Is rentvesting all it’s stacked up to be?

Rentvesting: what is it?

As you might have guessed by the name, rentvesting is a property investment strategy that aims to access the best of both worlds.

For new investors, rentvesting has become an increasingly key strategy that allows you to rent where your interests and values lie and make sound property investments for the future – all while sticking to a budget that doesn’t compromise your lifestyle or finances.

Buyers agent and popular personal finance youtuber Ravi Sharma explained on Property Insights, “it’s an investment strategy where you’re renting where you want to live and then buying and investing in areas that logically make sense or where you can afford.”

home-ownership investment and looking for alternatives and, as he points out, with the potential inherent in new technologies and work styles, there’s no reason an investor has to live and work where they invest.

“I think we’re getting to the point where people now have alternatives, where you go – I can live anywhere.”

While the final goal might remain the same, younger investors are more aware of the different pathways to their dream home.

“Young investors reach out saying, ‘why would I listen to someone who did this 50 years ago, their circumstances were different.’ So there’s this disconnect.”

“They all pretty much want the same goal, which is financial freedom, having a house paid off and self-retirement … but there’s so many different ways we can do it, especially with different asset classes.”

According to Ravi, property investment in this generation is going to build up to the dream. You’re not initially purchasing where you want to live, or your dream property, but you’re starting the investment journey that will get you there over time, without compromising those values.

Ravi says, “It’s about moving the goalpost. Start with the end goal. Then come back to the present and say: what can we realistically do?”

“Do we want to splurge on a million dollar home right now? Would we be stuck? Or can we go out there, buy a handful of different properties in different markets, and be in the mentality that you’re not emotionally attached to any of them?”

It’s about looking for growth and positive cash flows over time so you can make repayments and get to a position where you have the best of both worlds. And eventually have enough to make a deposit on, or even buy outright, the dream home.

And rent-vesting allows that.

How does it work?

You’re renting where you want to live and it’s working for you. Here’s a simple example:

You’re paying $2000 a month rent and enjoying your life there. You’ve got another $2000 a month you could use, but that doesn’t cover the mortgage of a property in your dream location. Buying there is out of the budget.

So, we use that extra $2000 a month to take out a mortgage on an investment property instead. It’s not where you want to be but it can be rented out and you can continue to live where you choose, all while creating some wealth and avoiding either overextending your financial capacity or stepping away from your chosen lifestyle.

What are the risks?

It does, like any investment strategy, have its own challenges. 

Rentvesting is a strategy to go into with your eyes open and a realistic understanding of the long-term scope that comes with this type of approach to asset accumulation.

Obviously, you don’t want to be in a position where you have over committed and are struggling to meet your financial commitments. Two key tips are budgeting and research.

You’ve got to have a good budget to be successful at rentvesting. Renting whilst managing a mortgage, let alone the costs of maintaining a rental property, are significant financial commitments.

And you definitely need to do your research. Do your research on the property, the area and feasibility so you can be sure that your chosen property works as an investment.

Like any investment strategy there are risks – be sure to be aware of the advantages and disadvantages of rentvesting so you can make the most of this investment strategy.

Advantages:

• Flexibility: Rentvesters have the advantage of beginning their property investment journey while maintaining a lifestyle more to their choosing.
• Accessing the property ladder: The increasingly high cost property market is not easy to access, particularly for first home buyers, so this strategy enables the investor to buy where they can afford and enter the market sooner.
• Tax benefits: There are tax benefits to owning property, including deductions and advantages such as negative gearing.
• Affordability: Buying in more affordable areas means a smaller deposit is required, and less restrictive loan terms. The goal is to own property now rather than holding out, hoping to invest in more expensive properties at a later stage.
• Investment opportunities: Capital gain or equity in the investment property opens you to further opportunity in the property market, allowing you to build on your assets over time.

Disadvantages:

• Renting: Living as a tenant is not an easy journey. Inspections, rent increases and the need to potentially move on a whim has significant impacts.
• Property management: It can be very time consuming to manage life as a tenant and a landlord.
• Grant ineligibility: Certain government assistance will not be available to you if your purchased property is not your primary residence.
• Costs and tax implications: There will be ongoing property costs and the chance of paying mortgage and rent if you can’t find tenants for your investment property. Conversely, if your property makes a profit, capital gains tax applies.

3 tips for getting started

There’s never a one-size fits all approach. Rentvesting is a long-term strategy that may or may not work for you – everyone’s values and situation are different. Ask a whole lot of questions and do a whole lot of analysis before looking at property to make sure rentvesting is the strategy for you.

Ultimately, make sure you:

1. Know your financial capacity
2. Know your lifestyle needs and goals
3. Are aware of the risks

If you keep this in mind, rentvesting, as Ravi points out, is ultimately about maintaining a chosen lifestyle, while getting you to the dream property faster, and with more choice. “They’re thinking smarter. If that means they get the best of both worlds … well, why not?”