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Rentvesting: what it is and how to do it successfully

Are you faced with the decision to rent or buy, but cannot afford a property in the area where you want to live? There is another option available to you. In this blog, our agents explain rentvesting and how to do it successfully.

Rentvesting is a way to get onto the property ladder quicker or move up faster, without spending above your means. Typically, rentvestors lease a property in a desirable area (where they cannot afford to buy) while buying in another area (where they do not want to live) to rent out as an investment property. Done successfully, the practice allows buyers to balance property affordability and quality of living. 

Rentvesting has become a popular trend in Australia because recent property value growth has not been matched by rental growth. Owing to this, rental yields across the country have declined to an average of 3 per cent per annum. In a nutshell, in most cases, it is currently more affordable to rent than buy. This is particularly the case in inner-city markets, where apartment vacancy rates are high, meaning rent is competitive, making them an affordable rental option but a less than optimal investment prospect for owner-occupiers.

Steps for rentvesting success

Save, save, save – the more significant your deposit, the less you will have to borrow, which means a better chance of receiving finance, paying less interest and borrowing without lender’s mortgage insurance.

Do your research – establish the true market value of the property. Research the history of neighbouring properties to understand local demand. Look at what has been sold and when it was sold, attend other open inspections and auctions, and compare the state of play. Robust comparable sales analysis and supporting documentation are your best chance at buying a property close to true market value.

Plan it out – rentvesting is not a cheap option and property investment is a substantial financial commitment, so take the time to do the sums. The whole point is to buy property and build a portfolio that makes you money in the future.

Think long term – look at locations with high potential in the long term. It might not be the hottest destination right now, but it could be in a few years. The success of this strategy is reliant upon solid growth in property values over the period of your investment.

Keep extra costs in mind – there are a lot of ongoing costs associated with property ownership that should be factored into your budget. Costs include home loan interest payments, property maintenance, council rates, insurance, etc. Always keep these top of mind.

Leave emotions at the door – buying an investment property should not come with the same level of emotional engagement as purchasing a home. Rentvesting allows you to buy a property purely as an investment. Focus on the property’s potential return (capital growth and rental yield) rather than personal connection.

Important things to note

Grants and schemes – rentvesting could cancel your eligibility for the First Home Owner Grant and the First Home Loan Deposit Scheme – read more about this offering here .

Apartments versus houses – apartments can be easier to rent out than standalone houses, but they typically do not grow in value as much as houses.

Capital gains – the sale of an investment property attracts capital gains tax, which eats into any sale profits.

Tax advantages – buying an investment property can offer tax advantages, as all expenses associated with an investment property are tax-deductible – including home loan interest payments, management fees, property maintenance, council rates, insurance, depreciation, etc. If your investment expenses come to more than the income from rent, losses can be leveraged to reduce the taxable income from your salary – this is known as negative gearing, which is used as a strategy by investors seeking long-term capital gain.

Seek professional advice – everyone’s situation is different, so before investing it’s worth considering seeking professional advice tailored to your lifestyle and investment goals. A professional advisor will take the time to carefully consider your unique situation and offer personalised recommendations to enable you to find the investment property that’s right for you.

For more help and advice on buying speak to your local Hockingstuart agent today.

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