What is rentvesting, and how does it work?

Property prices in Australia’s capital cities can be outrageously high. It can be harder to get on the property ladder because you need to save for a bigger home loan deposit while forking out thousands a month on mortgage repayments. 

But there is another way to become a home buyer and build home equity: rentvesting. This property investment strategy has taken off among young buyers recently as a fantastic way to get a foot in the door. 

However, rentvesting has pros and cons to consider. Here’s what you need to know about rentvesting, and how it could work for you.

Rentvesting is a home-owning and property investment strategy. Essentially, it means you buy a more affordable property in another market while renting your primary residence in a place more aligned with your lifestyle. You act as a landlord to your rentvested property. 

For example, you live and work in Sydney but rentvest a small property in Western Australia. This way, you become a property owner and enjoy the perks of living where you want.

Rentvesting is a process similar to buying any other investment property in Australia. 

1. Set a budget. Determine your home-buying price range and borrowing power.
2. Compare property markets. Have a look at property markets with high capital growth potential that fit your home-buying budget. A real estate agent can help you compare suburbs that might work for you.
3. Compare investment home loans. Compare investment home loans so you get an idea of what interest rates, fees, and features are available to you. A mortgage broker can help you with this step. When you find one you like, apply for a home loan preapproval. 
4. Make an offer. If you find a property you’re keen to rentvest, make an offer or put your hand up at auction. A solicitor can help you keep emotions off the table and advise you on the best moves. 
5. Home loan settlement. If your offer is accepted, congrats! Now you just need to go through a home loan settlement, pay stamp duty if necessary, and hand over the deposit. 
6. Get a property manager. Since you’ll be the new landlord of this rentvested property, you’ll need a property manager to act on your behalf. You may also need to pay strata fees, depending on the property type.

Rentvesting combines the perks of renting your home and owning property.

• Flexible living arrangements. Not owning your living space outright means you can choose a home that works best for your lifestyle. Plus, you’re not the master of your domain – if the plumbing breaks or the cockatoos eat your flyscreens, the person in charge is just a phone call away. 
• Capital gains. By owning property, you could be tapping into a serious source of wealth through capital gains and home equity. Property values tend to rise over time, so if you’re careful about where you invest, you could enjoy a nice appreciation. Your equity can be used in many creative ways, too – including buying your first home later on.
• Rental income. Charging rent for your investment property can be a great source of income. For example, your rental income could cover your investment mortgage costs and even your own rent.
• Affordable investment opportunity. Because you’re not buying where you intend to live, you have many more property markets to choose from and a wider selection of affordable prices. This is a popular tactic for city-dwellers buying then renting properties in regional Australia where prices (and thus home loans) can be more reasonable.
• Tax deductions from rental expenses. You can claim many rental expenses on your taxes, from the interest repayments on your mortgage to council rates and property management fees.

On the other hand, rentvesting also means you could cop the worst of renting, investing, and being a landlord. 

• Insecure housing. Not owning your living space outright means your housing situation is potentially insecure. If your rent goes up or your landlord decides not to renew your lease, you face the costs and inconvenience of moving.
• Home loan costs. Rising home loan interest rates make taking out a mortgage a daunting prospect these days since it limits your borrowing power. You’ll want to carefully compare home loans, talk to a mortgage expert, and consider what you can safely afford before applying. 
• Ongoing home-ownership costs. Being a landlord means paying the bill for every burst water pipe and cockatoo-damaged flyscreen, not to mention council rates, property management fees, and strata fees. Consider how much cushion you have in your finances to absorb these costs. If they stack up too quickly, you risk negatively gearing your property.
• Capital gains tax liability or potential capital loss. While property prices generally trend up, it’s not always the case. A badly-located property could lose value over time, giving you negative equity and, ultimately, a capital loss if you sell. Conversely, if properties in your area boom too much, you could be on the hook for a hefty capital gains tax. 
• Miss out on first home buyer grants. Because you’re not an owner-occupier, you’re ineligible for first-home buyer grants. These schemes can bring down the cost of buying property, so weigh up whether you need the extra help – you might need to get your parent or legal guardian to become a guarantor instead.

Like all major financial decisions, whether to rentvest will depend on your goals and circumstances. 

If you enjoy living in your current area but can’t afford the prices, buying somewhere more affordable and renting it out can be a great way to get a foot in the property door.

However, if you’re looking for a more permanent home and want to avoid the expense and hassle of being a landlord, then rentvesting might not work for you.

It’s all about balancing your plans and budget – research can help fill in the rest. 

Keep updated with the latest in Australian property through our home loan news hub. Compare investment home loans below.