Is Rentvesting Right For You?

personOtto Dargan access_timeMarch 12, 2019

If you’ve been looking into options for home ownership or property investment, rentvesting may have been a term you’ve come across.

There has been a growing trend in rentvesting across Australia, particularly with millenials and first home buyers looking to get onto the property ladder.

Even with the real estate market cooling down in recent months, young Australians often feel like they’ve been priced out of the property market.

For instance, the median house price in the popular capital cities Sydney and Melbourne are $925,000 and $720,000, respectively.

Rentvesting offers a viable solution for people who can’t afford to buy a property in the suburb they want to live in.

How does rentvesting work?

This form of investment involves purchasing a property in a location you can afford while renting in an area you wouldn’t be able to afford.

Essentially, a rentvestor is both a renter and a landlord.

For example, you might want to live in a capital city or in a popular family suburb where property prices are incredibly high.

Instead of buying a home in your desired location, you would rent and use your savings to invest in a property elsewhere.

Being a rentvestor vs being an owner occupier

You might be weighing up the pros and cons of being a rentvestor compared to being an owner occupier.

One of the biggest advantages of being a rentvestor is the ability to explore areas across Australia when trying to find an investment grade property within your budget.

When looking at less expensive properties, you’ll be able to put down a smaller deposit and also pay less in mortgage repayments.

In areas with a high rental yield, your rental income might be able to entirely cover your mortgage repayments.

However, in the case that it doesn’t, you can benefit from negative gearing.

As an investor, rather than an owner occupier, you can claim interest payments and other fees incurred as tax deductions.

Rentvesting and owner occupancy both allow you to build equity.

However, being an owner occupier could restrict your options in terms of where you want to live and the lifestyle you want to uphold.

In the case that you can afford to buy a property in the area you want to live in, it might make more sense to be an owner-occupier.

To some extent, the saying “rent money is dead money” still applies.

You won’t have a tenant covering your mortgage but you also won’t have to be paying rent to anyone else.

Furthermore, if you’re a first home buyer, you might not be eligible for first home buyer schemes and grants if your first property is an investment.

For instance, the First Home Buyers Assistance Scheme in NSW requires you to live in your property for at least six months.

Hence, there are some cases where rentvesting won’t make sense.

Being a rentvestor vs being a renter

If you’re weighing up rentvesting and renting, the pros and cons are slightly different.

Both rentvesting and renting allow you the freedom to move locations with minimal restrictions.

However, with rentvesting, buying a property requires you to pay a 10-20% deposit as well as an entire host of fees such as stamp duty, Lenders Mortgage Insurance (LMI), legal fees and bank fees.

With renting, you could put this money into other investments.

Renting also comes with the benefit of being able to rely on your landlord for the maintenance of where you’re living.

As a rentvestor, you’re responsible for the maintenance of your investment property unless you decide to hire a property manager.

The main disadvantage of renting is of course the inability to build equity on a property.

On top of this, you won’t have the stability of having your own property.

Even with property values currently in decline, property remains a relatively stable investment option that you can be almost certain will lead to capital gains in the long term.

Is rentvesting the best of both worlds?

In short, rentvesting does seem to be the best of both worlds.

Not only do you reap the freedom of renting, you’ll know you have a long-term investment that you can fall back on.

However, you do have to consider your unique situation to see if rentvesting would be beneficial or even suitable at all.

With each state having different regulations, it could be more or less beneficial for you to rentvest depending on your location.

Guest post: James Pointon is a commercial manager at OpenAgent.com.au, an online agent comparison website helping Australians to sell, buy and own property.