Rentvesting: Just a craze, or a savvy move?

An increasing number of millennials are rentvesting to enter the property market, but is it actually a good way to get ahead?

Even if you’ve been living under a rock, you know that Australian property prices have surged lately.

Supply shortages have driven higher prices because Australians have been using their savings from the lockdowns (mostly coming from missed holidays) to buy a home more suited to their lifestyle.

Bigger homes and scenic suburbs further away from CBDs experienced the biggest jumps. After all, who doesn’t want a study or wish they could go for a walk near the water in between work calls?

The dark side of the story is that this surge in property prices is making it even harder for young people to buy their first property.

That’s why an increasing number of millennials are getting into rentvesting. It’s a way to get a foot in the door of the real estate market, without sacrificing lifestyle.

Let’s have a look at what rentvesting is and if it could be right for you.

What is rentvesting?

Let’s say you’re single and have put some money aside for a deposit, but it’s not enough to buy a place in the area where you spend most of the time with your friends.

Or maybe you have a young family and work from home most days. You want an extra room and a bigger backyard for the kids to play under your watch, but you can’t afford to buy where they go to school.

Or you could be someone who needs to move frequently for work reasons. Or likes to experience what it is like to live somewhere different.

With a rentvesting strategy, you rent where you want to live and invest in an area where you can afford to buy a property.

Perhaps you live in Sydney, Melbourne or Brisbane and purchased a property in a less expensive, or up-and-coming, neighbourhood. Alternatively, you could buy in regional areas where property prices are lower than in metro areas.

You could buy purely with an investor mindset; or buy to move into the property later down the track.

For some, rentvesting is the best way to get into the property market without overstretching their budget, or breaking the bank of Mum and Dad. But for others, it could be an expensive money mistake.

Like with everything else, there are pros and cons to it. Let’s see what they are.

Pros and cons of rentvesting

Is rentvesting for you?

It might shock you to hear this, but there are very limited circumstances when rentvesting makes true financial sense.

Here is why.

Comparing apples with apples, if you consider the renting vs buying options for the same property, rentvesting almost always leaves you worse off.

One of the fundamental differences is the Capital Gain Tax, which you have to pay when selling your investment property, but don’t have to when selling your home. In the short term, your cash flow looks better, but your long-term asset accumulation suffers – ie. you actually lose money when rentvesting.

Also, remember that purchasing an investment property today will limit your ability to buy your own home in the future, because you might not have enough funds for a deposit.

The other thing to consider is the quality of your investment.

Making a good investment means buying low and selling high. But there are other factors to consider, such as how fast your investment appreciates over time, and more.

Sometimes, rentvesting is used as a technique to sell property to Melburnians and Sydneysiders who are used to high prices. When purchasing at lower-prices, especially in Queensland, they feel they are getting a bargain.

Reality is, over the past 18 years, the real estate market in Brisbane has consistently underperformed the Sydney and (to a lesser extent) the Melbourne ones.

Of course, there are exceptions in every market, and good investments can be made.

Otherwise, you could be temporarily living away from where you want to settle, but planning to buy and move back later down the track. For example, you could be from Adelaide and enjoying the Bondi lifestyle, but planning to move back home to start a family in a few years.

In these cases, rentvesting is a better option.

How to decide if it’s right for you

To make sure rentvesting really ends up being the best and not the worst of both worlds, here are some simple questions to help you decide.

1. Should you rent or buy your home? To answer this question, see this article.

2. If you’ve decided to rent because you can’t afford to buy where you want to live, the second question you need to answer is: how will you invest the spare cash that you would have used for the deposit? Remember, there are many other investment options available besides real estate.

Consider your values