It’s the ultimate Aussie dream to own a home that’s relatively closer to the city and supports a lifestyle you’re used to.
However, the recent spike in interest rates and property prices across the country may have put a spanner in the works. Even as you save up for a deposit, property values in your desired location seem to be outpacing your earnings.
Nonetheless, many potential home buyers with a significant cash flow are keen to climb the property ladder with some intelligent financial forecasting. If rentvesting as an investment strategy matches your circumstances and you’d like to take the plunge, this page will help you get a fix on the nitty-gritty.
Understanding Rentvesting Strategy
By paying rent for a home that matches their lifestyle and at the same time purchasing investment property elsewhere, home buyers are strategically moving ahead with their property plans. This strategy of renting and investing, also called rentvesting, allows you to purchase an investment property at a place you can afford while living on rent where you want to live.
Why Do People Rentvest?
Understandably everyone wants to live in their own home at one point.m However, the current climate with spiralling house prices has made owning property more challenging.
Even if your relevant credit provider approves your application, heavy mortgage repayments may result in severe financial stress, especially in the first few years of your home loan term.
You could consider one of the following options:
- Take out a huge home loan and proceed with your plans for an owner-occupied property in your desired location.
- Look for affordable housing in another location.
- Consider rentvesting. For example, you do the next best thing since you cannot afford a 3-bedroom home in a Melbourne inner-city suburb. You purchase a property in a more affordable suburb and earn rental income from it.
Rentvesting is a viable option that helps you cover your rental payments and maintain your lifestyle. Moreover, you also get to save up for your future home while enjoying the best of both worlds.
Take, for instance, another possible scenario: you have a great rental property and are not ready to move. Or, you’re pretty happy living at your small inner-city apartment though you’ll want to upgrade in the future. Suppose your investment property is profitable; you could use that income towards your home rental payments.
Rentvesting in Another State or Territory
Many home buyers find rentvesting an excellent opportunity to enter the market – even if it means buying an investment property instead of an owner-occupier objective.
In addition, you can even make a property investment outside your home state, territory or city for rentvesting. You can invest in upcoming suburbs and more affordable neighbourhoods around city limits.
If you live in a major city, buying an investment property in a regional or smaller city can help you save a lot of money.
“At the same time, don’t rush into property investment without doing your due diligence. While smaller cities with more affordable options may seem appealing for rentvesting, take a step back and check the potential for finding tenants easily, the rentals, etc., in the neighbourhood,” advises Graeme John, Head of Growth at Joust.
When Is Rentvesting Suitable?
Rentvesting puts you in control of investments while navigating your financial situation and record-breaking property values. Here are some scenarios where rentvesting can be particularly helpful:
1. High Differential
Rentvesting is suitable when your monthly home loan repayments are significantly higher than your rent payment.
When raising a family in a particular area is essential. Single parents and even family households may find it helpful to rentvest for the present while living on rent at the desired location and to upgrade later.
Millennials with city jobs often have limited choices in the costly inner suburbs. Likewise, many young singles prefer the lifestyle they have in their present rental accommodation. Rentvesting is ideal for individuals keen to buy an investment property and earn rent money for a robust financial future.
Rentvesting in Practice
Let’s understand how you can Restvest with an example:
Oliver is a hard-working, 28-year-old IT expert living in Melbourne with his family.
He has long dreamt of owning a home of his own. But property prices in Melbourne are extremely high, and saving for a deposit seems like an impossible task. After all, the median house price in Melbourne stands at $918,350 today.
Oliver has heard about rentvesting and decides to give it a try. After understanding the concept and the basics, he is ready to move forward with the following plan.
He begins by researching the most affordable and well-connected suburbs in Melbourne and identifies Melton as an ideal choice with a median house price of $410,000.
Oliver then executes his Rentvesting strategy with these steps:
Saving the Deposit
Oliver understands that he needs to save a minimum of 20% as a deposit toward the home. This corresponds to $82,000 for the house Oliver has identified as a possible investment option in Melton. He wants to fulfil his goal in 12-24 months through a monthly saving target of around $3416 - $6833 (assuming Oliver has zero savings). The remaining $328,000 is funded by a home loan from a financial institution.
For most people, following the 50-25-25 financial strategy can help save for a deposit.
Under this, you divide your monthly income into 3 buckets:
- 50% of the income goes towards basic monthly utilities.
- 25% of the income is used for lifestyle-related expenses.
- 25% of the income is saved, no matter what.
Structuring the Loan
For a sound restvesting strategy, this is what an ideal loan structure would look like:
- Acceptable debt: This should be between 10-80%. In many cases, anything more than this can trigger the need for a lender’s mortgage insurance.
- Variable rate: Opting for a variable interest rate will give the flexibility of additional repayment.
- Offset account: Setting up an offset account (and even multiple offset accounts sometimes) will help you save significant interest payments.
- Repayments: Interest-only repayments for a certain period (first 5 years of the loan) will help you as tax deductibles. Principal payments are not tax deductible.
Appointing a Property Manager
With the loan structure ready and disbursed, Oliver is now prepared to buy the property and make the agreement formal. But he does not want to self-manage the property, as it would be a hassle. Hence, he appoints a professional property manager to oversee the day-to-day operations, find tenants, collect rent, and maintain the property on Oliver’s behalf.
Managing Rental Yield and Interest Rate
The property manager that Oliver hires helps him to get the right tenant and manage a yearly rental yield of 5%.
This amounts to:
Rental yield = 5% of $410,000 = $20,500
The annual interest rate payable to the bank is 4.5% of $328000 = $14,760
Surplus income = $20,500 - $14,760 = $5740
Using the Surplus
Oliver is now in a much more comfortable boat than he would have been compared to buying an expensive house in the heart of Melbourne. He now has an additional income of $5740, which can help him to make extra loan repayments and reduce the interest payments even further. Additionally, he may also use this money to:
- Pay the property manager
- Undertake the cost of maintaining the property
- Save for the deposit of a second investment property
Important to Note:
Rentvesting is a great way to get into the property market without breaking the bank. But it is important to note that this is just a hypothetical example, and the actual numbers will vary from one person, location, and property to another.
There may be many variables that Oliver did not consider while formulating his strategy. Hence, speaking to a professional financial advisor before making any major investment decisions is always advisable.
Rentvesting Vs. Buying
Rentvesting is a preferred investment strategy for potential home buyers who can’t yet afford to buy a home of their choice. For instance, a house close to a swish suburb or city centre.
Instead, they become property investors and use their rental yield to pay their monthly rentals while building a corpus for a future home. Our free-to-use Rent vs Buy Calculators and other calculators will help you determine the property options that work better for you.
For a quick rentvesting vs buying comparison, assume the following:
- You want to buy a house in a Melbourne suburb, where average prices hover around $800,000. If you pay a deposit of $160,000 and a 5-per cent interest rate, your monthly principal and interest repayments would be approximately $3,520.
- Renting in the same area may cost you $2,200 a month.
- So, with a reasonable $1,320 to invest each month, rentvesting can help in wealth building to buy your dream home when you feel the time is right.
Rentvesting may also be ideal if your job involves plenty of travel or you like to take off on long journeys every so often.
The rentvesting route can benefit you in several ways, including equity building and capital growth, while bypassing exorbitant home loan repayments. In addition, the mortgage interest, maintenance costs and other investment property expenses qualify for deductions from your taxable income.
You May be Ready to ‘Buy’
On the other hand, rentvesting implies a longer wait to live in a home of your choice. Moreover, it nets you in a continuous cycle of renting and paying a mortgage, not forgetting the prospect of moving home every few years.
Likewise, if you feel that your rental payments are dead money, and you’d instead invest in other areas, i.e., the stock market. These experiences can be incredibly frustrating if you’re chasing your dream to live in your own home.
If you think you’ll be happier giving up the fast-paced suburb for a more affordable and relaxed suburban life, it’s another sign that you may be ready to buy your own home.
Whether to rentvest or buy? Ultimately, it’s a decision you must take based on your financial situation, objectives and own circumstances. Do your background research and, if needed, seek professional advice to understand the long-term implications of your decision.
Rentvesting Pros and Cons
Weighing the odds carefully can help you decide whether rentvesting suits your objectives. Here are some pros and cons of rentvesting to help you plan your move.
Pros of Rentvesting
Sustains Your Present Lifestyle
Depending on rental property prices, you can live in a home without having to trade off location or features for costs. Moreover, you can rest easy without the stress of hefty long-term home loan repayments.
Similarly, you can use your rental income for your mortgage repayments and/or your rental payment without financial stress.
Rentvesting is an excellent step in developing your investment property portfolio. It enables a firm footing on the property ladder. In addition, you can enter the market with a smaller deposit, start building equity and chase capital growth instead of waiting for several years.
As and when your property value shoots up, you could sell it and make a quick profit. Rentvesting can thus empower wealth creation that’ll help you save up to buy your own home.
Provides Tax Benefits
You may be eligible to claim tax deductions on the interest payments on your property investment loan. Likewise, investment property expenses, including rental expenses such as insurance and advertising, and depreciation costs could be eligible for tax deductions.
Even property management fees are tax deductible. In this way, at the end of the financial year, you should be able to recover the costs of managing your property asset.
Low Maintenance and Scalable Costs at Your Rented Home
Rentvesting gives you the flexibility to move homes quickly, depending on your circumstances. For example, if you get a job in a new city, land a higher-paying job, lose a job, or want to travel around the world before settling down. Furthermore, rentvesting spares you the hassle of high upfront costs, stamp duty etc.
Likewise, being a tenant, your landlord will, in all probability, have to look into repairs and other maintenance jobs. These rates are generally higher in cities and inner suburbs compared to the smaller places where your investment property is located.
Supports Your Investment Decisions
While plenty of factors may influence where you set up your primary residence, you can use your good financial judgment to zero in on the best place for property investing. By setting long-term goals, i.e., tax deductions, capital growth, and duplicate rent, you could look at property options that are a perfect fit for rentvesting.
Moreover, rentvesting can help you enjoy more margin in your finances as your investment property value increases and your tenant pays the rent.
Cons of Rentvesting
Not Eligible for First Home Owners Grant
If you opt for rentvesting, you will not be able to apply for the First Home Owners Grant. The grant, which ranges between $7,000 and $29,390, caters to eligible first-time home buyers who intend to be owner-occupiers of their homes for the first year.
While your intent may be to save on interest repayments, some investment home loans come at higher interest rates. This would defeat the very purpose of your investment.
Capital Gains Tax and Potential Capital Loss
When you sell your investment property, you will have to pay capital gains tax, which you don’t have to on most owner-occupied properties. Likewise, should your property decrease in value, you may have to sell it off at a loss.
No Ownership and Less Security
As much as it matches your lifestyle, your rental property is not yours. Therefore, you must be ready to shift if your landlord wants to vacate the property or increase the rent beyond your budget. This may not be easy if you have a family and young children whose lifestyle is location-dependent.
Furthermore, you cannot implement renovation or improvements to give your home your personal touch, which you would be able to do in your own home.
Many consider rent expenses as dead money.
Typically, your landlord will be responsible for the costs of repairs etc., to your property. However, you will need to pay your leasing agent’s fees, and where your rental expense is more than your rental income, it may spread your finances thin.
Is Rentvesting Worth it?
Choosing between rentvesting and buying is akin to walking a tightrope. Now that you hopefully have an accurate idea about rentvesting and its pros and cons, reflect if rentvesting works for you. Everyone’s circumstances are different, and what suits others may not be suitable for you.
Before buying a home or rentvesting, assess your financial capability to afford rent and have a mortgage at the same time.
Seeking help from a financial advisor will help you plan your property and other investments better for a financially sound future. While an investment property may be less expensive than your dream home, it doesn’t necessarily mean that it’s more affordable.
On the other hand, because renting feels like dead money, you may not yet be ready to take on a huge home loan.
Are you ready to buy your own home or prefer the rentvesting option? As one of Australia’s most user-friendly and comprehensive online marketplace for home loans, we are the better and faster way to suitable home loans from trusted Aussie lenders.
Our Instant Match tool can help you find competitive loans while saving thousands of dollars each month. 13,000 Australian home buyers have already begun saving with Joust!