At first glance, rentvesting is bad—renting a home while investing in a residential property. And yet, industry figures indicate that the rentvesting strategy has been gaining ground among Australian households.
Figures from the Australian Bureau of Statistics (ABS) indicated that up to 15% of all of Australia’s private tenant households are rentvestors. This percentage represents approximately 340,000 Australians.
A separate survey also showed rentvesting gaining even more disciples. This poll showed that among all investors, the ranks of rentvestors have grown from 20% to 30% over a two-year period.
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Rentvesting vs buying?
For these folks, there really is no rocket science behind rentvesting. They simply chose to continue renting in a place that jibes with their lifestyle while investing in a residence fit for their budget.
For them, rentvesting vs buying is a non-issue. With their available resources, they can have the best of both worlds—renting where they feel at home while at the same time having a residential investment.
What drives rentvesting?
The appetite for rentvesting has picked up partly because of rising home prices, particularly in the inner cities of Australia.
According to ABS’s most recent report, gains in the house values in the country’s smallest cities drove Australian residential property prices to soar by 23.7% in 2021.
Notably, this rise was the strongest annual growth recorded. And with this record high, expect rentvesting to continue gaining traction among investors in the years ahead.
Millennial rentvestors are hot
The rentvesting strategy appears to have grown quite popular, particularly among younger investors, and recent statistics bear this out. According to a 2020 research by Commbank, 43% of millennials are investing their money, with property one of their most favoured investments. Some also buy a duplex and rent out half so they can live in the same property.
Significantly, this research showed that the millennial investments were self-directed. This trend is also contrary to the common observation that millennials are a generation of spenders.
Indeed, the rationale behind rentvesting looks a perfect match for the younger demographics or millennials. This investment strategy is ideal for those who are still single and want to engage the property market.
Planning for the future
They can look for properties within their budget’s reach, while also maintaining the lifestyle that they enjoy in the inner-city area where they’re renting. These investors, though unable to afford inner-city home purchases, thus have an option in the future to settle into a more spacious residence.
Moreover, by renting out their residential property investment, these investors can partly or wholly cover their inner-city rental costs. Anticipation and timing, thus, are the elements foremost in the minds of rentvestors.
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A sound financial plan is a must
It goes without saying that you must have a sound financial plan to pursue rentvesting. This investment strategy involves a substantial amount of money, plus considerable planning time and effort. Here are some of the steps which are key to rentvesting success:
- Save for a house deposit. A significant deposit saved for your home purchase means you will have a better chance of getting a mortgage and will need to borrow less. Hence, you’ll pay less interest and be able to borrow without the costly lender’s mortgage insurance
- Target lower-value purchases. Conduct thorough research on the markets where you can find the best value-for-money home purchase. The more affordably priced houses are the typical targets of rentvestors. You need to frequent auctions and home inspections for a better perspective when examining comparable homes on the market.
- Focus on the long-term. Look at the long-term potential of property locations. Look for buying destinations which may not be hot right now but promises to be in a few years’ time. Your rentvesting success depends much on the growth of property value.
- Keep a tab on all costs. Factor in all costs of property ownership into your investment budget. Besides loan interest payments, you have to consider such costs as insurance, council rates, and property maintenance. In budgeting, consider using some online property investment calculator tools that can serve as your rentvesting calculator.
- Keep emotions out. The purchase of a residential property as an investment shouldn’t be an emotional engagement like buying a home to live in. Leave personal connection out. Your main focus is the property’s potential return on investment in terms of rental yield and capital growth.
- Do you need to live in your house for a year before renting it out? The answer is yes, to avoid capital gains tax.
Weigh the pros and cons of rentvesting
Bear in mind also that like any investment strategy, rentvesting has certain pros and cons to weigh. Some financial advisors even highlight more the side of why rentvesting is bad.
The disadvantages that they cite include the following:
- Disqualification on government incentives to first home buyers. Rentvestors lose their eligibility to schemes like the First Home Owner Grant offering low deposit requirement and exemption from lenders mortgage insurance.
- Cost burden of homeownership. Being a homeowner, you will have to shoulder the costs of maintaining and managing your investment property. These costs can be substantial in the long term, especially if your homeownership costs exceed the income from renting out the investment property.
- Capital gains tax liability. Once you sell the investment property, you will be assessed a capital gain tax. This is unlike selling an owner-occupied residence that is not covered by a capital gain tax.
Benefits of rentvesting
A well-planned and well-executed rentvesting strategy, however, can outweigh these drawbacks. One of the weightiest benefits of rentvesting is for investors to buy a house while continuing to live renting in an area suited to their wants and needs. If the investment property is delivering a profit, this income can even cover their rent.
At the same time, rentvestors can also enjoy other potential benefits such as:
- Early entry into the property market. Rentvesting targets lower-value areas which may require a smaller deposit. Rentvestors can enter the market sooner with relatively smaller savings.
- Opportunity to build wealth. The potential for rental income and value appreciation comes when rentvesting. Eventually, this wealth accumulation allows rentvestors to save money for their dream home.
- Access to tax benefits. Rentvestors can claim tax deductions from their rental property which does not generate a profit.
- Residential flexibility. Because they are renting, rentvestors can easily downsize or upgrade their residence without worrying about the costs and hassles associated with such move involving owner-occupied homes.
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