What is Rentvesting (& Is It a Good Idea)?

rentvesting

Tuan Duong

Are you looking to climb the property ladder but can’t afford to buy in the area where you want to live? Rentvesting could be your key to entering the property market.

The ever-increasing property prices have had many new investors weighing up the issue of lifestyle versus property ownership. 

However, the rentvesting home-owning strategy has allowed many Australians to expand their property portfolio without sacrificing their lifestyle. It’s the best of both worlds. 

But how does it work? What are the pros and cons? Is it the right option for you? Does it make sense to pay off a mortgage and rent simultaneously?

We aim to answer all your questions and more through this step-by-step guide to property rentvesting.

What Is Rentvesting?

The rentvesting strategy involves purchasing an investment property in an area that suits your budget, generally outside of the city, and renting a property in an area that suits your lifestyle. Renting also offers the benefit of low maintenance costs, as tenants are usually not responsible for expenses caused by natural wear and tear.

Rentvesting allows individuals to enjoy the benefits of a city, such as transport, dining out, and access to good schools, while owning property elsewhere.

So, essentially, you are finding the perfect balance between owning an affordable property and living in your dream home – that you can’t currently afford to buy.

The Pros of Rentvesting and Tax Benefits

  • The freedom to live where you want

The main advantage of using the rentvesting strategy is the ability to live your dream life, while still climbing up the property ladder.

  • Entering the property market sooner

Instead of waiting until you can afford to purchase your dream home, the rentvesting strategy allows you to start building your property portfolio sooner.

  • Tax Benefits

Owning an investment property allows you to claim several tax deductions that you aren’t able to claim if the property was your home.

  • Flexibility

When you’re renting, the absence of permanency allows you a degree of flexibility when it comes to choosing a home based on your circumstances. For example, you may get a promotion at a company in another city. 

Renting allows you to move to that city without the hassle of selling a home. Additionally, as a tenant, you are not typically required to cover any maintenance costs, which are usually the responsibility of the landlord.

Cons of Rentvesting You May Want To Consider

  • Having to rent your home

As much as you may love the lifestyle that comes with renting your dream home, it’s, unfortunately, not your home. This means you may have difficulty settling into the property as if it were your own, and you will have to seek permission and assistance from property managers and landlords if something needs to be fixed or if you simply want to hang a picture on the wall. 

Additionally, one of the cons of rentvesting is the emotional difficulty and potential inconvenience of moving houses multiple times.

  • Counter-Intuitive

One factor that may dissuade you from going the rentvesting route is the idea of purchasing a property just to rent it out, while you pay someone else’s mortgage at the rental property you live in.

  • Capital Gains Tax

If you own the house that you live in, you are generally exempt from paying capital gains tax on the eventual sale of your home. 

However, if you sell an investment property, you’re usually liable to pay capital gains tax on the profit you make from the sale, constituting the capital gains tax liability. This means you must pay tax on any capital gains made from selling the property. 

It is advisable to seek professional financial advice when considering property investment to fully understand your capital gains tax liability.

  • No access to First Home Owners Grant

As you will not be occupying your new home, and rather investing in it, you won’t be able to access the First Home Owners Grant.

  • Potential Capital Loss

It’s not always guaranteed that your investment will increase in value. Suppose it decreases in value. If that is the case, you might have to sell it at a loss.

Things You Should Consider Before Deciding to Rentvest 

Besides the drawbacks and benefits of rentvesting, there are a few other factors that you should consider before making your final decision. Owner-occupied properties are exempt from paying Capital Gains Tax and are ineligible for the First Home Owners Grant, unlike investment properties, which may have tax liabilities and grant ineligibility.

Crunch Your Numbers

Rentvesting obviously needs to make financial sense in your specific circumstances. 

On the one hand, if you’re considering rentvesting as a strategy for your first property purchase, you’ll be missing out on considerable first-time buyer benefits such as the First Home Owner Grant or a reduction on stamp duty. 

With the grant potentially saving you $10,000 and a reduction in stamp duty fees, it all adds up. 

On the other hand, if your property is negatively geared (i.e. it’s running at a loss), you could claim deductions to save on your personal income tax. So, it could potentially compensate for the lost benefits. Remember, you’ll also need to take into account any other property or multiple properties in your portfolio.

Either way, you need to check your numbers. It pays to crunch your numbers first to make sure the rentvesting strategy makes sense for you. 

Rental Income 

While you may have access to certain tax savings from a negative gearing property, it’s not an ideal situation to be in as a first-time property investor.

The high transaction expenses, paired with the price of maintaining the property and ongoing home ownership costs are all likely to stretch your cash flow quite thinly. You also have to pay your own rental costs during this time.

The key to the rentvesting strategy is to consider your property as a long-term asset. You’ll need to hold on to the property for at least five years for it to realise potential growth. Even if you buy in an area with a strong rental return, it’s not likely that the rental income will cover all the costs. Additionally, if the investment property increases in value over time, you could benefit from capital gains.

Along with seeing your purchase as a long-term investment, you should make sure you can cover the gap between the costs of the property and the rental income. However, there is also a risk that the investment property decreases in value, leading to potential capital loss.

3 Steps To Successful Rentvesting

If, after weighing up the pros, cons and all the other variables of rentvesting, you’ve decided that this is the best property investment strategy for you, you can start taking the next steps on your investment journey. 

Step 1 – The Deposit

The first step involves securing a deposit for a property. If you can secure a 20% deposit, then you won’t be required to pay Lenders Mortgage Insurance (LMI). 

While 20% sounds daunting, remember that 20% of $450,000 is much better than 20% of $1,000,000!

Step 2 – Research the Property Market

Rentvesting is a fantastic strategy for investors looking to enter the property market sooner, but only if you make the right investments.

Essentially, choosing the right location to buy your property starts with evaluating your long-term goals. You’ll need to consider factors such as:

  • potential growth;
  • low vacancy rates; and
  • best rental yields.

Purchasing investment properties in rural or regional areas can be beneficial due to their lower prices compared to city areas, allowing you to enjoy the advantages of a city lifestyle while owning property in lower-cost areas.

You may want to consider getting an expert’s opinion during the research step. For example, a buyer’s agent will have all the information you’ll need to buy your investment property at an attractive price and with good potential for growth.

Step 3 – Purchase an Investment Property and Repeat

The aim of the rentvesting strategy is to fast-track your wealth-building by getting into the property market sooner rather than later. Rentvesting involves purchasing an investment property in lower-cost areas while renting in the city to enjoy the benefits of a city lifestyle. 

So, the next step would be to start considering your next property goal.

If you’re able to secure that 20% deposit and buy in an area with the potential for future capital growth, it’s entirely likely that you’ll be able to start seeing a positive cash flow from your investment property early. Especially if you’re claiming all the tax deductions available to you, such as depreciation.

The savings and equity held in your first investment property can help you secure the deposit for your next investment property or even your future dream home.

Learn how rentvesting works

Key Takeaways

There is no “one-size-fits-all” strategy for building your property portfolio.

The key to choosing a property investment strategy is to ensure it aligns with your current financial circumstances, lifestyle preferences, and future financial goals.

One property strategy you might want to consider is rentvesting. Rentvesting allows you to balance your lifestyle and property goals by getting your foot in the property market faster while still fulfilling your social desires. Purchasing investment properties in lower-cost areas and renting them out to generate income can be an effective way to maximise returns and leverage tax benefits.

As with all property investment strategies, however, rentvesting comes with many advantages, as well as a few disadvantages.

Making the right decision requires a good understanding of the property market, the costs involved, and how to make every dollar count.

As a team of property investors, we at Duo Tax understand that every dollar counts, especially if you’re starting in the investment property sphere.

Whether you’ve decided to rentvest or not, we have the expertise to help you take your property investment to the next level through depreciation schedules and valuations.

Depreciation on your investment property is a significant tax-deductible expense. In fact, it’s the second-largest tax deduction for your investment property after interest on your loan. That is why it helps to purchase a tax depreciation schedule.

To see how we can help you with your future property, get in touch with us today.

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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