A property buyer’s guide to rentvesting

What is rentvesting?

Rentvesting is a strategy where you buy an investment property in one location (often somewhere affordable or with high growth potential) while choosing to rent in a location that caters to your lifestyle needs. This is often seen as an appealing choice for people who prefer living in cities or suburbs where buying can feel out of reach. For example, you might consider buying property in a high growth suburb or in an emerging interstate area while continuing to rent in a vibrant, upmarket urban area with quick and easy access to work, dining and entertainment.

Is rentvesting an easy way to enter the property market?

It really depends on your personal circumstances. Rentvesting can be a more accessible way to break into the property market, especially in places where high prices make home ownership tough. Buying in a suburb or area with lower prices or high rental demand can be a good way to get a foothold in the property market faster than saving for a deposit for a house in a prime location.

Benefits of rentvesting

Freedom to live where you want

You can get the best of both worlds with rentvesting, which means you can invest where it makes financial sense and live where it suits your lifestyle.

Build wealth through property

An investment property in a high growth location may provide you the opportunity to quickly build equity as your property’s value increases over time. With enough equity you may look to sell, refinance or use the equity as leverage for other investments.

Tax benefits

As a property investor, you may benefit from tax deductions, usually not available to owner occupiers. These can include deductions on property management fees, loan interest, repairs, and depreciation.

Diversification of your property portfolio

Rentvesting may work as an excellent diversification strategy by allowing you to spread your investments across a range of asset types (for example, property, shares, or other investments). The property has the potential to become part of a broader financial plan, complementing other investments, which can ultimately help balance and spread your risks, as your wealth isn’t tied up in one asset.

Potential for cash flow

A property investment at the right price and in the right location can generate rental income that not only covers your mortgage payments and other expenses, but also leaves you with extra cash to spend on the things you enjoy or build your savings.

Considerations of rentvesting

Upfront costs and maintenance expenses

Rentvesting requires an upfront deposit, fees, as well as ongoing costs like maintenance, property management and insurance. There could also include unexpected repairs or vacancies that could impact your budget.

High interest rates

Rentvesting can prove costlier in an economic climate where inflation and interest rates are high. In fact, a high cost of living market doesn’t support this strategy too well, so be sure to run your numbers before you make any decisions.

No access to First Home Owner’s Grant

Even if it’s your first time buying a property, as a rentvestor you won’t have access to government schemes like the First Home Owner’s Grant (FHOG) or the First Home Super Saver Scheme (FHSS).

Potential capital gains tax (CGT)

While there are tax advantages to rentvesting, you can also expect CGT implications when selling your investment property. Understand these implications and factor it into your strategy during the planning process.

Investing in another state or territory as a rentvestor

Rentvesting gives you the freedom to invest anywhere in Australia. When you widen your search, you’ll have more opportunity to find emerging markets with potential for high returns. That said, you’ll need to keep in mind that different states and territories have their own regulations, taxes and market trends. You’ll also need to be comfortable with the idea of managing your property from afar.

Get advice on buying an investment property that fits your financial goals and lifestyle.

Does rentvesting work for you?

Start by assessing if rentvesting fits your financial goals, lifestyle and risk tolerance.

Assess your financial situation

Calculate how much you can comfortably direct towards your investment property, including deposit, property management fees, stamp duty, loan repayments, and maintenance costs. You’ll need to remember that this investment strategy involves paying rent as well as your mortgage repayment, so it’s important to check that everything balances out, so you’re not feeling financially stressed. It’s also crucial that you have an emergency fund set up for unexpected life situations.

Define your investment timeline

It’s worth considering how long you’d need to hold the property for it to make the best financial sense for you. For example, are you looking to build equity over five, seven or even 10 years?

How does rentvesting fit in with your lifestyle?

If you’re open to the flexibility of renting, rentvesting could be a good fit. However, if you’re leaning more towards a sense of permanence in your living space, buying a home to live in can feel more satisfying.