Rentvesting Explained: Is It a Smart Strategy?

Rentvesting has become a common term in recent times, with rising house prices and a dwindling affordability factor making it difficult for young people to get onto the property ladder.

And with the capital cities clocking the fastest price rises, it’s no wonder young people are taking a different approach to home ownership.

But what is rentvesting, and is it a good idea for those wanting to get a foot in the door?

Rentvesting is when someone purchases an investment property, but continues to live in a rental property.

They tend to continue living in cities, close to work, family and friends, while purchasing in a more affordable suburb or region, that might even be in a different state.

This method allows them to get a foot in the door where property might still be affordable, but continue to live in a convenient location, without the need to upheave their life.

It’s a good way of securing your place on the property ladder, but with all investment strategies comes pros and cons. Let’s take a look at the benefits and downsides of rentvesting.

Pros of rentvesting

As mentioned above, the greatest benefit of rentvesting is that it allows people to get a foot on the property ladder, without having to save a huge deposit, and qualify for a large loan.

Apartment prices in some inner city suburbs of Sydney and Melbourne are astronomical, experiencing huge growth that has made them somewhat unaffordable to a sizeable portion of young Australians.

But a lot of people have grown up in these areas, and despite financial barriers, still want to live close to friends, family and work. So rentvesting benefits them in that regard.

A budding investor living in Sydney paying the median unit rent of $667 might be unable to afford a $1.4 million unit, the median price for the City.

But they have options outside of Sydney.

Some other capital cities present great value, with data reflecting strong growth.

According to CoreLogic and SQM Research, the median unit house price in Perth is $450,905, and the median rent for a unit is $546 per week, equivalent to roughly a 6.3% yield.

Alternatively, Brisbane’s median unit price is $545,354, with a median rent of $547 per week. It equates to a yield of roughly 5.2%.

For investors prospecting their options, properties in these suburbs might tick all their boxes. They offer growth potential, can provide rental income, and are an affordable entry point.

Additionally, investing elsewhere could empower rentvestors to leverage capital growth in the form of equity.

As the property appreciates in value, a rentvestor can utilise their equity to expand their property portfolio, all while still living in close proximity to work and family.

The greatest benefit to rentvesting is that it provides a more achievable avenue into homeownership when so many young Australians are gradually becoming locked out of the market.

House prices are rising despite economic headwinds, and a surge in migration coupled with insufficient housing supply will see house prices continue to increase, reaching new records and further impacting affordability.

Rentvesting helps young Australians overcome this hurdle, providing access to the property market to secure their financial future.

Cons of rentvesting

As with all investment strategies, there are downsides and risks with rentvesting.

The greatest one is that as a renter, money is still being funnelled every week into someone else’s asset rather than your own.

It means that instead of paying off your own house to live in, you’re contributing to the mortgage of someone else, and that is money you will never recoup.

There’s also an element of instability in the renting aspect, with renters generally holding fewer rights than landlords.

Renters can be evicted (with notice), subjected to open homes if the landlord decides to sell, and are also restricted in what they can do to a property.

And with current constraints in the rental market, with record low vacancy rates and unprecedented increases in rent, it’s an exceptionally difficult time for renters.

But nonetheless, property ownership is a goal for many, and rentvesting is a strategy that helps people achieve that goal.

Property investment can be a path to financial freedom, and if rentvesting helps more people achieve that, it can be a better option than the alternative – which is becoming stuck in the rental market.