Your Comprehensive Guide to Rentvesting in 2023: A smart way to invest in property
Rentvesting is not a new trend we are just seeing in 2023 - rentvesting has been happening for years. In fact I’ve written a number of articles on it over the years and it seems to have gained a lot of media attention. But what exactly is rentvesting?
What is rentvesting?
Rentvesting is a tactic used in property investment where an individual (or couple) rents a property to live in and invests in another property to build equity and generate rental income.
Said another way, they rent a property to live in -in the area they desire yet can’t afford- and invest in property in more affordable locations. They then use the rental incom to pay for the property they rent, whilst enjoying the lifestyle of that area. The approach itself allows an individual (or couple) to enter the property market without compromising their lifestyle - which seems to be one of the big drivers of rentvesting.
Rentvesting has proven to be quite popular among young Australians who wish to establish themselves in the property market but are unable to purchase property in their desired area. We’ve seen rentvesting happen across almost all states of Australia. However there does seem to be a slight changing trend.
A changing trend: However, according to the australian bureau of statistics (ABS) “Almost one third (31%) of Australian households rented their home in 2019–20, a decrease from 32% in 2017–18.” So we may be seeing a shift from rentvesting and more into home ownership. However at Joust, our data shows that the majority of the market right now are more interested in refinancing opposed to buying a home to rent. As a matter of fact, since the start of this year 2023, the Joust platform has seen almost 90% of all people using it, looking to refinance (see graph below)
Rentvesting vs your traditional homeownership.
Rentvesting is different from traditional homeownership in many ways. For example, while traditional homeownership allows you to live in your own property and build equity, it generally requires a large deposit and a long-term commitment. On the other hand, rentvesting allows you to invest in a property that you can afford, while renting where you want to live. It also offers more flexibility and less upfront costs. Another difference between rentvesting and traditional homeownership is that with rentvesting, you can invest in a property in a different location than where you live. This means that you can choose to invest in areas with higher capital growth potential, even if you cannot afford to buy a property in that location for yourself. Here is a graph of some of the other differences:
What are the benefits to rentvesting?
Besides being able to enjoy the lifestyle and live in an area where one can’t necessarily afford to buy, other benefits of rentvesting include:
- Tax Benefits: There some some potential tax benefits to property investors which may include depreciation, interest on the mortgage, and repairs and maintenance. (It’s best you speak to a trusted partner mortgage broker from Josut or your accountant about these for further details)
- Diversification: Rentvesting can provide a way to diversify one's investment portfolio beyond stocks, bonds, and other traditional investment options. Investing in property can offer potential capital growth and rental income, which can help to spread risk across different asset classes.
- Cash Flow: They say cash is king right? Well iIf you invest in a property that generates rental income, the rent can cover some or all of your mortgage payments, making it easier to manage your cash flow.
- Location Flexibility: Rentvesting allows you to live in a location that suits your lifestyle, while investing in property in an area that has better growth prospects.
It’s great to look at the benefits, but it’s always important to look at it with the other perspective, that being the cons. So you can clearly understand the 2 views (pro vs con) we have provided the below table for you:
What are some tips to be successful at rentvesting in 2023:
Going into rentvesting, like any investment should be done with careful consideration, assistance from professional advisors and a level of due diligence With that in mind we still have some tips we’d like to share with you that might help with your rentvesting journey.
- Establish Your Budget: Work out how much you can afford to spend on an investment property, taking into account your income, expenses, and borrowing capacity.
- Research the Property Market: Identify areas with good growth prospects and strong rental demand. Look for properties that have the potential to increase in value and generate rental income. Adjust your budget if needed
- A Property manager: A good property manager can take care of the day-to-day management of your investment property, including finding tenants, collecting rent, and handling repairs and maintenance.
- Your Investment Property Wisely: Look for a property that is well-located, in good condition, and has the potential to increase in value and generate rental income.
You’ll want to;
- Secure Financing: Speak to a mortgage broker or lender to secure financing for your investment property. Shop around for the best interest rates and loan terms.
- Purchase the property: Once you've found the right property, make an offer and complete the purchase.
- Maintain the rental property: If you want to attract quality tenants and generates a decent rental income, be sure to have it well looked after (both inside and out).
Is rentvesting worth it in 2023?
The market in 2023 is quite different to several years ago when the cash rate target was around .25% (April 2020). Now with the RBA cash rate target being (as of time of writing) 3.0% the pressure for renters and investors has increased. On top of that there is said to be a ‘housing /building crisis’ in Australia right now so that will certainly not help with rentals or with the demand and supply challenges. Ultimately it comes down to your individual circumstances, your objectives and financial positions. There is still plenty of pros to rentvesting in 2023, but home loan interest rates are sure a lot higher than just a few short years ago. There is a lot to take into consideration.
What are the risks associated with Rentvesting?
While we have listened some of the pros and cons for rentvesting (read above), there are additional risks that need to be taken into consideration. Some of these risks include (but not limited to) the following:
- Market risks: Keep in mind, the value of an investment property can fluctuate based on the economical conditions within Australia and the real estate market. You (as a rentvestor) must be prepared to handle the financial risks associated with investing in property. Again, we advise you speak to an expert about this.
- Interest rates: When you have a mortgage on your investment property, you are exposed to interest rate rises (pending the type of mortgage you have). Let’s say interest rates rise and you are not on a fixed rate, then your mortgage repayments will increase. This could potentially affect your overall financial situation - and even your everyday living habits.
- Cash flow / Vacancy period: When you have an investment property, it’s sometimes possible that you will experience periods of vacancy. This of course can impact the your cash flow. You ( as a rentvestor / investor) should consider what contingency plan might look like to ensure you can cover any costs associated with owning the investment property. Said another way, have a plan B for cash flow during the vacancy periods.
- Maintenance: You might be surprised by the amount of maintenance and upkeep a property requires. There are repair costs, maintenance costs, ongoing costs - they almost seem never ending. The point is you should be in a position where you are prepared to handle those costs. To get a better idea of what those costs look like please read our guide to maintenance costs here.
Rentvesting is a smart and affordable way to invest in property, particularly for first home buyers and those looking to refinance in Australia. It offers many benefits, including affordability, flexibility, tax benefits, diversification, and the opportunity for growth. However, it's important to be aware of the risks involved and to review your financial situation regularly.
Rentvesting? Get the home loan interest rate you deserve
Rentvesting can be a smart and affordable way to invest in property, particularly for first home buyers and those looking to live in certain areas in Australia. It offers many benefits (feel free to scroll back up if you skimmed down here). But it’s also not for everyone. Either way it’s best to speak to a trusted partner broker who will be able to help you on your journey. Create your free home loan profile in just a few minutes and have lenders bid for your home loan with their most competitive offers. You can get started here.
Frequently asked questions.
What are the most popular locations for rentvestors in Australia, and why?
You probably wont be to surprised by our answer to this FAQ, given the major cities are the most expensive, have the most demand, situated near work + lifestyle.
- Sydney -
Surprise, surprise! At the top of the list is the nations most expensive city. So only makes sense right? The popularity among rentvestors is due to the city's position as a major economic hub with diverse industries and ample job opportunities, leading to high rental demand. Additionally, Sydney's property market is relatively stable and presents opportunities for capital growth and high rental yields. The city's attractive lifestyle, including beautiful beaches, parks, cultural events, and a vibrant food and entertainment scene, adds to its appeal.
- Melbourne -
Forever and always a popular place for rentvestors due to all on offer plus the balance of some degree of affordability and desirability. Everyone knows Melbourne has a vibrant culture and a great job market. It’s attractive for young and old alike and rentvestrs seem to love the CBD and surrounding areas that are accessible to the CBD via public transport.
- Brisbane -
Good ol Brisy. I’ve had many friends move to Brisbane (who happen to rentvest) and for good reason; the job market has remained strong, the weather is lovely - and, it’s more affordable than that Melbourne and Sydney… which makes it a cracking option for rentvestors located in Queensland on those on a tighter budget but willing to relocate.
- Adelaide -
ANother major city on the list. Our research indicates that Adelaide has become increasingly popular location for rentvestors due to its affordable property prices and strong rental demand. As for being able to rent where you want to live, Adelaide itself is pretty well known for its great food and wine scene, making it an attractive location for young professionals and families.
- The Gold Coast -
Australia, it remains a popular location for rentvestors due to its strong job market and high rental demand. However, the high cost of living and property prices mean that many rentvestors may need to look at more affordable areas outside of the city.
- Brisbane -
Brisbane is another popular destination for rentvestors due to its strong job market and growing economy. The city is also more affordable than some of the other major Australian cities, making it a good option for those on a tighter budget. Adelaide - Adelaide is an increasingly popular location for rentvestors due to its affordable property prices and strong rental demand. The city is also known for its great food and wine scene, making it an attractive location for young professionals and families.
How do rentvestors in Australia typically finance their property investments?
There’s a few different answers to this, however from what we understand, rentvestors in Australia commonly finance their property investments by combining personal savings, equity from existing properties, and funds borrowed from banks or mortgage brokers.
How do changes in the Australian property market, such as interest rate fluctuations or regulatory changes, affect rentvestors' investment strategies?
Changes in the Australian property market can have a significant impact on rentvestors' investment strategies, which are based on owning investment properties in a location different from where they reside. Factors such as interest rate fluctuations or regulatory changes can affect the property market demand, trends, rental yields, capital growth, investment property location, and property management, among others. As such, rentvestors need to be aware of these changes and implement effective strategies to navigate them and continue building wealth over time.
Disclaimer: The information in this blog article is current as of April 2023 and is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.