What Do You Need to Know About Rentvesting?


First-time home buyers have traditionally had to sacrifice the bones of their lifestyle to build a home in an area they can afford, uprooting themselves in the suburb they've rented and built a life in. For those struggling to break into the market, inexpensive areas offer the most achievable starting point, but these areas aren't always the most desirable to first-time buyers.

Rentvesting means first-time buyers don't have to sacrifice their current lifestyle – they can continue living in a suburb they love while building an investment property in an area they can afford.

While first-time buyers have always been in the difficult position of competing against investors, rentvesting gives buyers more of a chance. As all investment types come with their pros, cons and risks, rentvesting comes with its own concerns that you should consider before jumping in.

How does building a property in an area you don't want to live in help you?

There are two reasons. Firstly, building in a regional location is simply less expensive, so it helps you enter the market at a sooner date, which is always a bonus. But also, in regional and more affordable locations, mortgage loan payments are often a similar amount to what you can rent the room out for. This isn't typically the case for inner-city and more expensive suburbs because the costs to buy are often much greater in proportion to the cost to rent.

The tenants in your regional rental property can cover most, if not all, of the mortgage repayments for the house, so once the upfront fees are paid, the property slowly becomes yours without much of your own money going into it. After this, you'll be in the property market, and as it's likely you'll have a larger income once your first house is completely yours, you can use the built equity from this property to buy your next home – maybe even in the suburb you're currently living in.

Rentvestors can make a more strategic decision

The beauty of rentvesting lies in its freedom. First-time buyers can completely ignore their own preferences while focusing on the most strategic location for their investment property. This can make it much easier to find the right location and build costs that best suit their budgets. For many rentvestors, the emotion is taken out of the decision, becoming one based on investment and getting into the market.

Though, this isn't what everyone wants from their first home; many first-time buyers want to live in their home long term and create lasting memories. Rentvesting isn't for everyone, and there are still some risks to consider for the ones that it suits.

So what do you need to be aware of?

Rentvesting is not always the idyllic plan for everyone. For first-time buyers who want to maximise their investment and live in their home long-term, there are some setbacks to consider.

Let's talk about rental yield. When the rental yield is low for the investment property, the gap between your mortgage repayments and rental income widens, so rentvestors need to ensure that they can cover the gap with their own funds. Suppose you stretch yourself too thin financially to pay your own rent and cover the remainder of your mortgage repayments. In that case, you might sacrifice your lifestyle in another way – through a lack of disposable income.

Rental vacancy is another concern. If you can't find tenants for your property, you'll have no rental income while you still have to repay your mortgage loan. It's unlikely your property will be vacant long-term, but the cost of rental vacancy between tenancies may need to be factored into the equation.

Pros of rentvesting

Here's why rentvesting can be a good idea for many individuals and families:

  • Lifestyle freedom: Without the restrictions of living where you build your first home, you can continue to live in the location that suits you, which might be close to work, friends and family and near local amenities.
  • Wealth building: Instead of over-extending your budget to buy in an expensive area, building an investment property in an affordable spot will make your money work better for you. It'll also allow you to enter the property market sooner and begin building your market power.
  • Maintenance savings: Your landlord pays the maintenance costs of the rental property you live in, and while you'll pay maintenance costs for the investment property, these are tax deductible, providing an overall cost saving.
  • Strategic buying: Without your preferences influencing the decision, you can make informed choices about your purchase and potentially find an undervalued area to build in.

Cons of rentvesting

And on the flip side, some things that can make it the wrong choice for you are:

  • Missing out on first home owners grant: Government financial support for first-time buyers is reserved for those who intend to live in their property, which means rentvestors don't have access to the First Home Owners Grant.
  • Loss of capital gains tax exemption: Your principal place of residence carries a full exemption for capital gains tax when sold for a profit, so if you're renting your property out, you'll have to pay this tax.
  • Less control: Rentvesting comes with less control because you're relying on other parties to keep the balance – like your landlord and the tenants renting your new build.

Is rentvesting right for you?

If the mortgage repayments and rental payments in your current location are similar, then rentvesting might not be the best choice as you can probably afford to buy or build there anyway.

But for many first-time buyers, this gap is much larger. Despite the risks, rentvesting makes good financial and personal sense for these people as long as the monthly difference between mortgage repayments and your rental income remains affordable for you.

Build affordably with First-Place

First-Place builds in Regional Victoria and we can help bring your rentvesting plans to life without giving up the things you love about your lifestyle. 

It's important to seek professional financial advice about rentvesting, we can get you on the property market smoothly and cost-effectively when it’s time to start building.

Ready to build your home?

Check out our first home buyer guide for everything you need to know about buying your first home, including finances, grants, buying land, buying a house and contract basics.

Price your home today with our home configurator, otherwise, give us a call on 1800 134 778 or enquire, and our sales team will get in touch.

This advice in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs. It is recommended you seek professional advice from a financial adviser before making any important decisions. 
First Place is not a financial adviser. You should consider seeking independent legal, financial or other advice to check how the website information relates to your unique circumstances.


Ask us below