Recently, I wrote about rentvesting as an alternative to buying a first home to live in. It’s a way to get a foot on the property ladder if you’re priced out of your desired location – buying where you can afford, and renting in the area where you want to live.
I was particularly interested, then, to read new research from Ray White on rentvesting.
According to the research, only 55 per cent of millennials aged 25-39 currently own their home. That’s in stark contrast to 70 per cent of baby boomers who owned at the same age back in 1991.
What this tells me is that the traditional path to homeownership – saving a deposit and buying in the city you work in – is out of reach for many. But there are other ways to build wealth through property, and rentvesting is one of them.
What is rentvesting?
Rentvesting allows buyers to purchase an investment property in a more affordable area while continuing to rent in their preferred location – maintaining lifestyle while building equity.
It’s a strategy that Ray White’s Chief Economist and co-author of the research, Nerida Conisbee, says is becoming increasingly popular among young adults.
“Remarkably, over 50 per cent of property investment purchases in the past year were made by millennials and Gen Z, according to Commonwealth Bank data,” says Nerida.
But there’s more to love about rentvesting than just the property purchase price.
Why is it appealing?
While affordability is the obvious drawcard, rentvesting offers other advantages.
“Young professionals can live in vibrant inner-city areas with superior amenities, shorter commutes, and dynamic social scenes while building wealth through property investment in growth markets,” says Nerida.
Rentvestors aren’t tied to their mortgage in the way traditional buyers might be. They can move where the work is while still holding property elsewhere.
And while investment loans generally require higher deposits (around 20 per cent) and come with slightly higher interest rates, the tax advantages – such as negative gearing and depreciation – can’t be ignored.
Rentvesting ticks a number of boxes – but not all of them …
Why it’s not appealing
Before getting too excited about rentvesting as a potential gateway into the property market, it’s important to recognise that it carries inherent risks that require careful management.
“Vacancy periods can severely impact cash flow, particularly for negatively geared properties. Property management responsibilities add complexity and cost, while market volatility can affect both rental income and capital values,” warns Nerida.
It’s also worth noting that investment properties don’t qualify for the principal residence exemption, meaning any profits from the sale are subject to capital gains tax.
The potential stress of simultaneously being a renter and a landlord shouldn’t be underestimated and requires financial backup and emotional resilience to ride the waves- for instance when the rent isn’t being paid on time.
Some people may also struggle with the feeling of not “really” owning, since they don’t live in the property. And of course, there’s always housing insecurity as a renter – you live lease by lease, never knowing when your landlord might sell.
If rentvesting will cause you any of the above financial or emotional stress (that you can’t prepare for and resolve beforehand), then it may not be for you. But, if you’re going in with your eyes wide open and have a plan for managing risks and uncertainty, then here are your options.
Which rentvesting strategy suits you?
There are three main approaches to rentvesting, according to Nerida. Which one suits you best depends on your financial goals and the market conditions.
They are:
1. Capital gains strategy
This approach involves buying in suburbs with strong potential for capital growth.
“The objective is straightforward: when it comes time to sell, the difference between purchase and sale price helps bridge the gap between your budget and your desired home price,” says Nerida.
2. High rental yield strategy
Focuses on immediate cash flow by purchasing property in suburbs with strong rental returns.
“This strategy appeals to investors preferring reliable income streams and those wanting to use additional cash flow to accelerate their savings for future property purchases,” explains Nerida.
“High-yield properties typically exist in regional centres, areas with specific employment anchors, or locations where housing demand exceeds supply,” she says.
3. The hybrid approach
A balanced strategy that targets suburbs offering moderate capital growth alongside reasonable rental yields – combining income support and long-term wealth creation.
“Hybrid markets often exist in established regional centres with diverse economies, growing populations, and reasonable infrastructure. These areas typically offer more predictable returns than extreme capital gains markets while providing better long-term wealth building than pure yield plays,” says Nerida.
Rethinking the road to homeownership
The Australian dream of a house you own and live in, may be just that for many young buyers hoping to enter the market; a dream, and a pipe dream if the desired postcode is in a capital city where low vacancy rates, high population growth and potential interest rate cuts keep prices high.
Rentvesting offers an alternate way to realise that dream – while still providing an opportunity to build long-term wealth.
“For young Australians priced out of their preferred locations, rentvesting can be a viable alternative to indefinite renting or sacrificing lifestyle,” says Nerida.
It’s worth considering.
