With the cost of living soaring, demand for housing sending property prices sky-high, and wages failing to keep up, it's no wonder many young people feel priced out of the areas they wish to live.
And while they may contemplate packing their bags and moving to the fringes or regions in a bid to secure their dream pad, actually doing so is a big call. Leaving behind friends, family, lifestyles, and jobs in order to secure an affordable roof isn’t always possible, let alone preferable.
Enter: Rentvesting. It’s a strategy that appears to be picking up steam, in which those looking to get a foothold on the property ladder choose to be both renters and investors.
According to our survey on the state of Aussies' savings, it was revealed that more than one-in-seven (14.5%) property investors are 'rentvestors'.
Here’s how it works.
What is rentvesting?
“Rentvesting is a great way to enter the property market whereby you are a tenant, renting where you want to live, but you are also a property owner, investing where you can afford to buy,” Aus Property Professionals founder and director Lloyd Edge told InfoChoice.
It might sound a bit backwards, but the concept offers some notable benefits over traditional property ownership.
“The biggest benefit of rentvesting is that you are able to live where you want, as opposed to having to live only where you can afford,” Mr Edge said.
“This gives you the opportunity to live in a location that offers the lifestyle, conveniences, and facilities that you enjoy, but still be able to hold some bricks and mortar.
“And what’s even better; if your investment property is cashflow positive it may provide you with the additional cash you need to better your lifestyle or move into a more premium suburb.”
Many rentvestors are using the strategy to enter the market with the goal of eventually buying a home they want to live in, according to Mr Edge. He notes it can be a great way to fast-track a deposit and provides opportunities to manufacture equity, through renovating, for instance.
And while many people chant the mantra ‘rent money is dead money’, he points out that in the case of rentvesting, the cost of rent is essentially the cost of living your preferred lifestyle.
“Rentvesting is also very popular among young professionals who may not know where they would like to settle down long-term,” he said.
“It allows the ability to travel while still receiving income, or to do an overseas work secondment.
“If you haven’t caught the travel bug, the flexibility of being able to move cities or suburbs easily is very attractive.”
It's not just young Australians joining in on the movement. Doctors, health specialists, and fly-in fly-out (FIFO) workers are also giving the strategy a go, Mr Edge stated.
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Taking advantage of cheaper markets elsewhere
While the housing crisis has seemingly taken grip of the nation, some areas are feeling it worse than others. House prices in Sydney, for instance, rose 9% over the 12 months to October 2023, CoreLogic figures reveal. Meanwhile, those in Hobart fell close to 5%.
A buyer snapping up a median-priced house in the NSW capital would have forked out more than $1.1 million at that point in time while another purchasing a median-priced house in the Apple Isle’s capital would be up for just over $660,000.
Meanwhile, renting is typically cheaper than owning - particularly if a person doesn’t have a hefty chunk of equity to start with.
So, renting a pad in the city centre while owning another in the outer suburbs – or in an entirely different town, city, or state – could prove worthwhile.
Deduct mortgage interest and expenses
As you are now a property investor, you can take advantage of various tax frameworks that benefit investors. Essentially, any cost you incur on the upkeep of your investment property, you can deduct as an expense against your taxable income.
This includes mortgage interest, as well as the upkeep and depreciation of the dwelling itself, plus any insurances you take out such as home and contents or landlord insurance.
Deducting such costs could make the double whammy of paying both rent and a mortgage much more palatable.
The downsides of rentvesting
Rentvesting might be the best option available to many, but it also comes with notable drawbacks.
“Like any investment, rentvesting carries risk,” Mr Edge warns.
“Your returns are never guaranteed and if you find your investment property is negatively geared or loses value, you may need to dip into your savings or spend more of your income to cover the mortgage and running costs of your investment property.”
But that’s not the only risk worth considering.
Tax
First off, rental income is considered taxable income. Thus, if you make a profit from your rental property, you’ll have to pay tax on that cash.
If your costs outweigh the income however, you might be able to make the most of ‘negative gearing’. That is, claiming expenses related to your rental income – home loan interest, council rates, repair costs, etcetera – as deductions, thereby reducing the tax paid on income from other streams.
Investment properties are also subject to capital gains tax or CGT, whereas a primary place of residence is not. However you may be able to mitigate this by taking advantage of the ‘six year CGT rule’. This rule means you can treat your primary residence like an investment property - i.e. get tenants - and not incur CGT for up to six years at a time. The catch is, nowhere else can be considered your primary residence.
If you’re unsure about your tax obligations, or what they would be if you became a rentvestor, it’s probably worth reaching out for professional tax advice.
First home owner grants, schemes, and discounts
Another thing a first home buyer considering rentvesting should be aware of is that they’ll likely lose access to many government benefits by purchasing property as an investor rather than as an owner-occupier.
The Home Guarantee Scheme, the Help to Buy scheme, and various first home buyer grants and stamp duty discounts are only offered to those purchasing a property they intend to live in.
Exposure to the rental market
Another consideration worth contemplating is the fact that a rentvestor will be exposed to the rental market on two fronts: As a renter and as a landlord.
The currently tight rental market will probably continue to burden them as tenants while they also face risks associated with renting out their property. And since various property markets don’t always cycle in unison, there is the potential a rentvestor could experience the worst of both all at once.
Take, for example, a situation in which the rent on their home is hiked while their investment property sits empty amid a struggle to find tenants. Or if the property is damaged and has to be taken off the market for a time, leaving its owner covering the entirety of their rent and their mortgage repayments.
While landlord insurance can help ease the financial strain of such events, it can’t alleviate all of the risks associated with renting or renting out property.
Further, if you’re listing your property you will also need to consider property management costs if you aren’t managing it yourself. This is typically anywhere from 8 to 12% of the weekly rental price, which adds up.
Those considering rentvesting would be wise to weigh their risk tolerance before diving in head first.
Rentvesting: An example
Take a couple, Trent and Ester, two professionals who live and breathe the Sydney lifestyle, as fictional examples.
They would need a nest egg of approximately $220,000 and the means to service an $880,000 home loan if they were to buy a median-priced house in their city (around $1,100,000) with a 20% deposit, according to CoreLogic data from October 2023.
If they were to go down that path, their home loan repayments, considering a 6% interest rate and a 30-year loan term, would demand around $5,370 a month, InfoChoice’s Mortgage Repayment Calculator shows.
But what if our Sydney couple decided to buy a median priced unit in Perth (around $451,000) and continue renting in the habourside city instead?
To do so, they would need to save approximately $90,000 for a 20% deposit. After which, still assuming a 6% interest rate and a 30-year mortgage, they would face repayments of close to $2,160 a month.
On the other hand, the median weekly rent of a Sydney unit is $679, or around $2,940 a month, as per SQM Research data.
In addition, if their Perth unit could demand a median rental income, they could realise around $550 of income a week (around $2,380 a month).
At this point, the cost of their mortgage and rent would be around $5,100 a month combined - a saving of more than $200. And that’s before they bring in any potential rental income on their Perth property.
Once they get tenants into the Perth property they will also need to balance the ledger with the ongoing property maintenance costs.
So, while Trent and Ester continue to live in their preferred location, they end up spending less on housing than they would have if they bought a median-priced Sydney house. They also needed a significantly smaller deposit.
When the time comes, they might choose to sell their Perth unit for (hopefully) a profit, potentially even providing them with capital to help purchase a pad in Sydney.
Pros & cons of rentvesting
So, with all that considered, let’s go ahead and break down the major benefits and drawbacks of rentvesting.
Pros
Work-life balance remains in tact
Rentvesting makes it possible for home buyers to maintain their preferred lifestyles while taking their first steps onto the property ladder, even if they can’t afford to buy where they want to live.
Get onto the ladder sooner
By buying a property for less than they otherwise might with the intention to rent it out and realise a regular return, a rentvestor might find themselves able to enter the market sooner than they otherwise could have.
Tax benefits
Australia has a range of tax deductions that can help minimise income tax for property investors.
For example, if an investment property runs at a loss, those losses can be leveraged to reduce the taxable income of its owner. This is called negative gearing.
“When you hold an investment property, as opposed to buying your own home, you are able to claim tax deductions on the interest you are paying on the mortgage, all expenses such as council rates, strata and repairs, as well as depreciation benefits,” Mr Edge said.
Flexibility
By continuing to rent, rentvesters can upgrade or downsize to a different home or pick up and move to an entirely different city or state if needed. They could even take off on an extended holiday without worrying about continuously meeting considerable mortgage repayments.
If they lived in a house they owned, on the other hand, shifting homes would likely mean selling one property and buying another, an often arduous process that incurs expenses such as stamp duty.
Cons
Missing out on government grants
Entering the property market for the first time as an investor rather than an owner occupier likely means rentvesters forego the right to receive grants and subsidies for the purchase of their first home.
Exposure to the rental market
While rentvesters get to revel in the benefits of both renting and investing, they also must experience the drawbacks of each.
As renters, they might face a less secure housing situation or see their costs increase due to rising rents.
As landlords, they need to ensure they have the time and funds needed to ensure their investment property is maintained. They might also face a vacant property from time to time.
Risks and costs
They’ll also realise risks born from investing in property and face the costs of maintaining their investment. Such costs can include:
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Purchasing costs such as the deposit, stamp duty, conveyancing fees, and transfer fees
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Loan interest and associated fees
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Property-ownership costs such as insurance, land tax, council rates, property manager fees, repair, and maintenance costs
Rentvestors would be wise to ensure they have a stable cashflow and a healthy emergency fund so they can afford to cover expenses when they pop up.
What to consider before rentvesting
The idea behind rentvesting is typically that the property purchased increases in value as the years go by. If that doesn’t eventuate, it might not make much sense.
“If you choose to rentvest, I would advise to invest into areas with multiple growth drivers,” Mr Edge said.
“It is important to buy an investment grade property which is very well located and in demand for tenants, otherwise you may find yourself stuck with an investment property that isn’t working for you.
“And if this happens you may not be able to afford where you want to live either.”
At the end of the day, you should consider your individual financial position, as well as future ambitions, before opting to become a rentvestor. Be sure to understand how investing in real estate works, the costs involved, and both the benefits and drawbacks of the property market.
Article originally written by Jacob Cocciolone on 6 July 2019, updated by Brooke Cooper on 27 November 2023
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