Rentvesting 101: Benefits of buying where you can so you can live where you want

Buying your dream home is rarely the first step on Gen Z’s property ladder — but there is a little-known trick to doing it so you can still reside where you like.

A home seeker who can’t afford to buy where they want should try rentvesting.

Buying a dream home is rarely the first step on today’s property ladder from many first-time buyers. Instead, the path to homeownership can take many forms, including rentvesting.

This process of buying a property you can afford, then leasing it to a tenant while you rent your preferred lifestyle property has become a popular step for first-home buyers.

RELATED: Money guru’s shock cash offer to homeowners

862 suburbs where rents are less than $400

Serious headwinds threaten real estate recovery

But with skyrocketing rents and mortgage repayments, it pays for potential rentvestors to crunch the numbers and determine if the strategy still makes financial sense.

WHERE TO RENTVEST

Ray White chief economist Nerida Conisbee said pre-pandemic rentvestors often lived in major cities, but bought in cheaper outer suburban or regional areas. However, that bang for buck had become less notable.

“The areas worth investing in have changed somewhat because some regional areas have seen prices shoot through the roof,” Ms Conisbee said.

Ray White chief economist Nerida Conisbee.

“It really is a case-by-case basis scenario. You need to look at the investment clearly because investing is quite different to an owner-occupier situation. You need to look at tax implications, interest rates, rental return, and, of course, potential capital growth.”

She said uninitiated rentvestors often felt tempted to buy a property they would like to live in, or simply liked the look of, rather than concentrating on the numbers.

“Buying somewhere you might not particularly like, or may never want to live, could actually be the better financial decision in terms of rental return or potential for capital growth,” Ms Conisbee said.

WHY RENTVEST?

Rentvesting can be a great first step onto the property ladder to support the lifestyle you want to lead, as long as your investment is positively geared.

One of the motivations behind rentvesting is using any surplus income from one, or several investment properties, to pay for your preferred lifestyle.

This only works if the investment is positively geared – that is, where rental income is higher than mortgage repayments.

But in a rising interest rate market, this can become harder to find.

“Some people like to buy a rental property and just have the cash coming in, or leave it neutral,” Ms Conisbee said.

“There are definitely places around Australia where you can still get a very good rental return and pay off a loan.”

Other rentvestors are happy to “top up” their rental income to meet mortgage repayments in the hope capital growth will one day follow. This is known as negative gearing, which has its own tax benefits.

“Whether it’s rentvesting or investing in general, have a look at places with a lot of potential for growth,” Ms Conisbee said.

“Really look at where the population is going because places that attract plenty of people also see good rental and price growth.”

RENTVESTING STRATEGIES

Nicole Haddow bought in Mordialloc but rents in Richmond with a friend, closer to her friends and work, and enjoys the lifestyle she wants. Picture: Sarah Matray

Your Empire founder and buyer’s agent Chris Gray said the key to successful rentvesting was the right financial strategy and mindset.

“I’ve done it for over 20 years and we still don’t think we’ll ever buy our own family home,” said Mr Gray, who has now lived in the same rental for 11 years.

Savvy rentvesting is about arbitrage – taking advantage of price differences across markets to make a profit.

“One path to rentvesting is rather than buying one expensive property, you buy several little ones,” he said.

“Instead of buying a $1m home, buy two $500,000 properties and then use the rent on both to rent a home to live in worth $1.5m.

“Whatever your price point, work out what the rent return is on your investment and make sure you’re always in front.”

---

Sign up to the our Weekly Real Estate Update. Click here to get the latest property market news delivered direct to your inbox.

MORE: Delta Goodrem’s inspirational childhood home for sale

$35m Byron Bay celebrity hideaway up for grabs

Inside Pup and Jade’s $13m ‘make up love nest

Originally published as Rentvesting 101: Benefits of buying where you can so you can live where you want