What is Rentvesting? and Pros & Cons for Investors

Ever heard of rentvesting? It’s an investment strategy that more and more investors are turning to. But what is rentvesting, and why is it suddenly gaining so much attention?

What is Rentvesting?

Simply put, rentvesting strategy is when you rent a place in an area that suits your lifestyle, maybe close to your work or a family-friendly neighbourhood, but you buy an investment property in a more affordable area that offers better financial returns. 

That way, you get to live where you want and your money works harder for you in a property that has more potential for capital growth and rental income.

Sounds pretty amazing, right?

Let’s understand how the rentvesting strategy works and see if it’s right for you.

How Rentvesting Works?

Now that we’ve covered the basics, let’s get into the details and learn how does rentvesting work in practice. Instead of buying your home in your dream area (which, let’s be honest, can be pretty expensive these days), you rent there while buying an investment property somewhere else. This property is usually in a more affordable location but still has greater growth potential, either in value or rent income. 

For example, you might love living in a trendy suburb, but the property prices are out of your reach. With rentvesting, you could still rent in that suburb and invest in a nearby property in a nearby area where prices are lower but the growth potential is high.

What’s the best part? Your rent covers your living costs, while your investment property is working for you, growing value AND bringing in rental income.

In short, rentvesting lets you get into the property market sooner, enjoy the area you love, and still make a smart financial move. What more can one ask for?

Pros of Rentvesting

Now, rentvesting might not be for everyone, but it definitely has some incredible benefits. So, let’s take a look at the pros and cons of rentvesting to help you decide if it’s the right move for you.

• Flexible where to live

One of the best things about rentvesting is the flexibility it gives you. You can live in your dream location, whether it’s near the beach, in the city, or close to your workplace, without worrying about the crazy property prices in that area. Renting lets you live exactly where you want, while your investment property does the heavy lifting for you in a more affordable spot.

• Tax deductions & negative gearing

Here’s where things get interesting for investors. When you own an investment property, you can claim tax deductions for things like mortgage interest, property management fees, repairs, and depreciation. This can significantly reduce your taxable income, which is great if you want to save money. What’s more? Rentvesting allows you to benefit from negative gearing too. In simple terms, if the costs of owning your investment property (like the mortgage) exceed the rental income you’re earning, you can claim the difference as a tax deduction. 

It’s a great way to reduce your taxes while still building long-term wealth.

• Access to property market

Rentvesting helps you get your foot into the property market a lot quicker than you might have thought possible. Even if homeownership in the neighbourhood you love is out of budget, this strategy lets you start building equity by investing in a more affordable area. 

With rentvesting, you get to enjoy the financial benefits of property ownership, even if you’re not living in it.

• Potential rental income

When you buy an investment property, you open the door to rental income. This income can help cover your mortgage (or even leave you with a bit of extra cash). And as the property value goes up over time, your rental income could increase too. It’s a win-win!

• Wealth-building & capital growth

Rentvesting is all about building wealth through capital growth. When you invest in a property in a developing area, you can actually see your property value grow over time. As your property appreciates, so does your equity, which, in turn, helps you build long-term wealth. Moreover, once you start generating rental income, you can reinvest that money into more properties and grow your portfolio even further. 

• Flexibility & low maintenance

When you rent, you don’t have to worry about repairs or maintaining the property. It’s one less thing to stress about! While your investment property might need some care and occasional repair, your rental property is low maintenance. It gives you the freedom to focus on other important aspects of your life.

Cons of Rentvesting

Now that we have talked about the many advantages of rentvesting, it’s also important to understand why rentvesting is bad for some investors. 

Here are some of its potential downsides:

• Paying rent & no ownership

One of the biggest downsides of rentvesting is that you’re still paying rent – which means you’re not building equity in your own home. Instead of seeing your rent payments as an investment, you’re technically paying someone else’s mortgage. Over time, this can make you feel like you’re missing out on certain benefits of homeownership, especially when property values increase.

• Dual costs

Another reason why rentvesting is bad for some investors is the burden of dual costs. With rentvesting, you might find yourself paying rent on your home while also paying a mortgage on your investment property. Even if your rental income covers some of the costs, you could still end up with dual costs. This can add unnecessary financial pressure.

• Less control & lifestyle trade-off

While you get to choose where you live, renting still means you don’t have complete control over your living space. You’ll be bound by your landlord’s rules, and you might have to deal with rent increases over time. Plus, living in a rented property means you can’t make it your own like you could with an owned property. 

P.S. You may have to make compromises on your investment property as well. 

• Missed owner‑occupier grants

If you’re not planning to live in your investment property, you won’t be eligible for government grants like the First Home Owner’s Grant (FHOG), which is made for people buying a home to live in. This can be a disadvantage if you’re relying on grants to make your first property purchase more affordable.

Key Considerations for Investors

Before you jump into rentvesting and make any big moves, there are a few things you’ll want to keep in mind. Ultimately, it all comes down to doing your research and making sure this strategy aligns with your financial goals.

1. Long-term goals:

Rentvesting can be a great way to start building wealth, but it’s not a “quick fix”.” Before diving in, it’s important to think about your long-term investment goals. Are you looking to build a large property portfolio over time, or are you more interested in short-term gains?

2. Risk tolerance:

Like any other investment strategy, rentvesting comes with its own set of risks. Market fluctuations, vacancies, and maintenance costs can all impact your investment. So, it’s important to judge your risk tolerance before committing to this strategy. It’ll help you make better decisions.

3. Property management and ongoing maintenance

Being a landlord can come with a lot of responsibilities. Yes, you’re earning rental income, but there’s also the work that goes into maintaining the property. This can include everything from routine upkeep to unexpected repairs. You can always hire a property manager to look after the day-to-day stuff, but that comes with a fee. So, make sure you factor that into your calculations beforehand.

Is Rentvesting Right For You?

By now, you’ve got a good understanding of what rentvesting is and how it works. But the real question is “Is rentvesting right for you”?

Take some time to think about:

• Cash‑flow analysis:

Use a rental income calculator to figure out whether the rental income from your investment property will be enough to cover your mortgage and other expenses.

• Tax planning:

Talk to a financial advisor to understand the tax implications of rentvesting. It’s important to know how negative gearing and tax deductions will affect your overall financial situation.

• Exit strategy:

Always have a clear plan for when you want to sell the property. It doesn’t matter if you’re holding it long-term for capital growth or planning to sell in a few years – it’s important to know when and how you plan to exit your investment.

Conclusion

At the end of the day, rentvesting is a powerful strategy for people looking to build wealth through property while maintaining flexibility in where they live. It comes with several advantages, but there are also some risks to consider. By weighing the pros and cons of rentvesting, you can make confident, informed decisions about your next investment. 

If rentvesting sounds like it could work for you, the next step is to talk to a residential buyers’ agent who can help guide you through the process and help you make smart choices. 

At InvestorKit, we do just that. With our expertise and research-backed insights, we can help you make the most of your property investments.

If you’re looking to invest in property, talk to our experts today.