Rentvesting is investing in property purchased with finance and rented out for a return, while the investor rents another property as their primary residence. The concept is a portmanteau or combination of renting and investing. The objective for rentvesters is for the rental on the investment property to cover the mortgage and the ongoing costs while their income covers the rental on their primary residence.
This property buying strategy can be popular with those that can’t afford to buy where they want to live or can’t afford the type of property they want to live in. But can afford to rent such a property. Investing in a separate property, possibly at a lower price or in a growth market, with finance geared to cover the costs, can present an attractive option for getting on the property ladder.
Is this right for you? There are benefits and risks to consider in becoming a rentvester. Consider our explainer and the loan options available and speak with one our mortgage experts to advise and assist you with your decision.
Rentvesting Explainer
The idea of renting and investing at the same time is fairly straightforward in principle – you rent where you live while someone else rents a property you have purchased with finance. A mortgage is taken out on the investment property while the rent payable on the residence is covered by salary or other income.
This can be an attractive option for individuals and couples that are having trouble saving enough for a deposit on the property in an area where they choose to live. But they may have sufficient deposit for a lower price property. Using that deposit to take out a mortgage on an investment property, at a lower price than what they would buy to live in, may present a realistic option to get on the property ladder and start building capital growth.
What is the best home loan for rentvesting?
Rentvesters will require an investment property mortgage. These loans are structured similarly to owner-occupier home loans but have different rates, eligibility and LVR. The property is used as the security for the loan. Fixed and variable rate investment property mortgages can be available, depending on the current rate market.
If considering moving from an owner-occupier to a rentvester by renting out your current primary residence which has a mortgage, and moving to a rental, you will need to speak with your lender or check the conditions of the mortgage. Owner-occupier mortgages are different from investment loans and may include a condition that the borrower must reside in the property. Changes may be required to the current mortgage. Speak with a mortgage broker on the options available.
Compare Rentvesting with Buying a Home
There are many factors to consider when deciding if investing in property while renting is right for you. These factors include both financial and non-financial aspects of the arrangement.
On the financial side, investment property finance typically has a higher interest rate than an owner-occupier mortgage. The LVR limits and some eligibility criteria also differ for investors. First home buyers may be eligible for Government support schemes but only if purchase a property they will live in as their primary residence. These schemes are not available for investors.
Trying to save enough for that dream home while still paying rent can be a challenge. But if you’ve saved enough for a smaller investment property deposit, it may be workable to act and use that deposit to purchase an investment property.
When considering an investment property, buyers should weigh up the upfront costs and ongoing costs of managing and maintaining the property with the potential rental yield. The outcome may depend on the investment strategy – rental return, negative gearing or longer-term capital growth.
There can be attractive non-financial benefits for rentvesters. Rentvesters may be better placed to rent and live in an area or in a type of property they prefer but cannot afford to purchase. Purchasing an investment property can enable them to get onto the property ladder and start building equity. As the equity in the investment property grows, the rentvester may then be better placed to apply for a home loan on the property they would like to live in, using the equity in the investment property as a deposit or to help secure the loan. Alternatively, they may use that equity to purchase a second investment property while still renting their primary residence. Building a property portfolio which may be beneficial over the long term.
The risks to consider are interest rate variations on the investment property mortgage. Variable rate mortgages will change with Reserve Bank cash rate decisions. This can increase the mortgage payments on the investment property. Investors also need to be prepared for times when their property is vacant. They will still need to meet the loan payments even when no rental payments are being received.
While the property market in Australia has proven a good investment for many investors over time, investors must be prepared for the risk of a downturn in property values. This may impact their rental return while their mortgage payments would remain the same.
When applying for investment property finance, lenders will establish the individual’s borrowing power. A key aspect will be if the income level is sufficient to cover the rental on the residence plus the investment property mortgage.
Estimate Costs and Returns of Rentvesting
Buyers considering becoming rentvesters can use our loan tools to assist in assessing if this is right for them, and what property to purchase. These tools include the Stamp Duty Calculator and Mortgage Payment Calculator. Conveyancing fees will depend on the provider and lender fees will depend on the lender. Requesting a quote can provide a more detailed figure for decision making.
Ongoing costs on the investment property may include land and water rates, strata levies, property manager fees, property insurance, and the maintenance and repairs. Our intel and tech resources in the property market may provide information on current rental yields in different areas. When the property is sold, Capital Gains Tax may apply. This would reduce any profit or capital gain accrued.
To discuss how we may assist you to get into rentvesting, contact a Yes Home Loans broker online or by phone 1800 000 937.
DISCLAIMER: THE INTENTION OF THIS ARTICLE IS TO PROVIDE INFORMATION OF A GENERAL NATURE ONLY. THE ARTICLE IS NOT PROVIDED WITH THE INTENTION OF BEING THE ONLY SOURCE OF INFORMATION ON WHICH PROPERTY BUYERS SHOULD MAKE THEIR DECISIONS. BUYERS WHO NEED GUIDANCE AND ADVICE ON PROPERTY LOANS BASED ON THEIR INDIVIDUAL CIRCUMSTANCES ARE ADVISED TO CONSULT WITH A SPECIALIST MORTGAGE BROKER OR FINANCIAL CONSULTANT. NO LIABILITY IS ACCEPTED FOR MISREPRESENTATION OF FOR ANY ERRORS IN DATA, POLICIES AND SPECIFIC DETAILS THAT HAVE BEEN OBTAINED FROM OTHER SOURCES.