Rentvesting is “the most common new property buying habit” among those looking to enter the property market. At least it’s described so in L.J. Hooker’s 2021: The (new) Australian Dream white paper. And according to Google trends, rentvesting has tripled in search requests. More and more folks are keen to learn about this investment strategy and how it works. But what exactly is rentvesting and what must you do to do to become a rentvester? Rentvesting is an attractive option for those lucky enough to get a foot on the increasingly difficult property ladder. In theory, it sounds good, but is it feasible at a time of rising interest rates? Just what type of investor is a rentvester? What are the pros and cons of simultaneously renting and buying? Before we answer all that, we must explain more thoroughly what rentvesting is. Then we’ll see if it’s a good idea.

What Is Rentvesting?

Rentvesting is a new term that describes an investment strategy of simultaneously renting one property while buying another. Or rather, you lease a home to live in while renting out the house you’re buying. You aim to strike a balance whereby the investment property is paid off by the rental income. Of course, this is by no means a sure strategy. Likewise, nothing is new about the concept. Many an entrepreneur has built an impressive property portfolio doing exactly this. But the new iteration of this process is geared toward young professionals seeking to balance their lifestyle and property ownership. If a young professional is keen on a city lifestyle but cannot afford to buy, they compromise. Suppose they want to be close to work and live near their social circle. They wish to avail themselves of all that the city lifestyle offers. But they can’t afford to buy there.

Assuming they wish to enter the property market and not spend dead money on rent, they have two choices. Keep in mind that they cannot afford to buy in the desired area, but they can afford to pay the rent. They might follow the traditional route of working hard and paying off the house in an area they can afford. This means living in that house, travelling a long distance to work, and missing out on their preferred lifestyle. In other words, they compromise, putting their ambition to own their first property before their chosen lifestyle. The other route is that they borrow money for a property they can afford while renting in their desired location. Their income is balanced between covering the rent and buffering the rental income, which goes towards paying off their house. To use the real estate market pitch, they get the best of both worlds.

Is Rentvesting As Breezy As It Sounds?

Lifestyle is the key to the concept of rentvesting. But it’s a little more than that. The average home in Sydney, say, is around $1 million. We are hearing about falling prices linked to rising interest rates, but that’s not likely to tilt the pail much. Interest rates might freeze prices, but they won’t suddenly make the prime areas readily affordable to more buyers. Borrowing is harder for buyers. Yet, as we’ve found during COVID, regional areas are likewise rising in cost. The pandemic incentivised professionals to move to regional areas. Fear of contagion, along with an obvious desire for cheaper housing and more, fueled the migration. However, city population growth factors into the picture as well. Cities are growing; what’s regional today will become growth areas tomorrow. Take into account that regional house prices are on the rise. City living and the greater city locations are just flat-out expensive.

The rentvestor must choose a viable location. This doesn’t just mean finding an affordable property—the area must ensure the property’s continuing occupancy. Its remoteness cannot be such that unemployment is an issue. Gambling on buying in a mining town might backfire. Similarly, investing in a property in another fad area may defeat the purpose. The future value of the property must be greater than what the investor paid. In other words, the location must offer growth prospects while being remote enough to be affordable. As it’s their first property, chances are the investor will sell it after it’s paid off. Therefore, the property must be capable of yielding enough profit to allow them to improve their situation. Yet, the investor is already paying high rent for city living. If city rents rise but the rents in their property’s area remain static, then they must account for the shortfall.

The Rentvestment Mindset

A rentvestor is taking on a precarious debt balancing act. Nobody would consider such a large sum if they lacked marketable skills. Glenn is a youngish Melbourne tradie who’s never been without work. He’s $100k shy of paying off his $800,000 home in Melbourne’s outer suburbs. In the ten years that he’s been paying off his house, he’s juggled all manner of finances. We asked whether he’d consider renting to improve his family’s lifestyle. Both he and his wife are working and could likely afford steep rent. Meanwhile, their house would be sure to have tenants and a decent rental income. He admitted, “Yes, we’ve thought about it.” But he and his wife decided, “It would be too much of a headache.” Glenn and his wife enjoy the city and would prefer to be closer to it and its temptations. But it wouldn’t be worth the bother.

The sort of person who is motivated and desirous enough to work for “the best of both worlds” is disciplined. Their choices will be suited to their circumstances and should be made according to their temperament. They don’t want to be the fickle kind that loses their rag one day and quits their job. They’re committed to their career and aren’t prone to making impulsive decisions. The house is unlikely to be the only debt they’re engaging in. Being the rentvestor type, they’re drawn to lifestyle accoutrements. They’ll likely have credit cards, be paying off a car, and be keen on travel. There is a fine line between “good debt” and “bad debt,” and they must be able to maintain that. The housing debt will be the biggest debt that they take on in their lifetime. Yet, unlike the obligatory iPhone and BMW, the value of their house will appreciate.

Rentvesting Pros

• With rentvesting you get flexibility. You won’t be locked into an owner-occupied mortgage. If you want to upsize you can.
• You aren’t limited to where you can afford to buy. But then again, you want to think about that. You don’t want to compromise the financial advantages of buying lower. Nevertheless, you don’t have to buy in a remote area. It all depends on what your ability to generate income.
• By investing in a cheaper market you’ll have access to various tax breaks and concessions.
• The income from your rental property can go toward paying off the property and your rental costs.
• Your property might increase in value and yield capital gain profits down the road.
• Tax deductions might generate positively geared cash flow.
• The dead money that you pay on rent is reclaimed by the rental income from your investment property.

Rentvesting Cons

• You are both a tenant and a landlord. You risk a rise in rent, being evicted, or the owner selling your rental property. You’re free from the hassle of covering maintenance expenses where you rent. However, if your tenants are feral, you’ll have to cover the maintenance of your investment property.
• As a landlord you’ll be responsible for fees to your leasing agent, assuming you appoint one.
• You will have a capital gains tax liability. If you choose to sell your property you’ll be liable for tax on any profit.
• Potential capital loss. Your investment might lose value and force you to sell at a loss.

Conclusion

Rentvesting is certainly an attractive proposition for anyone wanting the best of both worlds. If you wish to remain in the city but still enter the property market, it offers you the chance. Sure, it’s not for everybody, but those who are lucky can make it work for them. Presently, only 80% of home seekers can afford to enter the market. If you’re one of those, then this is an exciting strategy to capitalise on that opportunity. Admittedly, it comes with checks and balances. While you get the best of both worlds, you may experience the pain of one of the other worlds. After all, you’re living in both. If you’re embarking on a rental journey, then seek sound investment advice. If you’re buying your first property or selling, Perfect Agent can help. We’ll introduce you to the best real estate agent for you. Contact us. Our service is free.