What is rentvesting?

Not everyone can afford to buy in the area they’d most like to live in. Especially if you’re keen to spend your days in a spacious apartment overlooking Bondi Beach. But what if we told you there’s a way to get your foot in the door of the property market while still living your best life in your favourite suburb? Introducing rentvesting. Keep reading to learn more about this popular investment strategy as well as the pros and cons that come with rentvesting.

Rentvesting explained

Rentvesting is quickly becoming a popular strategy for many budding homeowners. As the name suggests, rentvesting is a combination of renting and investing. Essentially, it involves renting a property in an area where you want to live while purchasing an investment property in a more affordable suburb or even in another city or state. Let’s take a closer look at exactly how rentvesting works.

Rather than buying a property to live in, the aim is to rent a home in your desired location. This often comes down to a number of reasons, from affordability constraints and lifestyle preferences to flexibility. While renting in one area, you then invest in a property in a more affordable area. 

Similar to most investment properties, the home you choose to buy is typically chosen based on factors like potential rental yield, capital growth prospects and overall affordability. Ultimately, the aim is for the investment property to generate rental income and appreciate in value over time.

Pros and cons of rentvesting

Just like any property investment strategy, rentvesting comes with its own set of advantages and drawbacks that you should weigh up before you choose to rentvest. Here’s a quick rundown of how the pros and cons of rentvesting stack up against each other. 

Pros of rentvesting

There’s a good reason why many Aussies are choosing to rentvest over living where they end up buying. Here are some of the main benefits of this strategy:

• Affordability: As a borrower, rentvesting allows you to enter the property market without having to buy a home in an expensive area. By renting in your desired location and investing in a more affordable property elsewhere, you can achieve homeownership while managing your budget more effectively.

• Flexibility: Renting provides flexibility in terms of location and lifestyle. It allows you to continue to live in areas where you might not be able to afford to buy, while still owning an investment property that can provide financial benefits.

• Tax benefits: As a property investor, you might be able to take advantage of certain tax benefits that come with owning an investment property, like tax deductions for interest repayments, property management fees and maintenance costs.

Cons of rentvesting

With that said, rentvesting isn’t all sunshine and rainbows. There are a few important drawbacks that you should take note of:

• Rental market risks: Renting means being subject to rental market fluctuations, including potential rent increases and the possibility of having to relocate if your landlord decides to sell the property or end your lease.

• Dual financial commitments: As a rentvestor, you need to manage rental payments for your own accommodation as well as mortgage payments for your investment property. This can be financially challenging, especially if the rental income on your investment doesn't cover your mortgage repayments.

• Limited control over living space: As you already know, renting means you have limited control over the property you live in compared to homeownership. You could face restrictions on renovations, modifications or even the length of your tenancy. 

Is rentvesting for you?

While it’s important to weigh up the pros and cons of rentvesting, if you’re wondering whether this is the strategy for you, a rentvesting calculator can help you assess the financial implications of both options. A rentvestment calculator works off a range of different factors, including:

• Current savings and financial situation,
• Desired property location for renting,
• Potential investment property location,
• Property prices in both locations,
• Rental rates in the desired location and potential rental income from the investment property,
• Mortgage interest rates and loan terms, and
• Any other relevant financial details like ongoing expenses, tax implications and anticipated capital growth rates. 

Based on these factors, the calculator will work out the costs of renting in your desired location and investing in another area. Based on the input factors and the calculated costs, the calculator will compare the financial outcomes of rentvesting versus traditional homeownership. It will usually provide a range of metrics such as:

• Total costs over a specified time period (EG. 5 years vs 10 years),
• Net cash flow (income minus expenses) for each option,
• Potential capital gains or losses from property appreciation, and
• Tax benefits or liabilities associated with each option.

If you don’t have access to a rentvesting calculator, you can even use a repayment calculator to work out how much your home loan will cost you. You’ll just also need to take into account the ongoing costs that come with owning your investment property, like council rates, strata fees (if applicable), utilities, insurance and home loan fees. From here, you can work the total costs against the costs of renting and compare these figures to traditional homeownership. But remember, a rentvesting calculator should be used as a tool along with your own research to decide whether rentvesting is the right strategy for you.

Just because you want to live in an area doesn’t necessarily mean you can afford to buy a property there, but that doesn’t mean you have to miss out on homeownership. Instead, rentvesting allows you to get into the property market while still living in an area you love. 

At Unloan, we offer home loans for live-in properties and investment properties. While we only currently offer refinanced loans, we’re working hard behind the scenes on our brand new buy a home offering that’s set to be released soon.

‍

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.‍

Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.