Rentvesting: the property strategy that could help you own a home sooner
Rentvesting is a property investment/ownership strategy where buyers rent where they want to live while buying where they can afford to, in a cheaper suburb.
The appeal of rentvesting is getting on the increasingly hard-to-climb property ladder without compromising on lifestyle. Rentvestors rent in suburbs where they want to live a more desirable lifestyle while buying where they can afford.
Rentvesting is increasingly popular among Australian households.
Around 15% of private tenants in Australia are rentvestors, according to the Australian Bureau of Statistics (ABS). Meanwhile, 45% of property investors said they would consider rentvesting, according to Statista.But as with any property-related decision, rentvesting has many advantages and disadvantages. Here is everything you need to know about rentvesting in Australia.
What is rentvesting?
UNO Broker Scott Wilkinson said rentvesting entails renting in a suburb where you want to live while owning a property where you can afford to.
“Buyers get the best of both worlds with the lifestyle choices and flexibility of renting while still building wealth through property investing.”
“It can potentially be particularly attractive in our major cities like Sydney and Melbourne, where there is a great up-front price difference between renting and buying.
“So someone in Melbourne might rent close to the city in a suburb like St Kilda but buy a rental property where they can afford in an outer or regional suburb,” Scott said.
Thinking about buying an investment property? Contact Scott today.
Pros and cons of rentvesting
Advantages of rentvesting
- Flexibility - Rentvestors can enjoy home ownership without compromising on their lifestyle. It can also be easier to leave a rental property than an owner-occupied one, making moving states or countries easier.
- Getting on the property ladder - Home ownership is increasingly difficult to achieve amid record prices, especially for first-home buyers. The greatest challenge is saving a large enough deposit to get on the property ladder. By buying somewhere more affordable - instead of waiting to purchase where you want to live - you get on the property ladder sooner.
- Potential tax benefits - Landlords enjoy tax deductions and advantages, including negative gearing. You could claim insurance, marketing, renovation, and many other property costs associated with the upkeep of your investment.
- Affordability - Property ownership can be more affordable by buying where you can afford to - like in a rural or cheaper suburb.
- Investment opportunities - You could make a capital gain on your investment property.
Disadvantages of rentvesting
- Living as a tenant - If your primary residence is a rental, you may be subject to inspections, rent increases, and the possibility of needing to vacate your home should your landlord decide to sell or not extend a lease.
- Managing two properties - Being a tenant and landlord simultaneously can be time-consuming, especially if you manage your own property. A property manager could help alleviate some of this time and stress.
- Ineligible for FHOG and other grants - You may be ineligible for First Home Owners Grants (FHOG) and other incentives if your property isn’t your primary residence.
- Capital gains - If you make a profit (a capital gain) when you sell your investment, you could be subject to capital gains tax.
- Ongoing home ownership costs - You will be responsible for your investment property's maintenance and improvement costs. There is also the rare possibility of needing to pay rent and a mortgage if your investment property is left without tenants.
- Renting can be challenging - Australia is amidst a housing crisis. National rent inflation reached 14% in the year until February 2023 and is expected to increase following recent RBA cash rate increases. Meanwhile, the vacancy rate sits at just 1.5%, according to the ABC. Hence, renting may not always be easier, especially in a competitive market.
Rentvesting to get on the property ladder sooner: an example
Heather rents a Surrey Hills apartment 30 minutes from Melbourne for $495.
She is considering buying a property but doesn’t want to compromise on her lifestyle of abundant cafes and friends nearby.
Heather has saved $40,000 for a deposit and manages to save around $20,000 annually. She is contemplating two options for homeownership.
Option 1: Purchase: Surrey Hills
- Heather wants to purchase a similar property in the same suburb for around $760,000. She is approximately $100k (or 5 years) short of a 20% deposit.
- Once she has saved a deposit, Heather’s mortgage repayments would be $3,665, assuming a 6.05% interest rate and a 30-year loan.
- Buying in the same suburb would cost Heather an extra $1680 a month ($420 a week). Heather cannot afford such a large deposit and considers rentvesting instead.
- After five years, Heather’s deposit is $156,900^
- The house she wants to buy has appreciated by 7% annually to $1.06 million.
- Meaning she is still $56,000 short of saving for a deposit.
Option 2: Rentvest: Darwin
- After some careful research, Heather decides rentvesting is suitable for her. She will buy a unit in the outer suburbs of Darwin for around $380,000.
- Heather has worked with a UNO broker to find a loan structure appropriate to her needs and only requires a $38,000 / 10% deposit.
- With a loan of $342,000, Heather’s repayments will be $2062 a month / $515 a week. Heather will work with an agent to rent the property out for around $500 a week.
- After five years, the Darwin property is worth $532,970 (assuming 7% annual appreciation). Heather now has $152,000 in available equity plus any extra savings she made during this time.
A step-by-step guide to buying a rental property
Before considering rentvesting, please seek professional advice from a financial advisor to decide whether it is the right move for you. Assuming you are already a tenant, buying an investment property might look like this:
- Estimate your borrowing power - Estimate how much you can borrow based on your income, expenses, and credit card limits with the UNO Borrowing Power Calculator. This will give you a budget for your property.
- Find the best deal - Thinking about becoming a rentvestor? A UNO broker can help you compare rates from over 20 lenders to find the best deal.
- Seek pre-approval - Submit documents, including payslips, for pre-approval.
- Search for a property - Look for the perfect property within your budget. UNO has recently partnered with property platform Abodable to offer customers up to $51,000 cash back when purchasing a new home*.
- Make an offer on your investment property and settle within 45 days.
What to consider before rentvesting? Which option is right for me?
Rentvesting might work well for those who move around for work a lot or want to own a property without compromising on quality. However, being responsible for two properties has its own challenges.
You should consider your lifestyle needs and long-term goals when thinking about rentvesting. What do you want to achieve financially, where do you want to live, and what do you value in your life?
There isn’t a right answer when it comes to personal financial decisions. Your best option is to speak with independent professional advice that considers your personal needs.
Disclaimer: Information in this article is general in nature and does not constitute personal financial advice. You should always seek independent professional advice that considers your personal needs before making financial decisions.*T&C’s apply. See https://abodable.unohomeloans.com.au/ for more information.
^Figures are based on current average interest rates and have been rounded for readability (i.e, $469,560 > 467k). They are indicated as a rough guide only. Sourceswww.statista.com/statistics/1347263/australia-share-of-property-investors-who-would-consider-rentvesting/https://www.abc.net.au/news/2019-07-23/this-single-woman-bought-a-house-with-no-hand-out-from-parents/11279302?nw=0&r=HtmlFragmenthttps://www.rba.gov.au/publications/bulletin/2023/jun/new-insights-into-the-rental-market.html#:~:text=Rent%20inflation%20for%20apartments%20with,the%20year%20to%20February%202023.https://www.realestate.com.au/vic/surrey-hills-3127/