For new investors or home buyers looking to get into the market, it might well be worth considering rentvesting.

While rentvesting is a relatively new term in the world of real estate, there are a lot of reasons why it might be an effective way to get your property portfolio started and growing faster than you might be able to otherwise.

Rentvesting involves renting a property where you want to live, and investing in a different location. This is different to the traditional approach of buying your PPOR (principal place of residence) first and then investing elsewhere, once you’ve managed to build up some equity and further borrowing capacity.

As a strategy, rentvesting allows you the best of both worlds - living where you want, while still being invested in the market. There are a number of advantages and disadvantages to this approach.

Advantages of rentvesting

Buy sooner

If you’re trying to purchase a house and you live in an expensive location, it can take a long time to try and save up enough of a deposit and you’ll also need the income to service the debt. By rentvesting, you can invest in cheaper locations meaning you can start sooner.

Buy in growth areas

Given there are thousands of housing markets across the country, it’s unlikely that the area you want to buy in offers the best growth potential. By renting in that area, you can live there and invest in a location that is likely to see faster growth. Learn how to find a fast-growing hotspot by reading our recent blog.

Boosts borrowing capacity

If you follow the traditional path of maxing out your borrowing to buy a PPOR, then it is very difficult to invest. Those people who have built large property portfolios have often done it by not maxing out their capacity early on and that has allowed them to continue to borrow. Rentvesting allows you to keep on moving forward and building your portfolio.

Rent in better locations

Typically, it is far cheaper to rent in a given location than it is to buy there when you factor in mortgage payments and that’s not including all the other costs such as council rates and maintenance. You can often rent in better areas and in superior properties compared to what you might be able to buy.

Tax benefits

When purchasing an investment property, the costs involved are often tax deductible as are the interest payments. Compare this to paying down a PPOR and you have to pay all the costs and they are not tax-deductible.

Disadvantages

Being a renter

For the most part, people would much prefer to own their own home rather than being at the mercy of a landlord. While there is some emotional cost involved, it comes down to which is most important to you on a personal level. Building a property portfolio, or owning your own home right now.

Capital Gains Tax

One downside of investing in property is that you have to pay capital gains tax on the profits, whereas your PPOR is exempt. This can be a disadvantage, but the other way to look at it is that you are investing to build wealth which can ultimately help pay down your PPOR faster when you eventually buy it. You still have to pay taxes in other forms and ultimately, you’re paying your mortgage in after-tax dollars.