Rentvesting gains momentum as savvy buyers exploit property price gaps

Rentvesting is gaining momentum as savvy buyers exploit the gap between rising house prices and rental costs to build wealth while living in premium suburbs.

Buying an investment property while renting somewhere else is increasingly common.

Rentvesting, the business of buying an investment property before you buy a home, is rapidly moving from the margins to the mainstream.

As house prices lift faster than rent prices, aspiring home buyers are exploiting the gap – aided by a view the Albanese government is willing to let negative gearing stay in place.

At its best, rentvesting allows buyers to leapfrog into the market through the accumulation of capital in an investment property while renting in an area that is most efficient for their lifestyle needs.

Buyer’s advocate Arjun Paliwal told The Australian’s The Money Puzzle podcast he’s a supporter of rentvesting but success hinges heavily on finding “the perfect match” in a borderless property market.

As speculation mounts that the banks are planning to launch specialist mortgages in this area, Mr Paliwal said rentvesting works best when the buyer uses the opportunity of more spare cash to purchase an investment property for strictly rational commercial reasons.

He pointed out the best place to live while making your money go to work on an investment property is where properties valuations are expensive.

That’s because holding a mortgage over the same property would be very costly, while rental costs are relatively reasonable, compared to the value of the property.

“The underlying logic is that the more premium the suburb is, the greater the disparity between rental yield and actual interest on a mortgage if you were to own it,” Mr Paliwal said.

“Or to look at that issue another way, if you are going to live in a regional part of Australia, in the most affordable suburb, then in that situation the rental yield is likely to be high and so rentvesting might not work for you in that location.”

Critics of rentvesting suggest the investment technique is flawed and would not work for the majority of property buyers. Stuart Wemyss from ProSolution Private Clients recently outlined his criticism of rentvesting when he told The Australian: “While renting can seem more affordable in the short term, rental costs typically increase over time, making it more expensive in the long run”.

“In contrast, homeowners steadily repay their mortgage, which builds equity and eventually leads to a situation where personal housing costs fall over time, often resulting in a mortgage-free retirement,” Mr Wemyss said.

“That’s a particularly attractive, and often necessary, position to be in during retirement.”

As the debate continues over rentvesting, new figures show a clear rebound in the number of buyers categorised as investors across the residential market.

The latest ABS figures show investor borrowers secured an extra 1656 loan agreements in the three months to June, a 3.5 per cent jump on the March quarter and the first increase since September.

Meanwhile, the government has indicated there are no plans to alter negative gearing tax breaks for investors, and the issue was not on the table at the recent economic summit.

Mr Paliwal did not deny the potential downside with reinvesting if the investor did not optimise their spare savings, but he said the technique is exceptionally useful because “it underpins the ultimate objective for the rentvestor, which is to get closer to the home you actually want to live in.’’

“What’s more, you now get to invest along with a lifestyle upside. You still live the same lifestyle of that multimillion dollar home, but not the multimillion dollar mortgage.”