What is rentvesting and how do you do it? With property prices being ridiculous in many parts of the world right now, many people are turning to rentvesting to grow their wealth and build passive income.
But how does it actually work? How do you get started investing in other regions? In this video I’ll explain why my wife and I personally rentvest right now and why we’ll continue to do so for the time being.
If you’re looking to learn about rentvesting in Australia or abroad, I’ll explain how it works in plain English.
Good day there, Ray Corcoran here. In this week’s video, we’re going to be talking about Rentvesting. So, I’m going to explain all about the pros of doing it, the cons of doing it, who it might be best suited for and how’d you get started?
So, overall property markets have been booming almost worldwide at the moment, and it’s definitely been happening Australia and where I live in Sydney, it’s been and crazy. Property market has gone mental. A lot of houses in my opinion are probably crazily overvalued but if you’re someone that’s looking to buy a family home right now, it can be very, very disheartening because you’re seeing the house prices go up faster than wages are going up. And for a lot of people, they’re just simply being priced out of the market. So, for a lot of people they’re wondering, “Well, what can I do about that?” And while some people are complaining to the bank, they’re complaining to government, and they’re saying these people should step in and do something about it.
For me personally, I’ve always rather be more proactive and look at things I can do and what action can I take, because these people might take forever or they may never do anything about it. And one of the best ways to combat this is Rentvesting. So, this is where you rent, where you want to live and you buy investments elsewhere. Most commonly people buy more affordable regional properties. So, instead of buying a house for, could be $1 million, could be $1.5 million or whatever, you’d buy, maybe a regional property for maybe 400 grand or something like that. And the difference in the cost of a deposit for that would be like $300,000 or so. You might only have to save up $40,000 or $80,000, which is much more accessible for people. One of the core premises of Rentvesting is that, where you happen to live is one out of thousands of cities across the country. So, the chances of that place being the number one place for you to invest and the place where you’ll get the best returns is extremely unlikely. It’s just, it’s simple maths.
So, what a lot of people are doing at the moment is they’re choosing to rent, maybe close to work or family or friends or places where they enjoy the lifestyle there. And they’re choosing to buy regional investment properties or invest in the markets. And this is actually something that I’m doing myself, me and my wife are doing it. We rent a apartment, that’s probably worth about $1.1 million. And we get rent of only about 600, 650 a week. So, the people that have bought this property, are probably getting a terrible deal, but we’re getting a great deal. And we’re getting a lot of value for not a lot of cost. And the reason this is possible is in Sydney and where I am anyways, there’s been a huge oversupply of apartments.
So, there’s been crazy construction of all these apartment buildings and so much so that we have an apartment building being built on the left and right side of us simultaneously right now. And one of the benefits of that is that there’s just so many apartments that they can’t charge high rents for these. So for us, we get the benefit of living in an area that we really like for relatively cheap and we can invest all the excess money that we have into regional properties and things like ETFs and that sort of stuff.
So, in terms of the pros of Rentvesting, the first one is you can live where you want to live. So, if you want to live somewhere, like I said before, if you want to live near friends or family or close to your work, or in a certain area with a nice lifestyle, maybe it’s closer to the beach or closer to the CBD or whatever it is, you can do that. So, you can just rent there and have investments elsewhere.
The second benefit is, that you don’t have to have maintenance costs, or you have very minimal maintenance costs relative to someone that’s bought a family home. There’s so many things that can go wrong with a large house, especially if you don’t spend… People’s first home typically isn’t very, very fancy. So, it’s probably going to be old. There’s probably going to be lots of things that need repairing or they’re breaking. So, you’re going to have a lot more maintenance costs, but if you rentvest, often you can get a newer, nicer place. It might be an apartment for example, but the repairs are negligible.
The third one, which is one of my favourites about Rentvesting is you save time. With a rental, you’re not going to really spend heaps of time or money decorating or buying really nice furniture or any of that sort of stuff. You’re not going to spend heaps of time minding the lawns, all those things I don’t really like doing. And while my wife would probably love to renovate our place and buy all this beautiful junk to furnish the place, it’s kind of hard to justify because we don’t plan on living here forever. So, we don’t have to worry about any of that cost or time being wasted on that because we’re just renting here. It’s furnished very, very simply. And that means that we have more money to invest.
The next benefit is the potential tax benefits. So, if you’ve an investment property, you can claim the interest depreciation and a few other costs related to that investment. If you lived in a family home, there’s just different things you can claim. And generally investments are a lot more tax deductible.
The next one is rental income. So, obviously if you’ve an investment property, you get rental income, whether it’s on a fortnightly or monthly basis, usually. And yeah, anyone that has an investment property knows the good feeling of having that money come in. And if you do get a positively geared property, you can take the money that you get, pay your payment for the month, and then the excess money you can either choose to leave on the property. You can invest elsewhere, or you can use it to pay for your lifestyle.
And of course the last benefit is just that you may get capital gains on that property. And one of my favourite general points is just the overall freedom that comes with Rentvesting. We don’t have to buy a place that we’ve to live forever. We can rent here and if we like it, we can consider buying down the track. And while still building up our investments.
In terms of the cons of Rentvesting so, the main one is your primary residence is less secure. So, if somebody wants to kick you out, they probably can. If the owners want to come back and live in the property that they’ve bought, they can do that. There’s going to be property inspections that happen. So, just generally, you might not feel as secure in that property. And that’s different from person to person, but you’re kind of at the whim of the owners.
Another con is, if you’re renting and you have a investment property elsewhere, or multiple investment properties, you will have all the costs associated with an investment property. So, property management fees, maintenance fees, utilities, all that sort of stuff, you’ll have to pay. And you’ll have to pay that with a principal home price of residence, but just something to point out.
The next one is, potentially having to pay capital gains tax. So, if you did buy an investment property and then you sold it down the track… For me, I don’t plan on selling any of my rentals, but if you were planning to sell it down the track, you’d have to pay capital gains tax on that growth.
Another con is something that I experienced, which is you can’t use the First Homeowner’s Grant. So, in many states and territories, you can get a First Homeowner’s Grant, if you’re buying a place to live in yourself. And the rules have changed a few times over the years, but it’s always been eligible to people that are going to be buying and living in that place, not to people who’re buying an investment property. So, I never got to claim the First Homeowner’s Grant because we ended up… Our first property was a rental property in a different state.
So how did you actually get started with Rentvesting? So, it’s relatively straightforward. First part is obviously, save your deposit. So, once you’ve kind of established roughly the range of the property that you think you can afford. It might be like $300,000, $400,000, $500,000, you’d typically have to save up a 10% deposit, maybe a 20% deposit. And for most people, that’s going to be somewhere between $30,000 to $50,000. For us, for example, our first property was $407,000 and we had a 20% deposit, which was ended up being about $80,000. And of course, if you don’t have $80,000, you can put down a 10% deposit, in most circumstances. And you’ll just need to pay LMI, which is Lender’s Mortgage Insurance, which should be another several thousand on top of that. But the good thing about that is it means you can get your foot in the door and then you can work it out from there.
As you start to save your deposit, the next step is obviously to aim to look at different areas to invest in. Now, this might take a while to actually get good at, but there’s a number of different drivers and places you can get data on, in terms of helping you select which area is going to be any good. Some ones that you may want to look out for is major investment in that area. So, they might be spending a lot on infrastructure in that area. People are spending money in that area is a good sign. There’s a lot of job ads. A lot of people are hiring in that area. It’s also typically a good sign.
If it’s a more regional area, sometimes a benefit is having a good infrastructure, where people can travel. It’s easy for them to travel to the major areas, from that regional area. So, it might have an airport, or it might be close to a major train line for example. Ideally you have a diverse economy, so you don’t want a situation where the whole town is driven by just mining or just tourism. Some of these industries are very, very volatile. So if your property is there and then mining dissipates, because it’s a bad time in the market, all the people leave, all the workers leave or reduce, and there’s less demand for the housing there.
It can often be a good thing when there’s low construction approvals so, they’re not building tonnes and tonnes and tonnes of new houses in the area. If there’s a low housing supply, that will keep the demand pretty high, because it’s just simply not enough houses to go around. Sometimes a good driver can be population growth and migration into that area. Another one to look at is rental vacancy rates. So, what percentage of all the property there is rented out, any one time.
And another one is property price to rent ratios. So, if your property is worth $400,000 and it’s renting for $400 a week. You can work out, whether it’s the 1% rule or 2% rule, that people talk about. That can give you a bit of an idea of what kind of cash flow you might be able to get from your property.
And in terms of getting that data, there’s a few different ways. You can look at a look at CoreLogic, RP data, SQM research. The thing that I like to do as well is follow buyer’s agents. So people that are buyer’s agents, they usually kind of allude to the areas that they’re invested in, or they allude to areas that they really, really like. For me personally, I follow a number of them and after a while, you can start to get a bit of an idea of the areas that, based on their research that they really, really like. It won’t tell you which house to buy, but it can start to give you a couple of areas that you can start to consider.
And for us, like me and my wife are always very, very busy with work. So, for us to spend hours and hours and hours going over data and all this sort of stuff, it was more economical for us just to pay them the fee. They could buy, hopefully a good property and we could spend that spare time that we’d freed up working more and making more money. And financially that’s worked out really well for us. And you might not have the money to buy to sorry, pay for a buyer’s agent, but it might be something you might want to consider. What I’ve found is their fee was minimal in relation to the performance of the properties that we’ve bought. So, just something to weigh up. You don’t have to do it, but it’s definitely something to consider. And I’d recommend chatting to some as well in the lead up, especially if it’s your first property and you’re buying interstate.
And the last thing I’ll say is that the whole Rentvesting thing works best when your rent is as low as possible. And the amount that you spend on investing is as high as possible, and the returns hopefully are as high as possible as well. When you’re doing Rentvesting, if you’re renting a really, really expensive place and you’re trying to invest, it probably still will work, but it might not work as well as somebody who’s renting potentially a more affordable place and then dumping heaps of money into their investments.
So, I hope you found that useful. If you found it interesting, let me know. If you’ve any questions or comments or if there’s anything I missed, please let me know in the comments. Yeah. If you feel like subscribing, please consider it. I do weekly videos on saving money, investing money and making more money. So yeah, I’ll see you in the next video.