The pros and cons of rentvesting

Australians, especially those in our capital cities, are often faced with a trade-off due to the rising cost of housing and their limited savings.

They can live in more desirable suburbs, but due to high costs of entry, they may have to rent; if they would like to buy, they probably have to move further out from the city centre.

This has become a growing concern in recent times, with the national median property price jumping 37.8% between March 2020 (the start of the pandemic) and August 2024.

That’s why more people have been talking about a strategy known as rentvesting, which aims to offer first-home buyers the best of both worlds. This involves renting where you want to live (such as the inner and middle rings of our capital cities) and buying an investment property where you can afford (such as a regional location).

The pros of rentvesting

One benefit is you get to live where you want. For now, that might be the suburb in which you are already established; later, it might be interstate or overseas, if you want to travel or accept a job opportunity.

Another benefit is you’ll be able to enter the market ahead of schedule, given your investment property will be cheaper than any owner-occupied home you might have eventually bought.

From that point, even as you’re renting, you’re still building wealth. As you pay down your mortgage and (hopefully) your property rises in value, your equity grows.

Furthermore, because your property will be an investment, you’ll collect rental income – which can help offset your mortgage costs – and may be able to claim tax benefits, such as negative gearing and depreciation.

The cons of rentvesting

Rentvesting, though, also has some disadvantages.

The biggest is that you have to make rent and mortgage payments each month.

Another downside is that you need to accept all the responsibilities that come with being a landlord. Most rentvesters outsource those responsibilities to a professional property manager – which incurs further costs.

One more thing

Rentvesting doesn’t have to be a permanent strategy: instead, it can be an entry onto the property ladder, and help you access the next rung.

Here’s how: after a few years of rentvesting, once you’ve built sufficient equity, you might be able to sell your investment property and use those funds – as well as any money you’ve saved in the meantime – to finally buy an owner-occupied home.

Rentvesting doesn’t suit everyone, but it can be a clever strategy for the right person. It is worth having a conversation with your accountant or financial advisor to determine if this strategy is right for you.