Rentvesting - what is it and what are the pros and cons?
For many, living close to the city, in a prestige area, or beachside is an integral part of their lifestyle, but homeownership in their preferred area is often beyond their means.
For others, the need to be on the move for work or because of their lifestyle seems to limit their property choices to short-term rentals.
In either case, the dream of home ownership often gets relegated to a distant, somewhat unreal future. But it needn’t be that way.
Enter rentvesting, or the art of renting a home while investing in property.
The concept isn’t new, but with inner-ring and metropolitan home prices having shot up over the past few years, the practice is becoming more and more common, especially among younger people eager to get a foothold on the property ladder.
How does rentvesting work?
Rentvestors choose to pay rent for the home they live in but, at the same time, invest in property elsewhere.
This “best of both worlds” strategy can work well because you get to live in your preferred location while your investment property grows in value and is (at least in part) paid off by your tenants.
A savvy investment could lead to significant future financial gains and may even provide you with enough equity over time to expand your investment portfolio or start to think seriously about buying your own home.
It’s true that rentvesting requires a certain shift in perspective about home ownership. After all, Australians have traditionally bought their own home before investing in other properties. But things are changing, and rentvesting is becoming more and more common, especially among younger generations and first-home buyers.
What are the advantages of rentvesting?
There are quite a few upsides to rentvesting, provided you choose the right investment property in a high capital-growth area and take a long-term view of your property journey.
The main advantages of rentvesting include:
- being able to live where you want while you own where you can afford
- having long-term potential for capital gains on your investment property
- using your rental income to pay off your mortgage, at least in part
- enjoying tax deductions for depreciation and running costs on your investment property
- feeling the security of ownership. If things go pear-shaped, you still have a roof over your head or an asset to sell
- having the potential to receive short-term financial gain from positively-geared properties.
Are there disadvantages to rentvesting?
Rentvesting might not suit everyone, and there are certainly some factors to consider if you are thinking about this strategy:
- It can affect your eligibility for government help schemes for first-home buyers.
- Investment properties attract capital gains tax when you sell them.
- Being a tenant and a landlord can mean a lot of extra costs and paperwork, although having an expert property manager will save you a lot of hassle.
- You’re still paying rent. It can be hard for some people to get past the idea that paying rent is like throwing money down the drain.
- Not all investment properties are a good investment.
A few final words on rentvesting
It’s becoming very popular, and it has a lot of advantages, but rentvesting might not be right for you, so it’s important to research carefully and get expert advice if you are thinking of becoming a fully-fledged rentvestor.
It’s paramount to find an investment property in an area that promises long-term capital growth. It’s also vital to find a property that you can afford to pay for, even during periods of vacancy.
Understanding the ongoing costs associated with owning a rental property is an essential part of any property investment. It’s not just the interest on your mortgage but also things like maintenance, rates, insurance, and management fees that you will need to keep in mind.
Research the markets and draw on the expert knowledge of your real estate agent, who will be able to point out potential growth areas and provide you with robust data to help you pinpoint the best property for your circumstances.
Finally, before making any decisions, be sure to seek professional financial advice to find out if rentvesting is the right option for you, and don’t forget that if you do become a rentvestor, an experienced property manager will be your number one ally.
Other buying, selling and investing articles and resources
Guide to property investment success in NSW
Selling a house or apartment in NSW eBook
Buying a house or apartment in NSW eBook
