Rentvesting is not just a financial strategy.
It is a lifestyle.
Many people fail with this strategy. This is because they think short term, not long term.
I am here to show you just how the financial strategy of rentvesting works. But, also explain what you need to prepare for, lifestyle-wise to ensure that you get the most out of this strategy.
Being upfront with you – this strategy is a very powerful property investment strategy.
However, rentvesting IS NOT for everyone. There’s nothing wrong with other property strategies.
This one bucks the trend of the homeownership dream (family home) so is the most unique. Which is why I wanted to write a detailed article reviewing rentvesting benefits and risks.
The common perception of rentvesting is you rent and buy investment properties.
This statement is far too simplified and I will explain why.
- 1 What Is Rentvesting
- 2 My Top 8 Benefits To Rentvesting?
- 2.1 #1 Get into the market sooner
- 2.2 #2 Tax Benefits
- 2.3 #3 Rentvesting Increased Income
- 2.4 #4 & 5 More Flexibility/Live Where You Want With Rentvesting
- 2.5 #6 Invest Strategically
- 2.6 #7 Potential Capital Gains
- 2.7 #8 Fast Track Your Property Portfolio
- 3 Getting Your First Rentvesting Property Example
- 4 5 Risks With Rentvesting
- 5 Recommendation
What Is Rentvesting
The first thing I want to explain to you is if you are considering rentvesting. Have you really thought it through?
Some of the most powerful investment strategies can fail. Even work out worse for you if you don’t consider all the variables.
A common problem is that some people use rentvesting as a way to get into the property market sooner. As they can’t afford to buy in the suburb they live in.
The reason this can be a problem is they don’t consider the risks of this strategy. Short term thinking can backfire on you.
What happens in a few years time, if this person wants to buy a family home? If there’s been no capital growth or even negative capital growth they are stuck with the investment and now it’s a burden.
As you can see above the property market fluctuates a lot. Periods of good growth and periods of negative growth, even zero growth periods. (ABS Property Stats)
There’s an old saying.
Time in the market beats timing the market.
I’ll give you an example. If you bought a rentvesting property in 2011.
By 2014 you would have had 0% capital growth over 3 years.
By 2015, you would have still only had approximately 5% capital growth over 4 years, of 1.25% per year. Not even keeping up with inflation…
What if you needed to sell? After associated costs to buy the property and selling costs, you might have lost up to $50,000 if you sold in 2014. however, if you kept the property for the long term you can guarantee that over time you will make money.
So remember, the less prepared and informed you are the higher risk this strategy is.
Rentvesting is a property strategy that you rent your family home & invest in property to get the maximum benefits.
My Top 8 Benefits To Rentvesting?
Now the common premise of rentvesting is to purchase an investment in an area within your budget. While renting in an area you cannot afford to purchase.
Whilst the premise is correct there are numerous benefits that come along with this strategy
#1 Get into the market sooner
Nearly 70% of Australians live in one of the 8 capital cities and the surrounding metropolitan areas.
The problem this 70% of people are facing is that these capital cities record some of the highest average property prices.
This has made it literally unaffordable for millions of people to purchase there.
One of the top benefits of rentvesting is you can get into the market sooner than if you tried to invest where you live.
One of the biggest questions asked is.
Is it cheaper to rent or buy where I live? And the answer to that is for 6 out of Australia’s 8 capital cities, renting is cheaper than paying a mortgage.
So why do people ignore this statistic? They still try and buy where they live. Due to this, they can end up paying more on their mortgage than what it would have cost them to the place.
The second consequence of their action. Did they buy the property to make money or as a place to live…?
The reason for this is emotion & the age dream of owning the family home.
As you can see in the 2 most populated cities 9 out of 10 people are better off renting than purchasing based on mortgage costs.
So basically, in all capital cities outside of Darwin & Hobart. Renting is more affordable than buying.
Rentvestors can take advantage of this, by being strategic and investing to make money and renting for lifestyle.
#2 Tax Benefits
For rentvesting to work, it needs to be affordable. That’s the entire point, isn’t it!
So, one of the ways this strategy allows it to be an affordable property strategy is with the substantial tax benefits that it can provide you with.
So you ask, what tax benefits does an investment provide:
Well, the following is a list of what the ATO allows you to claim as tax benefits.
- Water/Council rates
- Real Estate rental fees
- Pest control, maintenance
- Depreciation of building and fixtures
- Interest on mortgage repayments
As you can see with this investment property example. The tax man pays for over 13% of the associated annual costs through tax benefits. Thus making it more affordable for the investor.
So when looking at potential properties this is why it’s important to look at the tax benefits of each property. The newer the property the more likely the tax benefits will be greater due to depreciation.
But remember Tax benefits is only 1 factor to look at. By far the 2 more important aspects are capital growth over the long term & rental return %.
Both of these are discussed further into the article.
#3 Rentvesting Increased Income
Now it’s pretty easy to agree that your income will increase as you start to receive rental income from your investment property. However, also your costs increase with mortgage costs & property costs.
Now there’s 2 ways to look at increased income
#1 increased cash flow income
#2 increased net surplus income
#1 Increased cash flow income
Now, I want you to understand something. You can have an increased cash flow income, but also have either a net surplus income or a net deficit income.
All an increased cashflow income means is that your income increased via receiving additional income from another source.
Cashflow income is NOT taking into account costs. We will go through that in the net surplus income section.
Why is increased cashflow income important?
Well, if we structure our loans correctly we can get a great benefit of offsetting interest charges so that over time we pay less interest and more principle. This pays off the loan much faster.
I’ve had people argue with me regarding paying down investment loans.
They always say, don’t do that you’re also decreasing your tax deductions. Which is true.
You can create equity in 2 ways.
- Your property increases in value
- You decrease your loan
In order to buy another investment you can either save for the deposit (which takes a long time) or you can focus on creating equity.
So, if you are focusing on decreasing your loan down simultaneously, you are effectively creating equity 2 ways.
Property growth and mortgage reduction strategies.
This will allow you to purchase a 2nd/3rd + investment much faster by accessing the equity quicker.
Now if you want to read more detail about how this works check out the blog Debt Recycling which will outline how the cashflow mortgage reduction strategy works.
#2 Rentvesting Can Increase Net Surplus Income
Ok, now we are coming into the territory of working out if your property is negatively geared or positively geared. Basically, this means it either:
- Costs you money
- Makes you money
The ultimate goal is to get your property positively geared ASAP.
This is where your goals come into play.
If you’re looking for a higher capital growth strategy, many times they are quite negatively geared.
However, if you are looking for a cash flow strategy. They can be positively geared right from the start.
Net surplus income is basically all your (property income – property expenses). If the result is positive you are a net surplus income.
I personally have switched from a high capital growth strategy to a high ROI cashflow strategy. This is so I can generate a surplus income to offset other associated investment expenses.
#4 & 5 More Flexibility/Live Where You Want With Rentvesting
If you decide to upgrade your property, If you are adopting a rentvesting strategy this is as simple as changing rental properties.
This is much easier than selling & purchasing again. Along, with the additional sale & purchase costs.
However, the main benefits I see for flexibility are:
#1 If you get relocated, it’s far easier to change properties when renting.
Many who have purchased their property, if they relocate they tend to turn the property into an investment property.
The problem with this is that it was never intended to be an investment. So most of the times it won’t generate the best returns for you.
#2 Live where the action is.
Ok, if you want to live near the city. Close to shops & nightlife, perhaps you’re a foodie and being in a hip neighbourhood would cost lots of $$$ to purchase.
Most times you can rent far cheaper within these types of areas than the cost of the mortgage. You get the benefit of living where you choose to and investing in a location that is good for investment and is within your budget.
Why this is important is because many people aren’t willing to give up their current lifestyle.
Just be smart about it & use a strategy like rentvesting to be able to have your cake & eat it too!
#6 Invest Strategically
One thing I find all the time, is that when people buy their own house to live in. Is that they use very different criteria to determine it’s suitability compared to an investment.
Furthermore, most don’t actually use much of a criteria when reviewing an investment property. You’re investing 100’s of 1000’s of $. You need to do research.
What does the average person look for when buying a home to live in?
- Location to employment
- Location to kids current school
- Entertainment purposes
These are the 5 most common top priorities.
Guess what? They are the 5 bottom priorities when looking at it based on investment performance.
I ran an investment business and when we looked at properties we had a 20 point criteria checklist. I’m going to share that with you.
Top 20 Investment Property Selection Criteria
- Regional investment infrastructure (past 10 years) both private and govt spending
- Regional investment infrastructure (next 10 years) both private and govt spending
- Rental Yield
- Vacancy Rates
- Capital growth projections
- Population growth
- Population density
- Current supply/demand
- Average time on market (time it takes to sell a property in the area)
- Average age of families
- Types of family hobbies that live in the area
- Distance to public transport
- KM to school (kindergarten, primary, secondary, university) both public system and private system
- How far to local parks
- Location to local pubs/club/ restaurant
- Employment types (blue/white collar)
- Average household income
- Current household family unit (how many kids etc)
- Housing trend shift (what’s currently renting better and why)
- Type of housing (multi-dwelling, duel occ, house, unit etc)
Then next depending on your strategy you look deeper at property types.
If I’m looking for higher tax deductions, I will look at new with depreciating and tax variation benefits.
Perhaps flipping the house, I look for perhaps rundown place that’s undervalued that ticks the boxes above.
However, if I’m wanting cashflow I look for duel occ or multi-dwelling on 1 title that has a high ROI for rental payments.
Again, it doesn’t matter what your strategy is as long as you have one that’s working towards your goal.
#7 Potential Capital Gains
The question to be asked is.
What makes more capital gains. An investment or your house?
I have to be honest. I’m 100% biased, I’m a very commercial thinker when it comes to finance. So, I’m always going to choose the investment and I’ll explain to you why.
There are strong emotional drivers behind people buying their own home to live in.
It’s the old saying American/Australian… whichever country you live in usually has the same… the dream is to own your family home.
This creates a sense of worth/self-value and pride. Beware… Ego isn’t far behind.
Now. I’m not saying that many people haven’t made money with their family home growing in value over the years. Many have used lady luck.
However, they have made money without being strategic, because overall the property market has grown (over time).
2nd problem people face is that they tend to upgrade their family home to a bigger better (more expensive) house. Effectively using their capital gain to further leverage.
This is what we call the Keeping Up With The Joneses problem.
See, most people focus on living in the now, the instant gratification. And, investing is a long term play.
Investing doesn’t give you the warm and fuzzies right away.
So, they upgrade and now still haven’t invested for their retirement.
This is why many rich look poor and the poor look rich.
Remember your wealth is determined by the number of months you can not work for whilst maintaining your level of lifestyle.
Your big house, nice car & expensive things. As Shania Twain put it… That don’t Impress Me Much!
Buy using the strict investment criteria you can make sure you give yourself the best possible chance to maximise your capital growth opportunities.
Investment Criteria Trumps
Now can I ask you a question?
Out of the 2 examples of what people look for when buying the family home and what I look for when buying an investment property. Who’s property is likely to outperform the other?
If you chose the family home example, I’m sorry but you’re predominantly going to be relying on lady luck.
However, if you want to be strategic and give yourself the best chances of your property performing well over the years to come. The second option is for you.
That’s why I would always prefer to invest first.
Invest where you can make money & live where you want to live.
#8 Fast Track Your Property Portfolio
Rentvesting is a powerful strategy to fast track your property portfolio. You can use the power of cash flow and leverage to go from 0-3 investment properties very quickly.
With the right loan structure & set up you can focus on making sure you get a strong foothold into the property investment market.
To show you exactly how the strategy works from the start to the finish I’m going to explain it to you step by step.
Getting Your First Rentvesting Property Example
So you want to start a rentvesting strategy? Good for you.
There will be sacrifices you have to make along the way whilst implementing this strategy. You will need to be disciplined to ensure you can grow your property portfolio quickly.
Remember, regardless of how fast you grow your property portfolio you can still use this strategy.
Step 1 – Get A Deposit Together
This is where discipline comes into play.
For many this is the hardest step, however, if you want to achieve it you will be able to save a deposit.
Generally, most people say to save 20% of the property price, however, you can have as little as 10-15%.
Just be aware, under 20% deposit you have lenders Mortgage Insurance which will add to your loan amount.
I personally don’t have an issue with LMI as it allows you to get into property sooner.
There are 2 options that you can use for your deposit:
- Equity in your home – if you own a current property (owner-occupied or investment) & you already have equity. The easiest way is for you to access this equity for the full 20% deposit if you can. Less if you don’t have the full 20% available.
- Savings – This is the harder of the 2. Saving a full 20% deposit can take some time. However, if you make some significant sacrifices you can save a deposit far quicker. Also, depending on your income level can dictate the time it takes to save. We use a 50/20/30 rule. 50% of your income is spent on things you need to live (rent, food etc), 20% on lifestyle & 30% on savings. Now, if you need to reduce your lifestyle down to 10 or even 5% then that’s a sacrifice you must make. The 30% to savings, helps you form a habit.
If you Break it down into weekly goals, & have discipline you can achieve this.
Also, if you’re renting an expensive place, move.
It really comes down to how much you want it.
Let’s take an example to explain it a bit easier.
The following are amounts you would need to save over a 24 month period.
I’m assuming you are starting from scratch & assuming 0% interest on your savings account.
Now, You might be saying that these numbers are high. However, you might be able to save more or less than this, all that changes is the timeframe. Not your focus!
Let’s take a couple. One earns $52,000 and the other $75,000.
They have zero saved and want to buy an investment property in less than 2 years.
Their income breakdown looks like this.
Following the 50/20/30 Budget Rule
If this couple followed the budget rule of saving 30% of their net income they have the ability to save $2,556 per month.
If they wanted to save faster they could move somewhere cheaper or cut down on dinners & entertainment expenses. This could add thousands extra in saving each year.
Buying Your First Rentvestor Investment Property
Before you jump in and buy the property, you need to have a process.
Ok, what type of property are you looking to purchase? Remember we looked at a few different types. The 2 main ones being.
#1 Capital Growth Property
#2 High ROI Rental Cashflow Property
If are looking to develop a long term property strategy, I recommend to start with capital growth for your first 3 then supplement with high cash flow properties. On top of this, you need to check with a mortgage broker regarding your budget.
Ok, this is important as it will identify the areas you should be investing in based on the criteria. By using this 20 point checklist you can ensure you give yourself the best chance to get a high-quality investment property.
Select your Investment Property
Once you have researched and narrowed down a shortlist that fits your budget & investment criteria it’s time to select one. Based on your research on the area you should be able to determine if this properties rental yield is higher or lower than the average. Also, you can determine the properties price comparing it to similar other properties that meet your criteria.
The goal with this is to select a property you think is undervalued, or valued competitively and you can see a lot of future potential.
Purchase Investment Property
This is the last step – you negotiate and complete the required contract obligations. (Finance, building/pest, pay deposit etc).
Congratulations now you have your first property!
Now we know about the benefits of becoming a rentvestor & also how to buy our first rentvestor property, what about the risks?
5 Risks With Rentvesting
Now just like any strategy, you’re going to encounter risks. It’s all about mitigating those risks as much as possible.
Now with rentvesting there are 5 main risks you need to consider and we will go through each of them for you.
#1 Rental Vacancy Risk
This is a very real risk. If your rental property doesn’t have a tenant your costs of holding the property will skyrocket.
This is where your market research comes into play. If you reviewed the area correctly and went through our 20 point checklist your chances of having a vacancy rate that’s too high will be mitigated against.
However, let’s say you invested in a mining town. then that mine slowed down or worse shut down. Literally overnight you could experience financial hardship.
Having an investment property in a strong growth area that has great amenities and is a desirable place to live will always have low vacancy rates and high rental demand.
#2 Home Value Dropping
The fact is property prices fluctuate. as we’ve seen you can have negative growth some years and positive growth others.
This is why it’s important to have a long term investment strategy. If you focus on the short term, you could get worried about price decreases.
In real estate, the only time you truly lose money is if you sell. It will always bounce back and increase in value over time.
Also, if you have a property in a good area it doesn’t matter if it goes down, you should always have a tenant paying rent. So your holding costs are affordable.
Through the GFC property crash, rental demand went up. As banks tighten up on lending, it creates a shortfall of rental properties as more people are renting.
#3 Interest Rate Risk
This is an easy one to understand. If interest rates increase your holding costs increase.
The best way to mitigate against this one is to always factor in a buffer of 3%. If the current interest rate is 4%. Make sure you can afford your repayments at 7%.
Also, as interest rates increase so do your tax deductions. So even though it might cost you more, you can save some extra tax to offset the increased mortgage repayment.
If you are really concerned then you could look at a fixed-rate loan. I only ever recommend fixed rates for people who absolutely need the certainty of repayment. Remember, historically you are better off with variable.
Another way to mitigate this risk is to always pay more off the mortgage than you need. This also helps to pay down the loan faster but also gives you a buffer/redraw in case of interest rate increases.
#4 Circumstance Change
The main problem people face is when they start a rentvestor strategy, they have good incomes & no kids.
Once they start a family their goals might change.
the most common issues faced are
- wanting to buy a family home
- costs increase due to family
Now, if you are wanting to purchase a family home, the problem you might face is the bank may not lend you the money. You already have investment loans, so depending on your incomes and if you have any equity in the investment might put a stopper on this.
Also, if you sell the investments it may not be a good time to sell & you could lose money.
If the investment property is costing you too much & you don’t have enough left over for your family this can be a major issue and risk too.
That’s why it’s important to go into this strategy 100% committed, fully knowing your budget & ensuring there is an adequate budget for future circumstance changes.
#5 Miss Out On The First Home Buyers Grant
This one to me isn’t that big a deal.
The First Home Owner Grant is available to Australians purchasing their first home (to live in). It doesn’t count for investment properties.
So if you make a decision to rentvest you will forfeit your right to claim this grant in the future.
If the price to buy and live in your area is too high, or you want to maximise your investment return. then missing out of the FHOG is just the price you have to pay.
Now I would like to finish by saying that there is no magic formula for investing. It comes down to your GOALS and what you want to achieve. Also, what your risk profile is.
Rentvesting is classified as a risky strategy. That’s because it uses the power of leverage (borrowing) to invest.
If you already own a home, you can still use this strategy to develop a property portfolio. Based on that, I recommend this strategy for anyone looking to grow their property portfolio.
If you want to get into property investing, the main things you need to consider is that you MUST do proper research to ensure you get a good quality property.
No strategy in the world will fix a poor purchase decision. The idea isn’t to make a perfect purchase, it’s to use the 20 point selection criteria to give yourself the best chance to mitigate against risk.
Feel free to add some comments or questions.