Rentvesting: pros and cons

Or is there? You can actually invest in a property while continuing to rent, even if you're a first home buyer. It might seem tempting to buy your first home as soon as possible, especially in today's housing market, but it doesn't always make perfect sense to do so. 

By employing a strategy known as 'rentvesting', you can get the best of both worlds. 

What is rentvesting?

Rentvesting is investing in one property while living in another rental property yourself. So, essentially, your mortgage is being subsidised by someone else paying rent. 

It's not a strategy for everyone, but it is one that's gaining popularity, particularly among first home buyers. According to research in December 2018 from Property Investment Professionals of Australia (PIPA), 36% of first home buyers are looking to invest while renting. That's about 6.5% of new housing loans.

The pros of investing while renting

1. Renting is cheaper 

This isn't always the case, but the average rent per week is usually lower than the average mortgage repayment. According to Domain's December 2018 House Price Report, the average rent across all capital cities in Australia was:

• $446 for houses
• $455 for units 

The Domain report calculates that by comparison, the average weekly mortgage repayment is $643 per week, based on:

• A median capital house price of $748,217
• A loan worth 80% of this median house price 
• A reasonably low interest rate of 3.80% 
• A loan term of 30 years 
• No monthly fees 

This is just one example, but a decent home loan could still be about $200 more expensive per week than the average rent. So you can continue to live somewhere cheaper by renting and receive a cash flow from your rental property.

2. Investing gives you a cashflow 

You might be asking why rentvesting is a good strategy since you still have mortgage repayments. Well, investors can receive a rental income from tenants, meaning that mortgage repayment shrinks. Based on the average mortgage repayment example above, that mortgage repayment would become just $197 a week once the tenants have paid their rent.

The tenants are helping you pay the mortgage on that property while it (hopefully) rises in value. There are also tax benefits to investing, which makes owning an investment property a lot easier...

3. There are tax benefits to investing 

According to the ATO, certain investment property expenses can be claimed as tax deductions. Chief among deductible expenses are interest repayments on your loan - you still have to repay the principal, but the extra interest charges can be deducted. This makes interest-only loans a popular choice among investors... 

You can also typically deduct management costs, maintenance costs and other borrowing expenses on your tax return. To name a few, this may include:

• Advertising to find new tenants
• Bank fees and loan charges 
• Body corporate fees, cleaning costs and council rates 
• Home, contents and landlord insurance 
• Legal expenses and land tax
• Repairs and maintenance
• Loan establishment fees
• Lender’s mortgage insurance (if applicable)
• Mortgage broker fees (if you used one) 
• Stamp duty charged on the mortgage 

There's also negative gearing to take into account. If you make a loss on your property, your overall taxable income can be reduced. So an investment property can be very economical, and in some cases can even help supplement the rent you pay. 

Speak to an accountant for advice on this. 

4. You don't have to sacrifice your lifestyle 

Say you've got your eye on a nice house in the suburbs, and you have the money to buy it. But you're not in a position to live in it right now: maybe you don't have a family or kids yet, or maybe you prefer living close to the city still. Finding a rental property in these desirable areas is much easier than finding a house to buy, and will usually be way more affordable. 

In the meantime, you can buy that further-out property and rent it out to someone who is ready to live there, and when the time is right you have a house ready-made for you to move into. 

Rentvesting is therefore normally suitable for people with short-term living aspirations, who still want to make a long-term investment. That's why it's so popular among young first home buyers, who may want a more flexible lifestyle. 

5. You can build equity in the home 

If the property you buy makes capital gains (i.e. it increases in value) then you can build equity in that property without having to live in it. Building equity in a property can make refinancing to another loan or buying another property much easier, all while you continue to rent in your desired location. 

Related: How to use equity to buy another home

The cons of investing while renting

1. The costs can be high

Many investment property expenses are tax-deductible, but not all. And even the deductible costs (like maintenance) still require a lot of admin on your behalf, like fixing broken fittings or plumbing. As a landlord, it's still up to you to arrange repairs.

Plus there are non tax-deductible costs, as well as unexpected costs like damage to the property from natural causes, which can be very expensive. There's more to owning an investment property than just meeting repayments every month, and it can cost more than money. 

2. You can lose access to first home owner grants 

If you're a first home buyer, then buying an investment property could see you lose access to the First Home Owner Grants, which in certain states requires you to not own any residential property before. These grants aren't huge - they're between about $6,000 and $25,000 - but can also provide some useful stamp duty concessions. 

This isn't clear yet, but it could also see you lose the ability to apply for the new First Home Loan Deposit Scheme proposed by the Morrison government. 

3. You're still at the whims of the landlord

The cons of renting are well-established by now by those who parrot 'rent money is dead money!' but you do relinquish some control if you decide to keep renting: 

• You can't make any material changes to the property without permission 
• You have to put up with inspections and body corporate 
• They can increase the rent at any time 

Rentvesting means you might have to put up with that insufferable landlord a little while longer, but this isn't an issue if you can maintain a good relationship with them. 

4. Capital gains tax 

As an investment, you're required to pay capital gains tax on the profit of your investment property should you choose to sell. There's a currently a discount of 50% that applies to properties held for more than one year, so a $100,000 profit would only be taxed on $50,000, but it's still a tax regardless. 

Capital gains tax does not apply to an owner-occupied property. 

5. Additional Risks

Investment is inherently a risk, and property is not immune, as shown by the property market swings of the last few years. There are some areas that have recorded year-on-year losses of more than 20% recently, while the average 10-year return on property, according to Stockspot, is 8%. 

If you do decide to rentvest, then carefully consider the property before you buy it, because it can be an expensive mistake to make. 

How to decide if rentvesting is right for you

Living in a house isn't the only way to secure your future, and rent money certainly isn't dead money. According to a report by EY, 60% of Sydney residents would be better off renting than buying a home, because the cost of renting there is much lower than owning.

For someone in a major city who has some spare cash lying around, is ready to buy a property but doesn't want to commit to a life in the suburbs just yet, rentvesting can be an ideal strategy. But if you're looking to settle down and are in a good position financially, then home ownership could be the right choice. 

The best choice for you will depend on where you are in life or what you want to achieve - speaking to a qualified accountant or financial advisor would be good idea for a decision this big. 

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More helpful resources:

• Investing in a house vs apartment, which is better?
• How to build a property portfolio
• Buying a property with tenants