyle better. Being a renter can be very restrictive.

Loss of capital gains tax (CGT) exemptions

Your principal place of residence (PPOR) carries government exemptions, including the 'main place of residence exemption', which supports if you sell your home, within six years, for a profit. Rental properties are charged CGT if they are sold for a profit. Renting is also overall cheaper as you don't have to worry about paying CGT, solicitors fees, real estate fees or other charges involved with selling a home.

Fees and costs of owning a home

Rentvesting does come with the responsibilities of being a homeowner. Renters have much flexibility and aren't responsible for the maintenance and upkeep of the structure of a home. Renters can pass issues such as plumbing, electrical and strata fees to their landlord.

When you rentvest, you take on the liability of owning a home. This includes property management fees, renovations when needed, rising interest rates, council rates and unexpected costs that arise with property maintenance.

An investment loan also carries a more significant interest rate than an owner-occupier loan.

Is rentvesting right for me?

If you’re prepared to rent for a longer  time in the area you love, and purchase in a growth-area to capture capital gains, rentvesting may be a great choice for you. Ultimately, it’s important to consider your financial and personal goals, as well as the timeline you have to achieve them when making decisions.

In some scenarios, a mortgage broker may be a great resource to discuss your personal financial situation and get impartial advice on your options. 

If you’re not ready to give up on the idea of owning a home you love in your preferred suburb, there are many other options available to you. 

Another options: rent-to-own with OwnHome. 

One option you may want to consider is rent-to-own. Services such as OwnHome are pioneering a new path to homeownership designed to help Aussies overcome the challenge of housing access and affordability.

With a rent-to-own agreement, the customer pays rent on a property for a set amount of time, during which time, they also pay towards a security deposit in the home. This gives them the option, but not the obligation, to buy the home outright. The tenancy agreement is identical to all other tenancy agreements and protects the customer the same way. 

Here at OwnHome, we're pioneering live-to-own, helping Australians live in their dream home today with the option to buy it in the future. If you still want to know more, check out how rent-to-own works or if it's a legitimate way to buy a home.

If you're looking to navigate the buying process for the first time, check out our ultimate guide to bidding and negotiation. Or, if you're looking to discover some additional options for how to get into your own home, check out some of our articles on rent-to-own vs a traditional home loan, rent-to-own vs paying lenders mortgage insurance and rent-to-own vs a guarantor loan.

 

Disclaimer: This article is intended to be general in nature and is not personal financial advice. It does not consider your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), target market determination (TMD), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
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