What is Rentvesting – 8 Things You Must Know
Have you found yourself wondering what rentvesting is? This is an odd term unknown to many outside certain real estate circles or investment and finance community Facebook groups.
Well, don’t stress – this helpful article will explain all about rentvesting and share x things you must know about this phenomenon.
We’ll explain what exactly rentvesting is, why people might choose to rentvest, some of the benefits and drawbacks of rentvesting and how it could be the way to live where you want while still achieving the great Australian dream of home ownership.
So, without further ado, let’s get tucked into it.
What is Rentvesting – The Recent Phenomenon
Rentvesting is the term given to when you purchase an investment property that you lease out to tenants for rental income. Then, you rent a home in your desired suburb. The term comes from combining the terms renting and investing.
Let’s take the city of Melbourne, for instance. You’re a young couple in Melbourne. You purchase an investment property in an outer suburb, which is relatively affordable and gives a decent rental yield. You obtain a mortgage on that investment property via a home loan from a bank that you have to pay off over 30 years.
Then, you rent a property in an inner-city location, close to work or leisure sites or where your future kids might attend school. You enjoy living in your desired location while you pay off your home loan from the rental income on your investment property.
Then, you use your income to pay your rent and for other lifestyle expenditures. You can see what is rentvesting from this explanation given above.
Why People Choose Rentvesting as a Lifestyle Choice
It’s as all the real estate agents say over the years – location, location! Many young people are entirely priced out of their desired suburbs due to the high cost of the property. Most inner-city suburbs in major cities in Australia have an average house cost of a million dollars or more.
For young people, even in a couple earning around $120-150k gross household income, this is not always enough to service a mortgage of $900,000 or more.
For a while, young people in this situation were forced to move out to suburbs on the suburban fringes of cities, where houses are more affordable. However, with this living situation comes long commutes. Some people drive over an hour each way to work if they work in the city or a central location.
This can mean you get tired quickly and sacrifice family, leisure and hobby time due to travel.
However, once rentvesting became a phenomenon, people found they could still own a home – not the one they lived in. They invest in real estate for rental income – which, as we said, pays the mortgage on the investment property.
Then, they can use their combined household income to rent somewhere desirable for them. All of a sudden, those inner-city locations are within reach and budget.
What is Rentvesting – The Benefits of This Tactic
There are several benefits to rentvesting, which we’ll explain in detail now.
Your Landlord Can Deal With Maintenance and Repairs
Being a homeowner means dealing with property maintenance and repair issues. Leaking roofs, burst pipes, blocked toilets, water damage, broken locks, holes in the wall, cracking and foundation issues. All this and more are a headache and cost you money.
Those taking the rentvesting approach still have to deal with these issues on their rental property, but we’ll discuss that in a minute.
The beauty of renting where you live is that your landlord and real estate property manager must deal with these issues. As a tenant, you can report a maintenance or urgent repair issue to your private landlord or property manager, and they should deal with it.
You can claim compensation and orders to rectify the issues through your state tribunal service if they don’t.
Then, you only need to worry about being home to let the tradespeople in to fix the issue. There are no invoices to pay or headaches chasing tradies or obtaining repair or maintenance quotes. You can sit back and enjoy where you live hassle-free.
You Can Appoint a Property Manager for Your Investment Home
The beauty of rentvesting is that a property manager from a real estate agency can manage your rental property. You’ll have a go-to person for all issues for a small percentage of your monthly rent. They can deal with tradies, obtain quotes, and arrange repairs and inspections.
All you need to do as the landlord is approve works and pay for repairs and maintenance. And, since you’re getting a rental yield from the property, you have an income stream to pay for this. You should always expect to spend some money on investment property.
After all, maintaining it and keeping your tenants happy is in your interests. You wouldn’t want to live in a dilapidated, run-down home, so keep your investment property looked after.
With this approach, you can relax and enjoy life as the property manager looks after your investment and escalates any issues to you as appropriate.
What is Rentvesting – You Can Enter the Market Sooner
The great thing about real estate is that, in most cases, it is appreciated. This means that the value of a home increases over time. If you’re priced out of your desired area, you can buy where you can afford by investing in a suburb you don’t live in. Remember, you rent where you want to live.
Then, you have a foot in the door of the property market. This will open other opportunities for you. For instance, if you sell after some years of owning the home, you might wind up with a tidy sum due to it appreciating in value.
Another advantage is that you can leverage the equity in your rental home to either purchase more investment properties or a principal place of residence. Equity is the amount of the property you own. It is typically the repayments you’ve made minus the loan amount plus your deposit.
You might even be able to afford to purchase property in your desired location. That is after you have amassed a solid amount of equity.
By entering the market by rentvesting, you are investing in your financial future.
You Could Develop the Land You Buy
As we mentioned above, you can put your rental income towards paying down the mortgage on your investment property. Then, as we said, your employment income pays your rent.
Also, if you buy a suitable piece of real estate, you could even develop the land down the track. This is a proven way of maximising the value of your land.
You are looking at significant profit potential by building two or more townhouses on the land and selling them off.
When the time is right, and you can afford the initial outlay for surveys and plans. Then, you develop the land and walk away with some serious bank. This is a possible outcome for rentvesting.
What is Rentvesting – Drawbacks of Rentvesting
There aren’t many downsides to this approach. But, as investing in anything is not without risk, let’s explain some potential downsides.
A Vacant Rental Property
A vacant rental property doesn’t provide any income. If your investment property is without tenants, you’ll need to manage your rent and mortgage repayments from your income. You can mitigate this risk quickly by ensuring you are not demanding excessive rent.
Furthermore, you should maintain the property well so it’s appealing to tenants.
Capital Gains Tax
If you sell your investment property down the line, you’ll need to pay tax on any capital gains. This is paying tax on any money you make from the sale after discharging your mortgage and home loan. You don’t have to do this if you sell an owner-occupied home, so this is a negative for rentvesting. The plus side of this is that you have made a profit. Like any income, the tax man gets his slice of the pie.
In Conclusion
This helpful article has shared all about what is rentvesting. We’ve also shared eight things you must know about this approach to investment home ownership and renting where you want to live. By now, you’re more educated about this angle that many people take to live their lifestyle on their terms. Will you join them?
If you want more information on investing in property in Australia, check out this book list.
