Why Rentvesting is Bad (Or So You’re Told)


Are you an Australian property investor grappling with the decision of whether to jump on the rentvesting bandwagon? 

You’re not alone. The concept of rentvesting – buying an investment property while continuing to rent where you live – has gained a lot of attention in recent years. 

But is it really the golden ticket to property wealth that some experts proclaim it to be? Having an additional revenue stream from rent sounds appealing, but is it really all it seems? 

How Rentvesting Works 

Imagine this. You’ve got your heart set on a posh neighbourhood – maybe because it boasts the trendiest cafes or because it’s right in the city’s heart. But, the property prices make your wallet cringe. So, instead of giving up your dream, you rent a place there. Now, you’re living your dream lifestyle without the outrageous costs of owning property there. 

With the rent taken care of, you now set your sights on a less pricey neighbourhood to make a property investment. 

And voila! You become a proud property owner without burning a hole in your pocket. Even better, you start earning from this investment through incoming rent and potential tax advantages. This is the beauty and simplicity of rentvesting.

The Financial Implications of Rentvesting

Did you know 15% of private tenants in Australia are rentvestors?

You’re probably already hearing the cash register ring when you think about rentvesting and the property market, but before you plunge into this journey, let’s take a moment to take a good look at the picture on the other side of the coin, the financial implications. 

The allure of rentvesting mainly comes from the potential for saving money. You’re renting where you want to live, often in high-cost areas, while buying property in more affordable zones. But you have to remember, renting is still costly. You might find yourself paying higher rent than what you’d pay as mortgage instalments. 

To ensure this doesn’t happen, you’ll need to get your calculator out and compare the sums before making your move. 

Then there’s instability. The rental market in Australia is notorious for its unpredictability. Rental property costs can skyrocket overnight, and there’s always a possibility you’ll need to pack up at a whim if your landlord decides to sell or move back in. 

Financially speaking, this could mean unexpected moving costs and even periods without rental income if your investment property is vacant. 

Don’t forget about the missed opportunities either. When you switch from being a homebuyer to an investor, you often miss out on a handful of government grants, incentives, and discounts that could have aided your venture. 

Finally, you need to recognise the fact that investing in a property is itself a financial commitment. Property maintenance, council and utility services, ongoing ownership costs, management fees, potential damage by tenants, and insurance rates don’t take care of themselves, and could potentially create holes in your pocket if not managed properly. 

Now, we’re not saying that rentvesting is entirely a bad decision, but we believe that you need to step back, weigh your options, crunch those numbers and consider all possible implications before stepping into the world of rentvesting. After all, a wise decision today could save you from a financial storm tomorrow.

Pros and Cons of Rentvesting

First off, the Benefits

With rentvesting, you have the freedom to live pretty much wherever you want. Ever dreamed of living in the heart of the city, close to work, cafes, and nightlife, but just couldn’t afford to buy there? Rentvesting could be your ticket. 

Not only can it help improve your lifestyle, but it can also diversify your investment portfolio, which is often a good thing.  

  • Flexible living: Live where you want and not where you can afford to buy.
  • Building wealth: Buying in a high-growth area means your investment property could enjoy significant capital growth over time.
  • Diversity: It lets you have your fingers in a few pies, financially speaking, which can limit risk.
  • Tax benefits: This varies depending on your situation, but you may be eligible for some tax cuts and claims on your rental properties, including depreciation

There are some downsides to rentvesting that you’ll need to consider seriously. For starters, you’ll likely be paying a high rent to live in the more desirable areas. Over time, these payments can match or even exceed what you’d be paying off a mortgage. 

  • High rents: Renting in desirable areas can be expensive and sometimes cost as much as mortgage repayments.
  • Uncertainty: You’re at the mercy of landlords and fluctuating rental prices.
  • Missed opportunities: Not being an owner-occupier means you could miss out on particular government incentives and grants.

Why Rentvesting is Bad

While it may sound appealing, it’s essential to bear in mind that rentvesting isn’t a one-size-fits-all strategy. There are important factors to consider that could determine whether this strategy is viable for you. 

  • Investment Risk: Buying an investment property always comes with its risks. You may face unexpected costs, such as property maintenance, which can chip away at your profits. Plus, depending on the market conditions, your property may not always guarantee the capital growth you anticipate, especially if your property value fluctuates.
  • Financial Pressure: Managing two properties can be financially challenging. While you’re rentvesting, you still need to pay mortgage repayments, while keeping up with your rental payments where you’re living. Remember this is also considered ‘dead rent money’ that isn’t going towards your own home.
  • Tax and Fees: There are also buying and selling fees to consider, and potentially even possible body corporate fees if you’re looking to buy a new investment property. You might need to also pay capital gains tax. However, you may be eligible for a capital gains tax exemption. Keep in mind you may have to consider lenders’ mortgage insurance as well.
  • No Security of Tenancy: Renting while you’re renting out can cause instability in your living situation. You may have to move frequently due to rental increases or if the owner decides to sell the property you reside in.

Key Takeaways

  • Climbing the property ladder and rentvesting involves buying investment properties while continuing to rent where you live. It allows you to live in a desirable area while investing in a more affordable location. Rentvesting offers potential for additional revenue from rent and tax advantages.
  • Financial implications include the need to carefully compare the costs of renting versus mortgage payments.
  • Instability in the rental market and missed opportunities for government incentives are important considerations.
  • Property maintenance, management fees, and potential financial commitments should be carefully managed.
  • Benefits of rentvesting include the freedom to live where you want, potential for capital growth, and financial diversification.
  • Downsides of rentvesting include high rental costs, uncertainty, and missed government incentives for homebuyers.
  • Important factors to consider include investment risks, financial pressure, and the need for careful financial management when managing two properties.

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