Rentvesting 101: What is Rentvesting? And is it Worth it?

Rentvesting is without a doubt one of the more innovative approaches to property investment emerging over recent years. It’s an effective way for investors to maximise returns on relatively small investments and take advantage of a growing real estate market.  According to the 2022 Property Investment Sentiment Survey, almost 30% of property investors are embracing this trend, it’s clear that rentvesting is here to stay – but it needs to be properly managed in order to ensure success. For those considering taking up rentvesting, having the knowledge and foresight to continually monitor market prices and trends will help them get ahead of the game and well positioned for growth.

So what is rentvesting? And is it the right strategy for you?

As the name implies, rentvesting is a property investment strategy where someone chooses to live (and rent) where they love but buy where they can afford. This approach sees rentvestors taking out an investment loan and buying one or more investment properties first before potentially buying their dream home to live in.

Why do People Rent while Investing?

As home prices continue to increase in prized inner-city areas, this strategy has become increasingly popular amongst younger buyers entering the property market. With over one-third of first-time investors rentvesting, this strategy will continue to grow as property prices continue to increase (2022 Property Investment Sentiment Survey).

At first glance, rentvesting doesn’t make logical sense. Why would anyone choose to pay additional rent (sometimes referred to as ‘dead money’) when they already have a property and mortgage repayments to make? 

The simple answer is that rentvesting can provide the best of both worlds. You can purchase an investment property that falls within your budget to start making rental income, get a head-start on the property ladder, and achieve future growth. On top of this, renting out an investment property may recoup most, if not all of the running costs. And when it comes to things like capital gains tax (CGT) and depreciation, you may be able to claim deductions on the property and save even more in taxes.

As you may not be able to afford a property where you want to live, adopting a rentvesting strategy can help you achieve your property goals sooner. It gives you the freedom to live where you want (close to work or important amenities or lifestyle benefits), while securing a future financial asset that will appreciate in value over time.

Advantages of Rentvesting:

1. Live where you want to
2. Makes living in more expensive suburbs possible
3. If your workplace changes, finding a place to rent is far easier than purchasing or finding jobs closer to your permanent residence
4. Invest in higher capital growth corridors without affecting your place of residence
5. Opens up your investment pool to opportunities in other more affordable cities such as Brisbane, Adelaide, and Perth

Potential tax-deductible benefits from negative gearing and depreciation

It all Sounds Great but How Does it Work Realistically?

Let’s take a close look at the following example. 

1. Both John & Jane purchase a property for $500,000 with a weekly rent of $400.
2. Both have identical annual incomes of $80,000 and have $100,000 in savings as a deposit.
3. Both John & Jane borrow $400,000 for the property and take an interest-only loan of a conservative 4%.
4. The only difference is that John (A) is purchasing as an owner occupier, while Jane (B) chooses the rentvesting path. 

At the end of the year, John, without any rental income would have to make home loan interest payments in the vicinity of $22,000 to live in the property himself. 

Rentvestor Jane only had to spend $2,536 out of pocket to hold the same property as an investment (not inclusive of her having to pay rent money). However, the graphic doesn’t end here because Jane can benefit from tax benefits as an investor.

When negative gearing and depreciation are added to the calculation, Jane saves $4,074 per year in tax. On top of this, if Jane rents in the suburb of her choice for $400 per week, Jane will have to pay $19,262 per year inclusive of rent and her investment property mortgage. 

Comparing the two, Jane saves $53 per week compared to if she’d bought the property to live in. That’s $2756 in cash for the year! 

So is Rentvesting Right for you?

As with any property investment, it’s important to do your research and work out the costs involved. But if you are looking for a way to grow your wealth while living where you want to, rentvesting could be an effective solution.

Ironfish offers a revolutionary suite of services designed to make investing easier than ever. Our research team offers data-driven insights to power investments, while our webinars, seminars and events help people learn more about investment concepts, strategies, and lending. Ironfish provides exclusive access to some of the most iconic residential real estate around, including apartments, townhouses, houses, and land all across Australia -allowing investors to feel confident that their investments are in the right places.

Deciding whether or not to rentvest depends on your personal budget, lifestyle, and stage in life. At Ironfish, our team of experienced property strategists can help run some calculations suited to you to find out whether or not rentvesting is an optimal investment strategy for your unique circumstances. Whether you are interested in buying your first property, investing in your dream home, or expanding your investment property portfolio, we can help you find the right path to start building wealth through bricks and mortar.

Book a discovery session with one of our property strategists today and discover your path to long-term investment success.