This site uses cookies to shape your online experience. Read more

Rent-vesting explained

05/11/2020

We look at the pros and cons of renting while investing.

Property 6 reasons to refinance We explore the most common reasons to make the switch.
Money 10 affordable home design hacks Budget ways to make your new house feel like a home.
Property Buying in sister suburbs Buying in surrounding suburbs could be a more affordable option than inner city ...

Rent or buy? It’s the million dollar question. For a lot of Australians who can’t afford to buy a home in their dream location, rent-vesting is the solution.

Say you’d love to live near the beach, but you just can’t afford the price of a home there. You might be able to rent a property for half the amount you’d spend on mortgage payments, and use the extra to invest in a property in a more affordable location. Of course, down the track, you could sell your investment property for a capital gain. 

On paper, it seems like a smart way to go. But like any investment strategy, there are pros and cons to consider.

Rent-vesting: what are the benefits?

Getting your foot firmly on the property ladder is of course one of the biggest benefits of rent-vesting. Instead of having to wait years until you can afford to buy your dream home, you can enter the market sooner with a smaller deposit, using an investment loan.

You don’t have to invest in locations you love, either. It’s all about making smart decisions, without emotion, and choosing a suburb with good growth and a demand for rental properties. That way, you can use the rental income to help pay off the mortgage (while also enjoying the potential tax benefits that come with being an investor).

Another plus to rent-vesting is the lifestyle choice it offers; you’re much more flexible about where you can choose to live. Renting in different locations enables you to ‘try before you buy’, and because you’re not locked into a hefty mortgage, you’ve got the freedom to move wherever you like, whenever you like.

For many home owners, rent-vesting may be a great stepping stone towards building wealth for the future.

Potential downsides to rent-vesting

Paying rent is a bitter pill for any wannabe homeowner to swallow – because you know your hard-earned cash is going towards paying off someone else’s mortgage rather than your own.

You’ll also need to budget for an investment property – and you may need anywhere from a 5-20 percent deposit before you can buy. If you have a deposit that’s less than 20 percent you’ll need to factor Lender’s Mortgage Insurance (LMI) into your budget, which can cost you thousands.

The other issue is that you can’t ‘set and forget’ an investment property. You may expect that the rent a tenant pays will completely cover your mortgage payments – but if you bought it without much of a deposit, there’s every chance you’ll have a shortfall to cover.

Factoring in strata fees, council rates, insurance and maintenance costs may also be necessary – these are all your responsibility as a home-owner. And if you can’t find a tenant or your property is empty for a time, you’ll have to cover the entire mortgage payments.

So while rent-vesting can be a worthwhile strategy, it’s important to budget for all contingencies and ensure you can actually afford your investment without getting into financial difficulties.

Bottom line: should you do it?

Before deciding if rent-vesting is a good strategy for you, it’s important to consider your financial position and your personal circumstances.

Can you afford to rent a lifestyle and service an investment property (including the mortgage payments and other fees and expenses)? Where do you want to be in five years? Do you have a family to consider? What are your long-term goals?

These are all great questions to consider if you’re looking at rent-vesting as an effective investment strategy. You may wish to seek advice from a financial planner before you decide whether it’s the right choice for you.

Terms, conditions, fees, charges and credit criteria apply. This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Information in this article is current as at the date of publication.

Home loans and mortgages

We'll help you find the right home loan for your needs.

Learn more

Send this article to friends and family

Share
Property Finding the right investment property Our tips for finding and buying an investment property.
Property A guide to investment home loans Getting the right loan is just as important as buying the right property.