What is rentvesting and is it a good idea?
As a renter, it’s difficult enough to enter the property market, let alone buy a home you’re happy with at a price that won’t make you queasy. However, a home-buying strategy that’s growing in popularity, known as rentvesting, is seeing Australians swapping out traditional home loans for an investment property.
In 2024 alone, Mozo's research found a 25% increase in first-home buyers opting for investment loans over owner-occupied home loans. But is the rentvesting strategy a good idea?
What does rentvesting mean?
Rentvesting is a combination of the words ‘renting’ and ‘investing’, and refers to those who continue to rent while investing in another property. People who do this are known as rentvestors.
How does rentvesting work?
The whole idea behind rentvesting is that it can be cheaper to purchase an investment property, rather than an owner-occupied property. Eventually, when the time is right, and if the property has increased in value, rentvestors can sell their investment property and buy the house where they want to live.
Rentvesting is usually undertaken by those who have been priced out of the market for the type of property they actually want to own, and instead need to rent one of them.
What is an example of rentvesting?
An example of a situation where it can make sense to rentvest is with a young family.
Say, they have two kids and need a three-bedroom house, close to the school where the kids are enrolled. They would ideally purchase a three-bedder inside the school catchment area, but they can’t afford to. Instead, what they can afford is a one-bedroom apartment, a few suburbs over.
So, the family continues to rent where they need to live, but they purchase the apartment as an investment. Over time, they build up equity in their investment by paying off more of the loan, until they are either able to sell the property for a profit and purchase the type of home they need, or use the equity as a deposit for a new home.
Is rentvesting a good idea?
The major draw of rentvesting is that you can get on the property ladder sooner without being limited to living where you can afford to buy.
For example, if you need to live near the CBD for work, but can’t afford to buy there, you can continue renting close to work or family, while investing in cheaper real estate elsewhere.
However, rentvesting is not a walk in the park and it can require significant involvement on your behalf.
Whether rentvesting is a good strategy for you depends on your financial goals, financial situation, the amount of time or resources you can allocate towards managing your investment property, and how much tolerance you have towards financial risks like investing.
Pros and cons of rentvesting
| Pros | Cons |
| Rentvesting helps you get on the property ladder sooner | You’re still a renter yourself, so you will be at the whim of your own landlord for longer |
| Where you live isn’t limited by where you can afford to buy | You are responsible for maintenance, council rates, water usage charges, agent or property manager fees, and more on your investment property |
| You can put rental payments from tenants towards your investment loan repayments | If the rental income you receive from your tenant is less than your mortgage repayments, then you will need to cover the shortfall |
| Potential tax benefits, such as tax deductions for investment property expenses and negative gearing | If you sell your investment property, you will be liable for Capital Gains Tax (CGT) |
| Potential capital gains from increasing property value | You won’t be eligible for the First Home Owners Grant (FHOG) and most other home loan grants and schemes |
| You get the flexibility of being a renter yourself, meaning you can move or downsize as often as you like | If your investment property falls in value and you decide to sell it, then you may make a capital loss |
| You may not be paying as much for your mortgage, which can help you save money | Investment home loans typically have slightly higher interest rates than owner-occupier loans |
How to start rentvesting
If you’re keen to use rentvesting as a strategy for entering the property market, consider following these five steps:
1. Research the property market
The first step in your rentvesting journey is to work out which locations you should be looking to invest in. Search for areas through the lenses of potential growth, low vacancy rates, and best rental yields.
For instance, you may consider an investment property in a regional area, where prices are typically lower. However, those same properties might have a limited growth potential. So, you need to weigh up your options based on your own rentvesting goals.
2. Save up a deposit
Before you buy an investment property to rentvest, you’ll need to save up for a deposit.
While a deposit is typically 20% of the property value, you can get an investment loan with a deposit as low as 5%. Although, you’ll likely need to pay Lenders Mortgage Insurance (LMI) if you do.
A lower deposit amount often also means higher interest rates, due to the way lenders calculate risk and consider your loan-to-value ratio (LVR).
3. Find an investment loan
Once you have your deposit saved or have worked out how much you need to save, you can start to explore your financing options. This is a crucial step because it’s when you’ll need to consider one of your major expenses: mortgage repayments.
When you compare investment loans, keep an eye on the interest rate and fees charged on each of your shortlisted loans. The aim here is to find a loan you can afford while ensuring that it fits your needs.
Remember that you’ll still be paying rent at your primary residence while needing to cover the cost of repayments. So, you’ll also need to work out how much to charge your future tenants.
4. Work out how much rental income you need
An important part of the equation for rentvestors is ensuring that your rental income – the amount of money you receive from tenants – is enough to cover your investment loan repayments and investment property expenses, with a little extra on top for profit.
You can estimate what your repayments will be by using a mortgage repayment calculator.
This is also a good time to research rental properties in the area you’re thinking of investing in. Look at what other landlords are charging in that area for similar properties and judge whether you can charge the same.
If you’ve done the maths on your income vs expenses and it’s looking like you’ll be able to afford to rentvest, then you can purchase your first investment property.
5. Organise a property manager
After you’ve bought your property, you may want to hire a real estate agent or property manager to help you manage it. While this will be another expense to contend with, it can save you time and money finding and looking after your tenants’ needs. It may also be a tax-deductible expense.
Ready to leap into the world of rentvesting?
A loan with a competitive rate can help fund your first investment property. Compare investment home loans today.
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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