Rentvesting: Is it a good idea?

Find out who rentvesting will likely benefit the most

Rentvesting: Is it a good idea?

Rentvesting has its pros and cons. It depends on numerous economic factors and market variables, but if the monthly differential between mortgage repayments and rent payments is high, it will likely make good financial sense for anyone who wants to buy a home in an area that suits their budget while living in an area that suits their lifestyle. Here is what you need to know about rentvesting.

What is rentvesting?

Rentvesting is when you purchase an investment property in an area that you can afford to buy and rent in an area that you want to live in but would otherwise be unable to afford. As a strategy, rentvesting can help you to overcome financial obstacles and the exorbitant costs that come with simply owning a home. In other words, it works because it allows you to rent in an area that better suits your lifestyle while purchasing a property in an area that better suits your budget.

It is a particularly deft tactic because even if you are renting simultaneously, the property you purchased acts as an asset—which grows in value, especially if you have chosen a smart, strategic location to buy—and is partially being paid off by your tenant. It also means that you are accruing equity that you can eventually use to purchase additional properties, such as a home of your own, when it makes financial sense.

Who needs rentvesting?

Rentvesting makes the most sense financially if the monthly differential between mortgage repayments and rent payments is high and is a good strategy for people who make a wide range of incomes. If your rent and your mortgage repayments are about the same cost in your preferred location, it is probably not the right strategy for you.

The types of people who might need rentvesting the most are young people who find the costs of living in inner-city locations too high, families hoping to live in better locations and a property that better accommodates them, and single parents where the area is best for raising a family.

But rentvesting is not only for those who are struggling financially. Those looking to simply better their lifestyles could also reap the benefits of this strategy, since it can also help if you need to move a lot for your work; enjoy travelling for longer periods of time; prefer the flexibility that renting offers, which also cuts out buying and selling fees; and want to live closer to entertainment districts typically out of your price range or in pricier suburbs.

Why rentvesting can be a good idea

Among the reasons rentvesting can be a good idea for you are:

Lifestyle. Ultimately, rentvesting allows you to rent in the area that you want to live in. It is also a major pro with regards to where you are in your life, local amenities, budget considerations, and safety and security.

Wealth building. Rentvesting will likely make your money work better for you and for your future, since your borrowing power will grow and you will save on higher mortgage repayments. All of this helps you to build up for your retirement nest egg.

Cost savings. When you are renting, your landlord has to pay the costs of maintenance, safety of the property and upkeep, and added costs like council and utility services, plus possible body corporate fees, and so on. Landlords also have to pay upfront for Lenders Mortgage Insurance and stamp duty. While you would also have to pay these expenses being a landlord yourself, they are usually tax deductible.

Why rentvesting can also be a bad idea

Among the reasons why rentvesting can be a bad idea for you are:

Losing capital gains tax exemption: If you sell your home for a profit, your principal place of residence will carry a full exemption of any capital gains tax liability. Typically, if sold for a profit, rental properties are subject to capital gains tax.

Emotional cost. Most Australians want to purchase a property and make their own memories in the home. By renting, you never fully own the home and have the added pressure of being a landlord to someone else who lives in your property.

Less control. When you are a renter, you are subject to landlords potentially telling you that you have to leave the property—for whatever reason. In the end, landlords own the home and have complete control over it.

Can rentvesting grow your wealth?

Yes. Purchasing a home, whether or not you reside there, is always better than consistently paying dead rent money and sitting idly by. Rentvesting can grow your wealth if the monthly differential between mortgage repayments and rent payments is high. While there are numerous economic factors and market variables that will have an impact on the amount of money you are likely to make, a simple example would be: as a renter, you have a $30,000 deposit and buy a $500,000 investment property that will grow 6% every year. After five years, you will have made $170,000 on the property – a solid return.