Rentvesting is an increasingly popular strategy where you rent a home in the area you want to live, and you buy an investment property in a more affordable location.
You can then rent out the investment and make money off it, all while accumulating capital growth.
It sounds good, but is it actually a strategy that serious investors should pursue?
As trusted property investment advisors in Melbourne, here’s our take.
Who Is Rentvesting Suitable for and Why Would They Do It?
Many people can’t afford to buy where they want to live, but they can afford to rent there!
So, rentvestors propose you do this:
Step 1, rent to suit your lifestyle.
Step 2, buy in a location with property prices you can afford so you can climb onto the real estate ladder.
Step 3, rent out that property to offset the cost.
Thanks to rentvesting, you’re now a property investor, and theoretically, you’re paying little to no more than you would just to rent. Your rental income is helping to cover either the investment loan repayments or the rent on the house you’re living in.
With that in mind, the type of person who might want to rentvest includes:
- Anyone who wants to live in an area they can’t afford – typically younger people who have been priced out of inner-city lifestyles
- Anyone who moves frequently for work or travels for long periods and wants the flexibility of renting
- Families who are prioritising a specific location and property type to live in but still want to invest and can’t afford two property purchases
The ideal rentvesting strategy involves selecting a location for your investment property where rental income will outstrip either the mortgage repayments or your own rental expenses.
7 Pros of Rentvesting
The benefits of rentvesting include:
1. It’s the Best of Both Worlds
Often touted as one of the biggest advantages of rentvesting. Live in the preferred location for your lifestyle, not just the neighbourhood with property prices you can afford. Meanwhile, get into the property market and purchase a cheaper investment that generates rental income and appreciates in value over time.
2. Enter the Real Estate Market Sooner
Rentvesting allows you to buy now, often with a smaller deposit. If the alternative is continuing to save for your dream house and watching house prices go up, it might be best just to get on the property ladder.
3. Get into Your Dream Home Sooner
Whether it’s through positive cash flow, building equity in your investment, or both, a rentvesting strategy could actually help you save more money so you can buy the home of your dreams.
If there’s a change to your lifestyle or finances, it’s much easier to move to a new rental property. There are none of the entry or exit costs associated with home ownership, and you still have your investment property on the side.
5. Wear and Tear Is No Worries
Because you’re living in a rental property, a lot of the big issues and natural wear and tear likely won’t be your responsibility to fix – it will be your landlord’s.
Of course, you are also responsible for upkeep in the property you’re renting out, so choose your tenants wisely!
6. Tax Benefits
As an investment property owner, you’re entitled to claim tax deductions on certain expenses, like loan interest, insurance, and depreciation costs.
If you’re getting less money from your investment than you’re making in rental returns, you can also offset those losses at tax time through negative gearing.
7. Capital Gains
If you have selected your investment property wisely, it will appreciate in value over time and you can sell it for a profit in the future.
7 Cons of Rentvesting
Here are some drawbacks rentvestors should consider:
1. More Flexibility Also Means Less Security
As a tenant, you can be asked to vacate the property or open up your home for inspections. Rental prices can also go up, which would require you to re-evaluate your rentvesting equation.
2. Fewer Freedoms and Less Personalisation
There are far more rules around what you can and can’t do with a rental property compared to a home that you own – from painting to pet ownership.
3. Ongoing Home Ownership Costs Still Apply
As we said above, you’ll need to pay the maintenance and repair costs for your investment property as a landlord. You might also need to cover the difference between rental income and mortgage repayments if there’s a deficit, as well as property management costs – to name a few expenses.
4. Time Is Money
Being a tenant and a landlord simultaneously can be time-consuming. If you don’t have the time to manage your investment property, that’s where property managers and those management costs come in!
5. Capital Gains Tax
So, your investment property increases in value and you choose to sell – that’s great news!
The bad news is that you’ll need to pay capital gains tax (CGT) on those profits.
6. Capital Losses
Capital gains taxes are bad, but capital losses are worse. The typical rentvesting mindset of “buy where you can afford the purchase price” doesn’t necessarily result in strong capital gains. It’s important to choose your investment property carefully because it’s the key to the whole rentvesting strategy.
7. You’re Still Throwing Money into the Rental Pit
They say that “rent money is dead money” because tenants are paying for someone else’s mortgage, not a home of their own. The difference with rentvesting is that you’re offsetting this with your own investment property and the rental income and capital growth that comes with it.
Once again, this is why your investment property MUST perform. You can seek professional advice from our buyers agent serving Ivanhoe, Templestowe, or your target suburb before making any property investment decisions.
What About the First Home Owners Grant (FHOG)?
Rentvesting strategies are often targeted at aspiring first homebuyers, encouraging them to buy an investment property rather than a starter home to live in.
The problem is, this could jeopardise your access to the FHOG when you do want to buy your first family home. This means you could miss out on stamp duty discounts or exemptions, as well as $10,000+ in government grants for purchasing a new-build home.
However, there are ways around this:
- To receive the FHOG on your rentvestment property, you must occupy the home for at least 12 months within 12 months of settlement/completion. So, you could rentvest for the first year or so before moving into the property, or you could live in the property for a year before transitioning it to a rental.
- There is also a loophole in FHOG eligibility in Victoria where rental property owners can claim the grant on a future owner-occupied home. As long as you buy your home after 1 July 2000 (tick!) and you have never owned AND lived in a property for six months or more, you can still claim the grant, as described in this Domain article.
With All That Said, Is Rentvesting Actually a Serious Investment Strategy?
At the end of the day, rentvesting is a compromise for most, and nobody wants to compromise if they don’t have to.
So, if you’re already a property owner, there’s no compelling reason to sell up and switch to rentvesting.
But, if you’re currently renting or looking for a new home, and you also want to invest, then rentvesting could be suitable.
If you’re a first-time property buyer who is prioritising getting into your dream home sooner rather than seriously investing, rentvesting could also be a solid property ownership strategy.
Choose your investment wisely and rentvesting could not only offset your rental payments but also generate modest capital growth/equity in just a few years, helping to fund that dream home.
Just keep in mind that “where you can afford to buy” isn’t always where you will find profitable investment properties, and that’s the big asterisk for rentvesting strategies.
The other drawback of rentvesting is that it’s a passive investment strategy that relies on the market to generate wealth. Serious money comes from active value-adding, i.e., renovating and developing sites to maximise capital growth potential.
What to Do If You DON’T Need to Compromise
If you have the capital and the desire to generate wealth through property, there are much better ways to use your money as an investor.
Property Analytics specialises in securing serious money-making investment properties and development opportunities for time-poor professionals.
From finding and securing high-growth investments to planning approval for keen developers, we do it all.
For more information about our approach, talk to a buyers advocate working in Doncaster, Thornbury, and all of Melbourne’s most promising suburbs.