Is ‘rentvesting’ too good to be true?

May 2018

‘Rentvesting’—or buying an investment property while continuing to rent—has been touted as a way of getting a foot on the property ladder sooner.


Whether it’s right for you depends on a number of different considerations. Here we look at the pros and cons:

Pros

Live where you like

One of the most appealing factors of rentvesting is your ability to live anywhere without sacrificing your lifestyle (i.e. proximity to work, café culture, CBD nightlife, beaches etc.)—just to own a home. 

Renting in inner city areas will generally be cheaper than buying and paying a mortgage there because capital growth for property in these “trendier” inner suburbs tends to outpace the rental growth rate. So you can live where you want while building up equity and wealth, working towards purchasing your dream home or buying other investments. 

More flexibility

For some people, the flexibility and temporary nature of renting provides more freedom to move around and experience different lifestyles, types of homes and neighbourhoods. It also means that if you need to relocate for work, you may very well have more flexibility in choosing where you live and how long you stay there.

Potential for additional income 

If the rent you have coming in from your tenants is greater than your loan repayments on the investment property, you’ll benefit from additional income. You could use this to save for a holiday, pay off student loans, on everyday living expenses or to fast track your mortgage repayments.

You may get some handy tax deductions 

Tax laws provide a number of appealing tax benefits to property investors that aren’t available to owner occupiers. For instance, there are certain expenses on an investment property you may be able to claim. It’s best to check with your accountant or tax specialist to figure out what works best for you. 

Cons

Renting is temporary 

As a renter, your home is only temporary. This can be tricky for some, especially if you hate moving or you’re at a point in your life where you want to settle down permanently. Living on a year-to-year lease isn’t for everyone, so factor the hassle of having to move more frequently and the uncertainty of renting into your decision-making.

You may miss out on the first home owner grant (FHOG) and first home super saver scheme (FHSSS)

The FHOG and FHSSS are government schemes only available to first homebuyers who are buying or building a new home and intend to live in it. First time investors miss out on the FHSSS, but not the FHOG when they do eventually buy their first owner-occupied home. FHOG rules differ from state-to-state so it’s worth checking the fine print.  

Balancing the books

If spreadsheets and managing multiple buckets of money isn’t your thing, then you may find it tricky to manage both the finances of owning an investment property, and paying the rent and associated costs of being a tenant. It’s worth making sure you’re comfortable with how you budget before making a decision either way. 

Capital gains tax 

Unlike an owner-occupied dwelling, you may have to pay capital gains tax when you sell the investment property.

Limited changes

If you’re into home DIY it may not be desirable to live in rental properties for the long term where you're restricted by the terms of the lease agreement and unable to make changes to the décor and house itself.

What’s right for you?

We’ve only provided a snapshot of some of the pros and cons to rentvesting. A qualified financial adviser or accountant can help you assess your financial situation and help you figure out exactly what’s right for you.

There are also many online tools—like MoneySmart’s mortgage calculator—that can help you check if you can afford to buy a home based on current rental payments.