Rentvesting 101: Your Strategic Guide to A Growing Property Investment Trend

Can’t afford to buy a home in your dream suburb but don’t want to give up on owning one? Many Australians feel the pinch of sky-high property prices – especially in blue-chip suburbs across Brisbane, Melbourne, and Sydney (by the way, you can get detailed insights on property prices from an expert Sydney mortgage broker today). But for now, let’s demystify rentvesting, a strategy that offers a creative solution to the ever-increasing homeownership barriers. 

Rentvesting is a simple and effective solution that helps you live where you want while investing in property elsewhere.

What is Rentvesting?

Rentvesting involves renting a property in your preferred living location while owning an investment property elsewhere. It’s trendy among young people who want to get a foot on the property ladder but can’t afford to buy a home in their preferred suburb. Instead, they buy an investment property in a more affordable area and rent where they want to live, getting the best of both worlds.

Why Rentvest?

The past few years have been tough for homebuyers:

• The Reserve Bank of Australia (RBA) has increased interest rates from 0.10% in April 2022 to 4.35% in August 2024.
• Wage growth remains relatively stagnant compared with the cost-of-living increases.
• According to CoreLogic, a median household income now takes 10.3 years to save a 20% deposit for a home.

Despite these challenges, owning a home remains the great Australian dream.

On the surface, rentvesting doesn’t make sense. Why pay rent and a mortgage? But rentvesting allows investors to enjoy the financial benefits of homeownership without sacrificing their ideal lifestyle.

Rentvesting is especially common for people who want to live in more desirable (yet expensive) capital cities. You can still rent a lovely inner-city house or apartment and live in an area that provides access to better work and social opportunities while owning a home in a rural or regional area with lower property prices and strong growth potential.

The Pros and Cons of Rentvesting

Rentvesting offers several financial and lifestyle benefits, making it an attractive option for many property investors. However, it also poses several challenges, which we’ve outlined in the table below.

Pros	Cons
AffordabilityOne of the primary financial advantages of rentvesting is affordability. By purchasing an investment property in a less expensive area, you can enter the property market sooner without saving for a large deposit. There’s also a greater chance you’ll avoid paying lenders mortgage insurance (LMI) due to the lower cost of your investment property.	Market FluctuationsIf the property market fluctuates, this can impact your equity, income, and overall financial situation. It’s essential to be aware of market trends and plan for potential downturns or decreases in investment property returns.
Wealth GenerationRentvesting allows you to generate wealth through capital growth and/or rental income. Depending on your goal, you can identify potential high capital growth areas in emerging markets or invest in a neighbourhood that offers high rental yields.	Management CostsBeing a landlord comes with responsibilities. Sure, property managers can assist you with tenant selection, maintenance, and rent collection – but their services come at a cost.
Lifestyle FlexibilityRentvesting lets you live where you want, not just where you can afford to buy. That might mean enjoying the amenities and lifestyle of a vibrant capital city while investing in a more affordable area elsewhere.	Financial RisksOwning an investment property can be expensive. Once you add costs such as property management fees, maintenance, and potential vacancy periods to your rent expenses, rentvesting can significantly strain your cash flow. There’s also the potential that your investment property suffers a capital loss.
Tax BenefitsInvestment property expenses, such as property management fees, maintenance, and depreciation costs, may be tax deductible. Additionally, investors can claim tax deductions for mortgage interest payments and use strategies like negative gearing to offset taxable income.	Capital Gains TaxWhile homeowners are generally exempt from capital gains tax (CGT), the same rules do not apply to investment properties. If you end up selling, you may need to pay CGT on any increase in property value.
	No Access to First Home Owner Grant (FHOG)The FHOG is only available if you are buying or building a home that will be your principal place of residence (PPR) for a year, within 12 months of your settlement. As rentvestors live elsewhere, they won’t have access to the FHOG.

Is Rentvesting Right for You?

Whether rentvesting is the right property strategy depends on your financial situation and long-term goals. Here are a few factors you should consider when making your decision.

• Financial Stability: Assessing your financial stability is crucial before starting a rentvesting journey. This includes stable income, savings, and a good understanding of ongoing home ownership costs.
• Long-Term Goals: Consider your long-term goals. Do you plan to build a property portfolio and use the income for financial independence? Or are you more focused on purchasing your dream home? Rentvesting can be a solid stepping stone toward both of these objectives.
• Lifestyle Preferences: Consider your lifestyle needs and preferences. Rentvesting allows you to live where you want, but does that align with your current and future lifestyle? Weigh factors such as family planning, job location, and desired amenities and how they will change over the next few years.
• Risk Tolerance: Property investment always comes with risks. Do you have the risk appetite for market fluctuations or interest rate rises? Rentvesting can give you a lavish lifestyle and help you build wealth, but the costs involved may cause stress if the economy takes a turn for the worse.
• Flexibility: For many people, taking out a home loan or signing a 12-month lease is a big financial commitment. Are you prepared to do both? Managing the demands of renting one property while paying off a mortgage on another reduces your financial flexibility.
• Investment Knowledge: A solid understanding of the property market, investment strategies, and tax implications is essential. This can take a lot of time, research, and hard work. Even if you are an experienced investor, consulting professionals such as mortgage brokers, accountants, buyer’s agents, and conveyancers will make your rentvesting journey easier.
• Exit Strategy: Even the best-laid plans can change. While you may do everything right and have a well-thought-out rentvesting strategy, you should also have an exit plan in case things go wrong.

Self-Assessment Checklist – Should I Reinvest?

These 9 questions will help you decide whether rentvesting suits your situation.

1. Do you have a stable income and sufficient savings?
2. Are you comfortable with the responsibilities of property ownership?
3. Do you understand the potential risks and rewards of rentvesting?
4. Are you prepared to manage your own rental costs and investment property expenses?
5. Does rentvesting align with your current and future lifestyle preferences?
6. Are you comfortable with reduced financial flexibility due to dual commitments?
7. Do you have a plan for potential market downturns or economic shifts?
8. Are you knowledgeable about property investment or willing to consult professionals?
9. Do you have a clear exit strategy if your circumstances or the market changes?

7 Steps to Start Rentvesting

Have you weighed the pros and cons, completed the self-assessment checklist, and decided rentvesting is the right strategy? Great! Here are the essential steps you should follow to get started:

1. Assess Your Financial Situation: Take a hard look at your finances. Review your income, savings, and debts to ensure a solid foundation for your investment property. Remember to factor in stamp duty, legal fees, and insurance costs.
2. Set Clear Investment Goals: What’s your dream outcome here? Are you looking to build equity, generate rental income, or save for that perfect forever home? Get clear on what you want to achieve with rentvesting – it’ll help you stay focused and make smarter choices along the way.
3. Research Potential Investment Locations: Now comes the fun part: scouting locations! Research areas with growth potential, affordable property prices, and strong rental demand. Don’t limit yourself to capital cities—regional areas might offer hidden gems. Look at future infrastructure projects, school zones, and local amenities.
4. Consult Property Experts: You shouldn’t have to go it alone. Seek professional advice from mortgage brokers, buyer’s agents, and financial planners. They can provide valuable insights and help you navigate the property market.
5. Secure Financing: It’s time to talk money. Get pre-approval for a mortgage and explore your financing options. A good mortgage broker can help you navigate factors such as interest rates and loan terms to find the right mortgage.
6. Find and Purchase the Right Investment Property: Choose a property that aligns with your investment goals and budget. Keep an eye on location, property type, potential rental income, yield, and the property’s condition. A fixer-upper might look cheap, but weigh up the renovation costs before jumping in.
7. Rent in Your Desired Living Location: Finally, find a rental property that suits your lifestyle and budget. Whether that’s a trendy inner-city pad or a peaceful beach-side home, make sure rent is within your budget. Remember, you’ll be juggling rent and your investment property expenses – so avoid the penthouse and keep things manageable!

4 Rentvesting Tips to Boost Your Chance of Success

If you’re considering rentvesting, here are a few tips to help you make the most of it:

1. Pick the Right Property for Your Goals

Think of your investment property as a key part of your financial plan. Look for a good balance between capital growth and rental income. Low-maintenance properties that are in demand with tenants are ideal—consider well-located apartments, townhouses, or houses in growing suburbs.

2. Focus on the Location

Location is everything when it comes to property success. Target areas where the economy is buzzing, infrastructure is rising, and vacancy rates are low. Being close to amenities, public transport, and employment hubs can make your property more attractive to renters and increase its value over time.

3. Maximise Your Rental Income

A vacant property is a disaster for any rentvestor. To ensure a steady rental income, you should:

• Choose a property in a location where rental demand is always high.
• Consider making upgrades or renovations that could increase rental value.
• Regularly review rent prices to stay competitive and reduce the risk of vacancies.

4. Keep Your Property in Top Condition

Good property management isn’t just about keeping the lights on – it’s about keeping everything running smoothly. Whether you do it yourself or have a property manager, ensure maintenance is handled quickly and your tenants are happy. A well-cared-for property means happy tenants who stick around, which provides a more stable income for you.

Real-World Examples of Rentvesting

Want to know what rentvesting could look like in the real world? Here are a couple of examples to give you a clearer picture:

Building Equity While Living Where You Love

A young couple, Tom and Sharon, love living in the northern suburbs of Sydney. They can’t afford to buy a house there but don’t want to get shut out of the property market. Tom and Sharon purchased an investment property in regional NSW and continue renting in North Sydney. Over the next five years, their investment property appreciates and generates rental income, allowing them to build equity and eventually invest in another property. Meanwhile, they continue to rent in an area they love living in.

Enjoying Your Ideal Lifestyle While Growing a Property Portfolio

Pradeep, a young investor, wants to live in Fitzroy, a trendy suburb east of Melbourne. However, he doesn’t believe there is as much capital growth as in the outer suburbs. So, he continues to rent in Fitzroy and buys a low-maintenance home in the southeast of Melbourne as an investment. The house generates positive cash flow, gradually allowing Pradeep to expand his property portfolio. Meanwhile, he still enjoys the cafes and restaurants Fitzroy has to offer.

Conclusion

Rentvesting offers a smart way to invest in property while still enjoying the lifestyle you love. Sure, it comes with challenges, but the potential perks – like capital growth and tax benefits – make it an appealing choice. As with any investment, doing your homework, planning carefully, and getting expert advice are the keys to making it work.

If you’re interested in rentvesting, the first step is to explore your options for finance. A mortgage broker can help you find the best loan products, explain the financial aspects of rentvesting, and guide you through the process. Get in touch with a mortgage broker now.

FAQs About Rentvesting:

1. What is rentvesting?

Rentvesting is a property investment strategy in which you rent a property to live while owning an investment property elsewhere. This approach allows you to live in an expensive location you love while building wealth through property ownership in a more affordable area.

2. What are the main benefits of rentvesting?

Rentvesting offers several benefits, including living in a preferred location, potential for capital growth, rental income, and various tax advantages. It provides flexibility and can be more affordable than buying a home in expensive areas.

3. What are the risks associated with rentvesting?

Risks include market fluctuations affecting property values and rental income, management challenges, additional costs such as property management fees and taxes due, and potential cash flow issues. You also have to manage your rental expenses for your primary residence.

4. How does rentvesting compare to traditional homeownership?

Unlike traditional homeownership, where you live in the property you own, rentvesting lets you rent in a desirable area while owning an investment property elsewhere. This approach can offer greater lifestyle flexibility and potential financial benefits but also requires careful planning and management.

5. Can investors access the First Home Owner Grant (FHOG)?

Investors are not usually eligible for the First Home Owner Grant, as the grant typically requires you to live in the purchased property for a certain period. This means that if you’re rentvesting, you won’t be able to claim the FHOG on your investment property.

6. What are the tax implications of rentvesting?

Rentvesting can offer tax benefits, such as deductions for property management fees, maintenance costs, mortgage interest, and depreciation. Negative gearing benefits may also apply if the investment property generates a loss, which can be offset against other income.

7. What is the 6-year rule for rentvesting?

The 6-year rule allows renting your former residence for up to six years without affecting your capital gains tax exemption. If you sell the property within this period, you may not have to pay capital gains tax on the sale or rent money.

8. What types of properties are ideal for rentvesting?

Ideal properties have a strong potential for capital growth and rental demand. These include apartments, townhouses, or houses in emerging markets or growth corridors. Low maintenance is also ideal to reduce ongoing costs.

9. How can I minimise risks when rentvesting?

To minimise risks, conduct thorough market research, opt for fixed-rate loans, engage professional property managers, and consider diversifying your property portfolio. A diversified portfolio can reduce exposure to market fluctuations in a single area.

10. Is rentvesting suitable for first-time buyers?

Rentvesting can be a great option for first-time home buyers who want to enter the property market without committing to a single location. It allows you to benefit from property investment while enjoying lifestyle flexibility. However, it requires careful financial planning and a good understanding of the property market.