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3 Reasons Why Rentvesting Beats Buying for Building Long-Term Wealth

February 2, 2024

We’re not big fans of financial jargon but we’ll make an exception for this one word: rentvesting. It’s an investing term you’ll be seeing a lot more of this year, so now’s the perfect time to learn all about it. If you play your cards right, rentvesting could be your solution to finally breaking into the property market.

So, what actually is rentvesting?

Rentvesting is a nifty investing strategy where you rent a home in an area that fits your lifestyle whilst owning an investment property in an area that suits your budget. As inner-city property prices soar, rentvesting has become increasingly popular, especially among first home buyers looking to get their foot in the property investment door.

If you’re scratching your head a bit at this point, we don’t blame you. Why pay rent and fund a mortgage at the same time? It seems backwards! But here are a few figures that’ll help clear things up and prove that rentvesting can be a great financial move.

Only 21% of homes across Australia are more affordable to buy than rent.
In New South Wales, one of the most expensive markets in the country, fewer than 7% of homes are cheaper to buy.
Six in 10 Australians aged 18 to 34 said they could no longer afford to buy a property in the area where they grew up.

In short, buying property where you actually want to live is just not realistic for a lot of people anymore. But that doesn’t have to stop you from buying property at all. By rentvesting, you can use the money you have to get into the property market where you can, without making any lifestyle sacrifices.

The rise of rentvesting

Rentvesting isn’t a new concept, but it has grown in popularity lately. With rising house prices and drastic rate increases, everyone and their mum is looking for creative ways to approach investing and stretch their money further in the property market.

How do rising house prices and rate increases impact you?

When the banks hike up their rates, your borrowing power decreases. That means you might struggle to get a loan big enough to cover your mortgage as an owner-occupier. Plus, with rapid inflation growth in 2023, you might have found it challenging to save up for your first home deposit.

Despite this, you’re by no means powerless in the housing market. Here are your options:

Take advantage of government schemes and initiatives. These are typically aimed at helping you to make your 20% deposit, and subsequently avoid paying Lender’s Mortgage Insurance (LMI). Many (but not all) of these are targeted at first home buyers, however, few help with making loan repayments or increasing borrowing capacity.
Structuring the purchase of your property as an investment, instead of as an owner-occupied home. Essentially, you would purchase your property as an investment to rent out to tenants, instead of for yourself to live in.

Why rentvesting might be right for you

By structuring your purchase as an investment, you can actually borrow a higher amount from the bank. That’s because you can use the rental income you make from the investment property to service your loan. So not only is investing in a rental property a more attainable option because you’re buying in a more affordable area, but you’re also able to borrow more from the bank.

The benefits of rentvesting

Still umming and ahhing about rentvesting? Let’s break down all the benefits so you get the full picture:

- Getting onto the property ladder. The sooner you own property, the sooner you’re on your way to building lifelong wealth and your dream future.

Tax benefits. In some cases, you can claim a number of your investment property expenses as tax deductions. For example, the interest charged for loans, rental costs like insurance and advertising, and depreciation costs can be claimed.

Diversified income sources. Any investor worth their salt will tell you that diversification is key to the long-term security of your wealth. By rentvesting, you’re taking a step toward future-proofing your income.

Potential capital gains. There’s a good chance that your investment property will increase in value over time. Later down the road, you could sell at a profit.

Living wherever you want. You don’t need to move away from your favourite suburb, friends and family just to afford your first property.

Another big benefit of rentvesting is that it makes investing in a another higher-value property (one that you could potentially live in!) much easier after a few years. It all comes down to equity – the value of your investment property, minus any money owed on it. You can use the equity from your investment property as a deposit for a second property, with your investment property serving as security for the new loan. This method enables you to purchase a second property without even needing a cash deposit.

The downside of rentvesting

There are a few important negatives to consider before going all-in on investing in a rental property.

You’ll become a landlord. Managing tenants is not at the top of everyone’s bucket lists. It’s crucial to understand that being a landlord can be hard work which means your rental income isn’t truly passive income.

Ongoing property costs. Another big part of being a landlord is taking responsibility for the ongoing cost of maintenance and repairs of your investment property. If your rental income isn’t enough to foot your ownership costs, you’ll have to make up the difference out-of-pocket.

Capital Gains Tax (CGT) liability. If you sell your investment property, you’ll have to pay tax on any profits you make, whereas you don’t have to pay CGT on most owner-occupied properties.

Debunking misconceptions about rentvesting

When investing in property, you can’t access any first home buyer schemes and grants because they’re only available to owner-occupiers. These typically help buyers purchase property with the equivalent of a 20% deposit. Or, in the case of the First Home Buyers Assistance Scheme, they can allow buyers to avoid paying stamp duty fees.

Without access to first home buyer schemes and grants, you might have to purchase your investment property with a deposit lower than 20%. That means you’ll have to pay Lender’s Mortgage Insurance (LMI), a once off payment that covers the lender for the life of your mortgage, in full.

At face-value, this can seem like a massive drawback. But, the reality is, the capital growth (value increase) of your investment property in its first year will most likely equate to more than those stamp duty and LMI costs anyway.

Get help with your property purchase and investment strategy

Managing your finances and investing in property requires a skilled, experienced hand and a tailored approach. At Connected Finance, our experts will work with you to plan your finances and figure out what homeownership and investing strategy is right for you.

Appointments with Connected Finance come to you at no cost, so you don’t have anything to lose by booking a time to chat with our team and learn more about your home loan options.