More people are rentvesting but is it the strategy for you?

From borrowing capacity calculations to long-term strategy determination, investors need to be confident rentvesting is the right move before they sign a contract.

View from inside bedroom of Melbourne apartment
For first home buyers who want to live in an apartment like this one in Melbourne, buying property in a cheaper area may be the strategy to achieve home ownership. (Image source: Shutterstock.com)

Rentvesting has become a popular phrase and concept in recent years. It literally refers to those investors who choose to rent and invest at the same time, as opposed to the traditional way of buying a home and paying it down.

Rentvesting has become popular, particularly among younger Australians who choose to rent where they want to live in the short term and invest where they believe their money can best serve them.

Australian Bureau of Statistics lending data shows a 25 per cent increase in first home buyers opting for investment home loans since July 2019. Back then, only 5.54 per cent of first home buyers were investors. Fast-forward to July 2024, this figure rises to 6.85 per cent. New South Wales, Queensland, and South Australia have the highest share of people choosing to invest for their first property rather than occupy it.

Five per cent of respondents to API Magazine’s Property Sentiment Report Q4 2024 identified themselves as rentvestors.

Some rentvest because they aren’t prepared to commit to a particular dwelling or location in the short term.

Others weigh up the cash flow implication and opt for a higher rental yielding property in a location outside of where they’d prefer to live.

I’ve met a few rentvestors who enjoy the apartment life in a dwelling that would otherwise prove to be an inferior investment. Such dwellings are often those with high strata fees and additional lifestyle elements such as gyms, pools and concierge.

Rentvesting allows a certain freedom, and it can be a great option for those who prefer to have flexibility with their home choices.

For most though, it’s the cash flow implication that drives this model. Take this scenario for example.

An investor is keen to build capital growth but can’t sustain the cashflow in the location they wish to live.

They decide to rent the modern, city-based two-bedroom, two-bathroom plus two-car space in Melbourne’s Docklands precinct.

This example property offers water views and a fun lifestyle. It’s located within walking distance to city amenity, and it features some modern fixtures and fittings, along with access to gym, pool, spa and sauna.

The rent registered for this apartment was $1,050 per week. While it is sizeable, the renter would justifiably weigh up the costs associated with owning the property.

Assuming a mortgage interest rate of 6.3 per cent on P&I, the monthly repayments would be $6066 per month based on the recent sale price of $980,000. The owner would also sustain strata fees of circa $5000 per year, rates of circa $2500 per year and they’d need to allocate maintenance fees for internal wear and tear.

The renter would pay $54,600 in the year, plus contents insurance.

The owner would pay $72,792 in principal and interest repayments, (or $61,740 in interest only repayments), plus circa $7,500 in outgoings (before maintenance).

The renter would save $14,640 per year when benchmarked against the interest-only ownership model.

The rentvestor could then consider some alternative property options with arguably stronger capital growth potential.

Not only would they enjoy their city lifestyle for a smaller cost than owning the apartment, but they could also enjoy the tax benefits associated with owning an investment property.

Negative gearing and depreciation benefits would offset the cost of holding a property with negative cashflow. But is this the optimal model?

The downsides to renvesting

The benefits sound exciting, and I’ve seen plenty of investors achieve their goals via this strategy, but it’s not for every investor.

There are some disadvantages associated with rentvesting.

For starters, the security of tenure is no guarantee for renters. An owner can issue a notice to vacate for a variety of reasons, and sometimes this timing can be particularly distressing for a renter.

Secondly, and more importantly, the decision to rentvest requires commitment and patience.

Many rentvestors start out with the best of intentions but somehow find the concept difficult to commit to long-term.

Rentvesting can often preclude investors from further borrowings. Upset can result when a rentvestor’s timing for purchasing their own home is delayed by their existing debt obligations.

We often find that a new partnership can put the rentvesting model to the test too. When a couple decide to purchase a home together, a rentvesting obligation that prevents the home purchase will likely precipitate a decision to sell.

If a rentvestor’s asset hasn’t been held for an adequate period, the capital gains may be questionable. The costs directly associated with selling can erode any gains, and the impact of capital gains tax will make a final blow on the rentvestor’s hip pocket too.

For some, simply targeting a principal place of residence can sometimes economically outweigh rentvesting, but this decision relies on a lot of variables. It is essential for budding rentvestors to obtain the right advice before jumping into this popular strategy.

From borrowing capacity calculations to long-term strategy determination, investors need to be confident that their rentvesting move is the right one before they sign a contract.

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