what is rentvesting? | the pros and cons of rentvesting
how does rentvesting work?
Rentvesting is renting where you want to live and investing elsewhere.
Rentvesting can be perfect when your aim is not to tie up a heap of your income on housing costs and just focusing on investing.
You might be feeling pressure from others in your life to save for a house to buy to live in – that’s not the only way to roll. Just because someone from another generation did this does not mean you should too.
To learn more about this concept have a listen to this my millennial property podcast episode about rentvesting:
the pros and cons of rentvesting
pros
Banks can look more favourably on you when borrowing to invest as opposed to buying a place to live in
This is for a couple of reasons. Firstly, the debt that you are signing up for will produce an income which is also used to service the loan. Secondly, usually when people want to buy a home to live in they will want to borrow the maximum possible, making servicing even tighter.
You can live in a premium location while you invest elsewhere
Want to live in a capital city? Want to live by the beach? Want to live in a great school catchment? Renting in these areas gives you the opportunity to enjoy these benefits without having to settle forever, or sign up for a mega mortgage which can be the case with some premium suburbs. This means you must build wealth elsewhere for your future.
Flexibility with your career and life
You may have a national role and move around for work every few years. Maybe you don’t want to be tied down in any one place – you may just like the freedom to follow the wind and try cool places to live. Renting does allow the ultimate flexibility.
cons
You don’t own where you live
Want to hang up some nice art? Wouldn’t that wall look nice painted or removed? Sorry – you don’t own the place so can’t do these things. This is more of a problem with older locations as they are exactly that – OLD. Newer properties will generally be closer to having the look and feel you want in your home. Some people may have to rent in older places if they wish to be more aggressive with their investing in which case get comfortable with the floral wallpaper and bright red bathroom tiles. It’s only for a time, yeah?
You have to put up with landlords and agents
This could be the most annoying part of the whole deal. Inspections every three months, long turn around times for repairs and just having to deal with other parties – generally only when there is a problem. Most people do not mind the agent coming and carrying out their inspection while they are not home. But there are processes specific to renting you need to be aware of – if they bother you, rentvesting might not be the best thing.
Uncertainty of living arrangements
This can be a problem if you’re self-employed, have a young family or have to travel a lot for work. You’re always a few months away from needing to find a new rental property to live in when you’re renting (if you’re out of your lease period). What if you’ve got an event planned that is a big deal and you’re asked to relocate. It can be a very disruptive time in your life and no-one likes moving house. If you’re onto a good landlord and/or agent, a great property and location – try and lock in a long lease. Remember to negotiate on the rent for any leases over 12 months (or any leases for that matter!).
“This is why it’s a great idea to possibly look at getting an investment property before you leave home, to lock the costs and strategy in before other “priorities” emerge.”
Other thangs
A word of caution
Rentvesting is great if you believe the pros outweigh the cons. Rentvesting is only effective, if you actually complete the strategy. A lot of people start out to rent where they want to live and never get around to investing as they get distracted with other expenses and ‘life’. This is why it’s a great idea to consider looking at an investment property before you leave home, to lock the costs and strategy in before other priorities emerge.
It’s not forever
The good thing about a strategy is you can make a strategy to suit your own life and goals. You may choose to live in a terrible place for the short term, while saving for a deposit for the first investment property. Then once you have your property you can then move to a more premium place to live. It’s up to you to choose your own adventure. Generally, it’s also a bit of a plan to beef up equity with investment properties, sell them and buy where you want to live with little to no mortgage – then start again . . .
Other options
You do not need to buy an investment property as the ‘vesting’ part of this strategy. You may choose to invest into a manage fund, super (if you’re a bit older perhaps), an investment bond or even use this time to live somewhere cheaper or more convenient if you’re building a business.
Happy renting!
p.s. if you do want to have a chat about this strategy, my colleague John Pidgeon does a clarity call on these issues and you can reach out here.
