Rentvesting Explained: A Smart Property Strategy

Rentvesting is an increasingly popular home-owning strategy where buyers rent a property in an area they want to live while buying an investment property somewhere more affordable. 

Often, rentvesters will buy an investment property or multiple properties in rural or regional areas where house prices are typically lower than in cities. They will then rent a property in the CBD or inner-city suburbs where they can enjoy the benefits of a city lifestyle.

Using the rental income from your investment property to pay for your rent and support the lifestyle you want is one of the top reasons why rentvesting is popular.

When inner-city housing prices continue to rise, rentvesting offers a strategic pathway into the property market, allowing individuals to build wealth through real estate without compromising their lifestyle.

This comprehensive guide breaks down everything you need to know about rentvesting. What it is, how it works, its key benefits and drawbacks, and the essential information you must understand to make rentvesting work for you.

What is rentvesting?

Rentvesting is a great alternative for homebuyers to get a foot on the property ladder by purchasing a property in lower-cost areas without giving up the benefits of a city lifestyle.

In the capital cities, there’s a significant price difference between the cost to buy and the rent, particularly in Sydney and Melbourne. This makes property ownership out of reach for many buyers, especially if the dream is to enjoy city-based living. 

For example, you could afford to buy in the inner-city, and the mortgage repayments were $3250 a month. Yet, if you were to rent a similar property in the same location, it would cost you $1750. This would leave you a ‘spare’ $1500 a month to invest. 

Rentvesting gives you the best of both worlds. You can buy a property and rent it out to cover some or all of your mortgage repayment costs while continuing to rent the property where you live. You can also use the income generated from your investment property to support your rental costs.

Rentvesting vs. stock investment

If you're looking to build wealth, investing is a smart strategy. But how does rentvesting compare to investing in stocks?

Before proceeding, it’s paramount to understand that the future performance of any investment cannot be guaranteed. Many things can influence the market that you cannot predict – for example, a pandemic. This means there will always be a level of risk involved in investing.

The key difference

If you invest in property, you’re getting a tangible product. Investing in stocks is entirely different. For example, if you purchase shares of a business, you are buying a claim to a piece of the company itself.

Another key difference is that stocks are more liquid assets than real estate. It’s easier to buy and sell stocks than to buy and sell real estate.

One of the major differences between investing in property and investing in the stock market is the initial cost. Real estate has a much higher entry point, especially if you’re wanting to buy in an expensive location.

With rentvesting, you must consider the home loan deposit, mortgage repayments and other costs associated with purchasing real estate, such as stamp duty and loan costs.

That said, it does provide a passive income stream and the potential for attractive appreciation.

Is rentvesting a safer option?

When you have an investment property, you have guaranteed rental income. The only thing is that your property needs to be rented out to get this income. You’re also not always guaranteed to be able to cover mortgage repayments with your rental income. This is known as negative gearing, and, while not ideal for investors looking to increase their income it does come with some appealing tax benefits. Also, investing in real estate can protect you from inflation given that property values typically rise in accordance with inflation.

When it comes to rentvesting, the trick is that you must invest the difference (not just spend it) to build your wealth for this strategy to work.

Why rentvesting is a great option to consider

One of the biggest advantages of rentvesting is flexibility. Instead of being limited to areas you can afford to buy in, rentvesting allows you to live where you want, whether that’s a vibrant inner-city location or a lifestyle-focused suburb, while investing in a property in a more affordable area.

For first-time buyers, rentvesting can be a strategic way to enter the property market sooner, without the long wait to save for a larger deposit.

It’s an ideal option for those who value lifestyle or have jobs that require frequent relocation. You can live in short-term rentals that suit your current needs, while your investment property works in the background, generating rental income and potentially growing in value over time.

Another significant advantage is that you're investing in a tangible, long-term asset, which helps build equity. Selecting the right property can lead to strong capital appreciation, providing you with a valuable position in the market.

The pros and cons of rentvesting

Pros

You can live where you want

As a rentvestor, you can live wherever you want and aren’t limited to where you can afford to buy.

Allows you to generate wealth

You can use the income generated from leasing out your investment property to pay down the mortgage on the property or to cover your rental costs in your primary property.

Potential tax benefits

There are a host of tax benefits on your investment property/properties. Even interest payments on your investment property loan can be claimed as a tax deduction. You can claim depreciation on the building and any new fixtures and fittings.

Low maintenance costs at rental home

As a tenant, you aren’t typically required to cover any maintenance costs as your agent/landlord will organise the repair.

Potential capital gains

If your investment property appreciates, you may have the opportunity to sell it for a profit in the future.

Cons

Living where you’re renting might be less secure

One of the downsides of being a tenant is less security in your primary residence. You may have to move if the owner wants to vacate or change tenants. Your rent could also go up.

No access to the First Home Owners Grant

Rentvestors aren’t able to access the First Home Owners Grant

Capital Gains Tax liability

If you sell your investment property, any capital gains will be subject to tax.

Ongoing home ownership costs

As a landlord, you are normally responsible for the costs and management of repairs to your property. You may also have to pay fees to a leasing agent.

Potential capital loss

If your investment property decreases in value, you might have to sell it at a loss.

The tax benefits of rentvesting

One of the key advantages of rentvesting is the potential for valuable tax benefits. Owning an investment property may make you eligible for a range of tax deductions. However, it's important to note that if you choose to live in the property yourself, you’ll no longer be able to claim these deductions.

According to the Australian Tax Office (ATO), you can claim the following expenses:

• Water and council rates
• Home insurance
• Agent fees and commission
• Repairs and maintenance
• Tenant advertising
• Depreciation deductions for general wear and tear from natural causes
• Land taxes
• Interest on mortgage repayments

Another tax benefit is negative gearing, which can make the cost of investing in property more affordable. Negative gearing is where expenses associated with an asset are greater than the income earned from the asset. 

While making a loss on an investment property might seem counterintuitive, some people are willing to do this in the expectation that the capital gain (sale price minus cost of asset) when they sell the asset will more than offset that loss.

The financials surrounding rentvesting

Regardless of your strategy, you need to buy a property with some capital growth potential and one that you can easily rent out if you want to make your investment work. 

There are two things to consider before purchasing an investment property:

1. Capital growth

Capital growth represents the increase in a property's value over time. Considering the constant fluctuations of the Australian property market, it’s clear that investing in property should be done for the long term. Therefore, if you’re looking for a quick return, rentvesting may not be right for you. 

So, how much can you expect to earn over the long term? This entirely depends on the size and type of the property, its location, and the real estate market in that local area. A suburb with a growing population and that is land-locked will have strong demand and low supply, putting pressure on property prices. A suburb located in the outer suburbs may have less pressure on property prices as there is more land to be developed and less demand.

2. Rental return

To get an idea of the potential rental return for your investment property, study the rental prices of similar properties in the area.

One important consideration is the yield of a property, which you can calculate by dividing the rent you receive over a year by the price you paid for the property, which is then multiplied by 100.

For example, if you purchased a property for $500,000 and are renting it out for $500 per week, which is $26,000 per annum, the gross yield would be 5.2% per annum.

What to consider before investing in property

Assess the risk involved

All types of investments come with risk, including property. However, property is generally considered to be one of the less riskier assets compared to other options such as shares. 

Generally, these are some risks of property investment to be mindful of:

• Property is not a liquid asset: is not a liquid asset: investing in property means your funds are tied up, making it difficult to access your money quickly if needed in a hurry.
• Exposed to market interest rates: if interest rates rise, your mortgage repayments will increase.
• Risk of losing money if your living situation changes: If your living situation changes and you need to sell immediately, you may have to sell during a ‘down’ phase and risk losing money.
• Poor performance: Even though the property market is relatively stable overall, it doesn’t always grow. So, you run the risk of owning a property that doesn’t increase in value over time. 

To evaluate the risk of your investment, you should conduct a cash-flow analysis. This can be done with the help of a financial planner, accountant, or property advisor. 

Minimising the risks

You can mitigate the risks associated with rentvesting by actively taking the following steps:

• Diversifying your property portfolio. If possible, invest in different property types in a number of different areas to ensure that if there is an economic downturn in one city, you have other properties that are performing well.
• Ensuring you have a cash buffer to cover any unforeseen expenses.
• Consider splitting your loan or opting for a fixed-rate loan so you know exactly what your repayments will be each month.
• Do market research into the property market you’re investing in. Consider local supply and demand, local infrastructure and upcoming projects, the local demographic, and the average rental return. 

Rentvestors who exercise their due diligence prior to investing can benefit from the safety, security and low volatility of property investment while avoiding undue risk. 

Do your research

Doing your research thoroughly when it comes to any investment is crucial. But when investing in property, it’s really important to consider the following:

• Getting clear on your investment goal: what do you want from an investment property? Are you looking to gain a steady income from rent? Is lifestyle important to you? If so, then rentvesting may just be for you.
• Having an investment strategy: After speaking to a financial planner or property advisor, you need to form an idea of how you will make a profit from the investment. 
• Finding the right property: This is perhaps the most important step of all. You need to find a property that matches your investment goal and strategy as well as one that will appeal to renters and retain value over time. 

Rentvesting strategy

Now that you have a clearer understanding of rentvesting and how it works, the next step is to develop a tailored strategy.

The beauty of rentvesting is that it’s accessible to many. With the right financial discipline and a smart savings plan, you can make this strategy work to your advantage.

Here is a 3-step rentvesting strategy to start your property journey:

1. Save up a deposit

This will be the most challenging step for many, especially amid rising property prices. However, the good news is that it remains entirely achievable for those determined to succeed.

A good rule is to save 20% of the property value as a deposit. Since 20% can be a lot of money, it’s best to start with an investment property with a lower value than if you were purchasing a home to live in.

One of the easiest ways to save up for a deposit is to:

• Set your goal amount
• Track your spending and cut out any unnecessary costs
• Choose a savings account with a competitive interest rate
• Set up automatic transfers to your savings account
• Keep tracking your goal

2. Finding your first property

This is the time where it’s imperative to seek help from a professional. The three most important professionals you should get are a Buyer’s Agent, Mortgage Broker and a Property Manager.

A Buyer’s Agent can help you to source a property within your budget, a Mortgage Broker can do all the legwork for you and provide a quick and easy comparison between your lending options, while a Property Manager can take care of the typical duties of a landlord to save you from the day-to-day running of the property.

Essentially, choosing the right property will depend on:

• Location
• Potential growth
• Low vacancy rates
• Best rental yields

Invest with confidence

At first glance, rentvesting may seem counterintuitive. Why pay rent while also servicing a mortgage? However, if you’ve done your research, considered your investment goals, and have specific lifestyle preferences, rentvesting can be a smart and strategic choice.

For example, you might be single and wanting to enter the property market, but the home you want isn’t in your price range. Alternatively, you might already be renting and enjoying where you live, but the timing isn’t feasible for you to move right now. Or, perhaps you have a life and job in the city where you’re currently renting or looking to rent, and know that down the track you’ll want a ‘tree change’ and move out to somewhere more spacious. 

Rentvesting gives you the best of both worlds. And with the right guidance from a rental property manager, you can enjoy living the lifestyle you want right now while planning a financially secure future.

How can property managers help you

Pursuing rentvesting? Engaging a property manager can provide valuable benefits. Their experience in the property market and finding high-quality tenants is one of the advantages of a property manager. They can also address issues including legal requirements, property maintenance and ensuring tenants pay on time to maintain the value of your rental property and to ensure you’re getting a steady rental income.

Property management fees are between 5% to 12% of your weekly rent. This varies greatly from state to state. Some types of fees you can expect from a property manager include the letting fee to cover the property manager sourcing a new tenant for your property, alongside a management fee to cover the day-to-day activities required to manage the lease.

Let LJ Hooker help you with your investment property

While the cost of hiring a rental property manager might seem concerning, it's important not to underestimate the time and effort required to find quality tenants and manage a property effectively. Rental property agents are trained to source the best tenants and are well-versed in the strict legislative requirements to manage an investment property. 

Choosing a property manager to manage your investment property is a wise decision that may save you time and money over the long term.

At LJ Hooker, our goal is to increase your income and ensure your investment is working for you with minimal risk. If you’ve decided that rentvesting is for you, then soliciting the help of a rental property manager is the easiest way to start.

 Find a property manager and maximise the potential of your investment.

DISCLAIMER - The information provided is for guidance and informational purposes only and does not replace independent business, legal and financial advice which we strongly recommend. Whilst the information is considered true and correct at the date of publication, changes in circumstances after the time of publication may impact the accuracy of the information provided. LJ Hooker will not accept responsibility or liability for any reliance on the blog information, including but not limited to, the accuracy, currency or completeness of any information or links.