Why Rentvesting is Bad for Some Investors?

Forget saving for a house in your dream city – in the last decade, soaring house prices have made buying a dream home in most cities out of reach.

But what if you could live in your ideal location and still be able to build wealth by owning a property?  

That is called rentvesting – that’s renting where you live and becoming a property owner somewhere else. And it might be something you would want to consider for yourself, too. 

Today, a whopping 42% of Australians are looking to rentvest, so why not learn more about it? 

What Is Rentvesting? 

Rentvesting is a strategy that is now gaining traction in big cities, where someone rents their current home and becomes a landlord elsewhere. 

While this seems like a big responsibility for younger adults, this can be appealing for a few reasons: 

• Big city dreams, smaller budget: Soaring housing costs in urban areas in Australia can make buying property out of reach. Rentvesting lets you experience the lifestyle you crave without the hefty buying price tag. 
• Investing for the future. You might score a property with better rental returns by purchasing in a more affordable location: This could become potential income to help cover your rent or grow your wealth over time. 
• Keep your options open: Rentvesting allows you to be more flexible than traditional homeownership. You can live where it suits you now without being tied to a specific property. 

Think of rentvesting as a way for young professionals to thrive in the city, but can’t afford to buy a downtown condo. Instead of paying a premium price for an urban home, they could rent a trendy apartment and buy a house in a more affordable suburb. 

The rent from the house could then help them afford their place in the city. 

Here is a side-by-side table showing Rentvesting Vs. Buying to help you see their differences: 

What Are the Benefits of Rentvesting?

You’re sold on the idea of rentvesting – but what are the tangible advantages? Here are some of the most compelling benefits: 

• Live in your preferred area and build wealth: Rentvesting allows you to live in your desired area while building wealth through a strategically chosen investment property. 
• Leave repairs to the landlord: Most wear-and-tear repairs in your rented home become the responsibility of your landlord, freeing up your time and wallet. 
• Tax time bonus: Investment properties can offer potential tax advantages. You might be able to claim deductions for things like loan interest, rental costs, and even depreciation. Ask your local tax agent for specifics. 
• Rent that pays for itself (and more): The rental income from your investment property can be a game-changer. It can sometimes help cover your rent, pay down your investment mortgage, or even become a source of extra income. 
• Building a brighter future: Over time, your investment property can increase in value, offering potential profit if you decide to sell in the future. 

Look at the benefits this way: 

If you would like to live in a two-bedroom unit in an expensive suburb but can only afford a house in a less expensive area, you can purchase the house and rent it out while you rent the two-bedroom unit elsewhere.  

In the meantime, you are building your wealth as your mortgage decreases and property value rises. Over time, your rentvesting property may help open up new opportunities to grow your investment portfolio or even buy a more expensive home in your ideal location.

Why Rentvesting is Bad for Some Investors 

While rentvesting offers a lot of perks, there are also some downsides to consider: 

• Goodbye, First Home Grant (Australia): If you jump into the market as an investor first, you might miss out on government grants for first-time homebuyers. 
• Less security: As a renter in your primary residence, you face less security than owning your home. Many people face issues with the landlord, such as unclear terms, price hikes, unannounced entries or inspections, and even sharing personal details with third parties. 
• Becoming a semi-landlord: As an investment rental property owner, you’ll take on some homeowner responsibilities like management and maintenance costs. These can add up over time, especially if your rental income doesn’t fully cover them. 
• Paying Capital Gains Tax: Remember, when you eventually sell your investment property, you’ll likely be liable for capital gains tax on any profit you make. 
• Paying double: The biggest drawback to rentvesting is that you must still rent elsewhere during the weeks or months that your property is not occupied. For young property owners who are happy to continue living with their family, this may be more palatable, but for those seeking independence, paying a mortgage on one property and rent on another can be frustrating, not to mention expensive. 

Is Rentvesting Right for You? 

Rentvesting isn’t a one-size-fits-all strategy. It has its own benefits and drawbacks, but your lifestyle and finances ultimately play a big role in your decision to invest. Here’s who might find it particularly appealing: 

• Urban workers on a budget: If you crave the buzz of city life but can’t afford to buy your dream home, rentvesting lets you live where you want without worrying that all the costs add up to nothing. You will still own property but in a more affordable location. 
• Career climbers with location flexibility: For those in fast-paced careers where frequent relocation is possible, rentvesting offers flexibility. You can wrap up your life and move to different cities while building wealth through your investment property. 
• Long-term investors with a good eye: If you’re a strategic investor looking to build wealth through property ownership, rentvesting allows you to target areas with higher rental yields and future capital gains. 

Do your homework! Before diving into rentvesting, it’s important to research and understand the market, potential costs, and financial goals.  

Financial Considerations for Rentvesting 

It’s crucial to understand the financial implications before diving into rentvesting. Before making a major financial decision, You should determine why rentvesting is bad or good for you. 

Here are some key costs to factor into your calculations: 

Upfront Costs: 

• Deposit: Just like buying any property, you’ll need a deposit for your investment property. The deposit amount you’ll need will vary depending on the lender and your loan type, but it’s typically around 20% of the property value. 
• Stamp Duty: This is a government tax levied on property purchases. The amount you pay will depend on the state or territory where you’re buying, as well as the value of the property. 
• Settlement Costs: These are one-off fees associated with buying a property, such as legal fees, property valuation fees, and loan application fees. 

Ongoing Expenses: 

• Mortgage repayments: These are the biggest ongoing costs, and you’ll need to factor in principal and interest payments on your investment property loan. 
• Rates and taxes: These are ongoing charges levied by the local council and state government on property ownership. 
• Property management fees: If you choose to hire a property manager to handle your investment, you’ll need to factor in their fees. 
• Body Corporate or Strata Fees (for apartments): These are ongoing fees paid to maintain common areas and facilities within an apartment building or complex. They can vary depending on the amenities offered and the size of the building. 

Hidden Costs: 

• Unexpected Repairs and Maintenance: While budgeting for general wear and tear is important, sometimes unforeseen major repairs like roof leaks, heating system breakdowns, or appliance replacements can arise. 
• Vacancy Periods: There will likely be periods when your investment property is unoccupied between tenants. Factor in the potential loss of rental income during these vacancies. 

Once you have your budget planned out, you can also use this Moneysmart Calculator to help you determine whether it’s better to rent or buy. 

Considering these things, it is still best to consult with a qualified mortgage broker to assess your financial situation and determine if rentvesting aligns with your long-term plans. 

If it doesn’t align, that’s okay, too. Rentvesting isn’t for everyone. People with a low-risk tolerance may not be comfortable with the potential market fluctuations or management responsibilities. 

Conclusion 

Rentvesting offers a unique approach to entering the property market, particularly for those priced out of their dream location. It allows you to enjoy your desired lifestyle while building wealth through a strategically chosen investment property.

However, it’s not without its drawbacks. You might miss out on first-home buyer grants, face potential instability as a renter, and incur additional costs for managing an investment property. 

The decision to rentvest hinges on your individual circumstances. If you crave city life but affordability is a concern, or if you value flexibility and long-term wealth building, then rentvesting could be a viable option. 

Consult with experienced advisors to determine your options and figure out why rentvesting is bad or good for you. 

Lauren Eakins Principal Broker – AR488354

Lauren is a mortgage broker with more than 20 years of experience. $500M+ settled. Almost all of it for investors and high-income professionals.

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