The pros and cons of rentvesting

Written by view.com.au in Buying

Pros and cons of rentvesting keys

What is rentvesting? It is an increasingly popular way younger homebuyers are entering the market, either on their own or in partnership with friends or family all in the pursuit of getting their feet on the property ladder sooner so that they can leverage growth in the market to eventually become owner-occupiers.

Scenario: David hits 35 and wants to invest his savings into property, rather than wait to invest with a life partner. With less capital with which to invest, he decides to invest in student accommodation for $300,000, requiring a $60,000 deposit, which he negatively gears, while living in a sharehouse within inner-city Melbourne.

There is little data about the proportion of investors who are renting their own homes in Australia, and the practice is still a relatively new one as it has been an approach driven by unaffordable markets (predominantly in Melbourne and Sydney). The above scenario of a single person entering the property market comes with very clear pros and cons, as having less with which to invest means less freedom to transform any investment into larger longterm growth.

If you do decide to head down this track, make sure you do a large amount of research and consult a financial adviser to calculate whether or not you would ultimately be better off to wait and become an owner-occupier in the long-run (in 40 years) rather than rush into the market in fear of missing out.

Pros and Cons of Rentvesting

Pros Cons
Fastrack your savings
If done effectively, rentvesting can be a way to help you save (through capital gains) and leverage your equity to eventually buy a larger or more suitable home for your needs.

Less stability
This only applies if you bought a home outright and had the financial capability to do so. Traditionally, being an owner occupier meant greater financial stability, but this adage has been eroded somewhat by an increased number of buyers susceptible to increases in their interest rates.
Time
Buy yourself time to live in different areas of the country or even internationally to enjoy the benefits of this (travel, different jobs, enjoying different communities) and research where you would eventually like to settle.
Less popular/traditional
This may be seen as a Pro or a Con, but investing in a home first is not the traditionally condoned approach to longterm saving with real estate.
Entry into the market
This is one of the main reasons people consider becoming rentvesters. Rentvesting allows you to enter the market sooner as you can invest a smaller amount of money in a smaller investment property, rather than wait to buy a large house.
Less growth
If you do decide to rentvest with less initial outlay, such as through buying a student apartment, then you are faced with the sacrifices that this entails, such as lower capital growth.
Freedom to move
Rentvesting can fit your financial situation, such as if you work less when bringing up children, as it allows you to move while still maintaining an investment property.
Can you have your cake and eat it, too?
Rentvesting does imply that you can enjoy the benefits of living closer to the city centre and its associated lifestyle while also getting a foot on the property ladder, but there is wisdom in the mentality of making sacrifices early on in your property ownership in preparation for the future.
Strength within the market
Rentvesting can buffer you in some cases from the harsher effects of a downturn in the market, as you have the freedom to lower your rental costs and increase your cash flow.
Renting limits
Renting means less stability in your living arrangements and less freedom to do what you want with your home.
Increased empathy
If you are renting as well, you are more likely to feel empathetic to the needs of your tenants, making you a better landlord, which comes with its own benefits.
Lack of access without funds
Rentvesting may be an option for those who want to invest with less, but this doesn't mean you can access Lenders Mortgage Insurance and may mean you are still locked out of the market you wish to enter.
Better lifestyle
It could be seen as a Pro that you can rent closer to work and amenities that younger generations enjoy being around before they have kids or their priorities shift.
Capita Gains Tax
This can offset any gains you may make in the short term, so consider whether you can live in the property for the first year to benefit from concessions to the tax.
Access to other markets
Just as you have the freedom to live wherever you like, you have the freedom to invest wherever you like, such as in stronger performing markets.
Slow or small growth
The fact that you are splitting your money into rent, which doesn't end up in your pockets through capital growth, and a smaller investment property which may not necessarily enjoy large gains in value, means that you may have been better off just to wait to become an owner occupier in the longterm.
Only for the wise
Don't be fooled by any stories you hear of young Australians making millions from multiple investments in the short term. They are simply stacking their investments and relying on growth in the market, which is an incredibly dangerous way to use your money.
Not necessarily cheaper
Changes to the market and your desire to live a certain lifestyle may mean that you may more to rentvest than you would if you just bought a home. This may be even more relevant if you then decide to have children three years into the investment process.