Keen to buy property but can’t afford your dream location? Consider rentvesting

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When property – almost inevitably – pops up as the topic of conversation at your family barbecue or birthday dinner, it’s often positioned as a solution to a problem. “If you can just save enough for that first deposit,” Uncle Keith says, while gently tending the Weber, “you can finally stop renting”.

And Keith is right: paying a mortgage rather than rent is often preferable, as rent doesn’t do much to further your financial position (other than obviously providing you a roof over your head), and you have far greater freedom when you own your home rather than borrowing someone else’s. Not to mention that next to our super, the family home is one of the greatest tax breaks available.

What’s the problem?

But what Keith and many others often gloss over is that renting offers a level of freedom that buying a home − especially your first home – doesn’t. It’s far easier to rent a great home in your dream location than it is to buy one, and often first homebuyers are forced to sacrifice location or size to find an affordable house.

Enter “rentvesting”, a financial strategy akin to having your cake and eating it too, where you continue to rent in your preferred location while purchasing an investment property to rent out elsewhere. It’s not exactly a new phenomenon, but it’s gained popularity recently thanks to continued issues with housing affordability.

What you can do about it

But, as with many money strategies, rentvesting has some pros and cons. Here’s what you need to know:

• How exactly does it work? Basically, as mentioned above, rentvesting is when you live in a rental in a suburb/area that matches your lifestyle, while simultaneously investing in a rental property elsewhere that can provide good returns. This could mean a family could rent a larger house closer to their preferred school while still getting into the property market by purchasing an apartment somewhere else. Brett Sutton, mortgage broker at Two Red Shoes, says the strategy is popular for people who are struggling to save amid a rising property market. “When property prices are increasing faster than wages and savings, waiting to buy the ‘perfect’ home can actually push the goal further away,” he says. “Rentvesting allows buyers to get exposure to the market sooner, rather than trying to chase prices from the sidelines.”
• What are the benefits? Other than the flexibility and ability to get onto the property ladder, Sutton says there are some other major benefits to a rentvesting strategy, one of which is the ability to use your investment as leverage and help save for a bigger property in the future. “By using the bank’s money alongside their own, buyers can control a much larger asset than they ever could through saving alone,” he says. “That means any capital growth applies to the full property value, not just the deposit. Over time, this can lead to significantly larger gains than cash savings.” Rental income can also help offset – or sometimes completely cover – the cost of the mortgage, Sutton says, and there are multiple tax deductions available for investment property owners which can also help soften the blow. Finally, banks are also typically more likely to issue investment property loans and may also lend you more than if you were buying a house to live in yourself, meaning you could afford a better place than you would have otherwise.
• What are the risks? One of the biggest risks rentvesters can face is if they cannot find or maintain regular renters in their investment property. Things can then go downhill rapidly, warns Jonathan Philpot, wealth management partner at HLB Mann Judd, as buyers will have to pay for the full investment loan while also meeting their own rental costs. “People can get into serious trouble quickly when events start to work against them,” he says. Rentvesters are also doubly exposed to interest rate rises, as they will have to pay more on their investment loan, and their rental costs could also increase as their landlord attempts to cover their own rising costs. “All these triggering events can cause significant financial damage, and if this results in you needing to sell the property fairly quickly, you’ll lose money on the transaction costs, and you might lose on the capital as well,” he says. Finally, Philpot says one of the best tax breaks you can get is the capital gains tax exemption on your main residence, which you can’t take advantage of with investment properties.
• Who does it suit? As is often the answer to this question, the only thing to really say here is “it depends”, as the suitability of rentvesting is heavily dependent on your personal circumstances. However, for what it’s worth, Philpot suggests it might be a strategy best suited to younger people, who have a longer period of time to ride out any volatility and aren’t imminently relying on their capital for retirement.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.