What is rentvesting and is it better than buying a home?

What is rentvesting and is it better than buying a home

Is it cheaper to rent or buy a home in Sydney? We crunched the numbers to find out.

To rent or to buy? That is the question facing many Sydneysiders grappling with the housing affordability crisis. As property prices continue to rise, it’s becoming increasingly difficult for first home buyers to break into the market, prompting some to consider whether renting a home may work out to be more affordable than buying a property.

A recent Reserve Bank of Australia discussion paper revealed that there’s been very little difference in the long-term economic fortunes of buyers and renters since 1955. The paper found that despite rising rents and regular reports of property booms and bubbles, renters and buyers ended up in a similar financial position. So if you decide to "rentvest" – rent somewhere to live and buy an investment property – you may come out in a better financial position than if you buy your own home straight away.

But does this mean it’s a better financial decision to buy or rent a property in Sydney? Let’s do the sums to settle the argument once and for all.

Need a real estate agent? Start comparing your options

Provider Details Get in touch
OpenAgent

OpenAgent logo

  • Compare 30,000+ real estate agents
  • Find the right agent and maximise your results
  • Get a free property valuation
Go to siteMore info
Commingle

Logo for Commingle

  • Compare proposals from qualified professionals
  • Access over 45,000 real estate agents
  • Free property valuation profile
Enquire nowMore info
Conveyancing Logo

Fill in your details to get free real estate agent proposals with Commingle

finder.com.au respects your privacy

By submitting this form, you agree to finder.com.au privacy policy

Receive a free property valuation, compare agent commissions and fees and choose the best real estate agent for you with Commingle.

  • Save time and money finding the right agent to sell your property.
  • Commingle is a free service that can negotiate on your behalf to get the best deal.
  • All your details will remain confidential.

What is rentvesting?

Owning a home was once a cornerstone of the Great Australian Dream. However, thanks to skyrocketing Sydney property prices, the dream is starting to take a different shape for some Sydney residents. With the median house price hovering around the $1 million mark, breaking into the property market is extremely difficult for many first-time buyers.

This has led to the rise of rentvesting: instead of buying the property they want, people rent a home and then invest their leftover money elsewhere.

For example, say you want to buy a four-bedroom home in Sydney’s inner west, but the sale prices in the area mean these homes are out of your reach. The rentvesting solution to the problem would be to rent the ideal four-bedroom house where you want to live, and then buy a property in a suburb where prices are more affordable.

The property you buy can then be rented out to help cover your own rental payments and later sold for a capital gain. This strategy lets you have the lifestyle you want now, while at the same time building a property portfolio for the future.

As another example, let’s assume that buying your dream home leads to mortgage repayments of $4,000 a month. But if you rent a home in the same area, rental payments could be $2,200 a month, leaving you with $1,800 per month to invest.

Although the traditional belief that “rent money is dead money” is a sticking point for some people, rentvesting allows you to use renting as part of an effective overall investment strategy.

Sydney property market - rentvesting

Pros and cons of rentvesting

Pros

  • Enter the property market sooner. Rentvesting allows you to break into the property market sooner with a smaller deposit, as opposed to waiting several years until you are able to afford your dream home.
  • Live the lifestyle you want. If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage.
  • Build wealth. Rentvesting allows you to start building your investment property portfolio, which can be used to generate wealth for you and your family in the future.
  • Save for your dream home. Owning an investment property allows you to save to buy your dream home.
  • Flexibility. When you’re renting, you can easily upgrade or downgrade to a different home if your circumstances change, for example if you lose your job or get a high-paying promotion, with no stamp duty expenses or legal costs to worry about.
  • Move around. If you’re not ready to put down permanent roots in a particular area, rentvesting gives you the freedom to move around and even travel the world if you wish.
  • Tax benefits. You can claim interest payments on your investment property loan as a tax deduction.
  • Choose where to invest. Where you want to live and the best place to buy an investment property often won’t be the same, so rentvesting allows you to be ruthless when it comes to choosing an investment.

Cons

  • Buying an investment first. Buying an investment property before purchasing your own home can seem counter-intuitive to many people.
  • Dead money. The old adage that “rent money is dead money” may be a deterrent for some people considering this approach.
  • You don’t own your home. As much as you may love your rental property, you don’t own it. This can be especially difficult if you form an emotional connection to a house but then the landlord wants you to move out.
  • You can’t make it your own. Although a rental property might be vastly improved by a renovation project or simply a fresh coat of paint, remember that it’s not yours to tinker with.

Buy or rent: Which is cheaper?

To get a better idea of whether it’s cheaper to buy or rentvest, let’s look at an example.

Buying

According to Domain Group’s March 2016 quarter house price report, the median house price in Sydney was $995,804. Rounding that down to $995,000 for easier calculations, let’s assume you have saved a 20% deposit of $199,000 — meaning you’ll need to take out a home loan of $796,000.

If you borrow that amount at an interest rate of 4.50% p.a. on a 25-year loan, your monthly repayment amount would be $4,424.43. The total cost over the life of the loan would be $1,327,327.96.

In the same quarter, the median unit price was $656,166 (let’s round that down to $655,000), so with a 20% deposit saved you would need to borrow $524,000. Once again assuming an interest rate of 4.50% p.a. on a 25-year loan, your monthly repayment amount would be $2,912.56 and the total cost over the life of the loan would be $873,768.66.

Renting

Now let’s compare that with the cost of renting a property and investing elsewhere. The Domain Rental Report for the 2016 March quarter revealed that the median weekly rent for houses in Sydney is $530, while units cost $520 a week to rent.

So assuming a house in Sydney costs $2,120 per month to rent, that’s more than $2,300 less than the monthly mortgage repayment on the average house. If you rent a unit for $2,080 per month, that’s still $820 less than the median monthly mortgage repayments.

House Unit
Median monthly mortgage repayment $4,424.43 $2,912.56
Median monthly rent $2,120 $2,080
Money left over to invest (per month) $2,304.43 $832.56

Investing the difference

Finally, we need to compare those potential investment returns with the capital gains you might enjoy on your property in the future. In the ten years to December 2015, Sydney property prices increased by an average of 6% each year. Assuming the same increases were to occur across the next decade, in ten years’ time your $995,000 house could be worth $1,781,893 (a capital gain of $786,893) and your $655,000 unit could have risen in value to $1,173,005 (a capital gain of $518,005).

But let’s consider what would happen if you decided to rent a house in Sydney for $2,120 per month, and use the remaining funds in your monthly budget to purchase a unit as an investment property. With more than $2,300 available to spend on your mortgage each month, you could easily afford to buy a $500,000 investment property (assuming that you have a $100,000 deposit saved and you take out a $400,000 loan).

Now let’s make another assumption: because you’re unconstrained by the need to buy somewhere you want to live, you’re able to choose an investment property in a prime location and enjoy larger than average capital gains. So instead of increasing at the city-wide average of 6% a year, over the next ten years your investment rises in value 8% annually. Once a decade has passed, your $500,000 investment has appreciated to be worth $1,079,462 – a capital gain of more than 130%.

So not only have you been able to live in your dream home for the past decade, but you now also own an investment property worth more than $1 million. Although your investment property may not have reached the same value as the home you could have bought and lived in, you’ve enjoyed a significantly better return on your investment and are now well placed to buy your dream home.

Buying a home Rentvesting
Monthly spend $4,424.43 (mortgage repayments) $4,343.33 ($2,120 rent + $2,223.33 mortgage repayments on investment property)
Property purchase price $995,000 $500,000
Property value after 10 years $1,781,893 $1,079,462
Capital gain $786,893 (79%) $679,462 (136%)

It’s important to point out that there are a huge range of variables that could affect the above equations, such as differences in sale and rental prices between suburbs and the assumption that property prices will perform similarly in the next ten years as they have in the past.

Nonetheless, these calculations should help you form a clearer idea of the potential benefits of rentvesting.

How to decide on the right approach for you

Taking all these calculations into consideration, should you rent or buy? Unfortunately, there’s no stock-standard answer to this question. Instead, the right approach for you will depend on your personal circumstances.

Before you choose to buy a home or rent and invest, make sure you can afford both strategies. Just because an investment property is cheaper than your dream home doesn’t necessarily mean that you can afford it, and just because renting feels like throwing away money doesn’t automatically mean you should mortgage yourself to the hilt.

There are plenty of handy rent vs buy calculators online to help you work out the costs involved in each approach, while you can also access a wealth of information about property purchase prices and rental rates. Before deciding on either approach, you could also benefit greatly by seeking out expert advice from a mortgage broker.

In the end, there are pros and cons to both buying and rentvesting, so you’ll need to consider your own financial circumstances before deciding which option is right for you.

Compare investment loan rates

Rates last updated August 18th, 2018
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.89%
4.24%
$0
$0 p.a.
80%
Sharp interest only package rate
Fix your rate and minimise repayments for 2 years with this interest-only investor mortgage.
3.99%
3.99%
$0
$0 p.a.
80%
Special discounted interest rate
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.98%
3.98%
$0
$0 p.a.
70%
Requires a 30% deposit
Investors can get a 100% offset account and a low rate if they have a big deposit. 100% online application process.
3.91%
3.92%
$0
$0 p.a.
80%
Add an offset account for $10 a month
Investors can go from application to approval in as little as 20 minutes with this innovative online lender.
3.97%
3.99%
$0
$0 p.a.
80%
Competitive investment package loan
Package your owner occupied loan with investment loan and receive a discounted investment rate. 100% offset account included.
4.09%
4.87%
$0
$395 p.a.
90%
10% deposit option available
Buy your investment property and set your repayments for the first year. Available in QLD, NSW and ACT only.
3.99%
5.17%
$600
$0 p.a.
90%
Available with a 10% deposit
Competitive rates for fixed for 3 years with redraw facility.
3.93%
3.94%
$0
$0 p.a.
80%
Competitive investor rate with plenty of features
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account.
3.99%
4.14%
$0
$0 p.a.
70%
Competitive investor mortgage for borrowers with a 30% deposit.
4.29%
4.31%
$0
$0 p.a.
80%
Flexible, low fee mortgage
Investors will pay no application or ongoing fees for this interest-only loan.
4.08%
4.09%
$0
$0 p.a.
90%
Low-fee investor mortgage with a partial offset account. 10% deposit option available.
4.18%
4.18%
$0
$0 p.a.
80%
Competitive investment mortgage
Investors get a 100% offset account and pay no application or ongoing fees on this loan from an innovative online lender.
3.99%
3.99%
$0
$0 p.a.
70%
Save on fees with this investor mortgage
Investors with a 30% deposit can get this low rate loan to fund their property portfolio.
4.29%
4.31%
$0
$0 p.a.
80%
Simple, flexible investment product
A simple, variable rate investor loan from an online lender that keeps fees to a minimum.
3.99%
4.62%
$395
$0 p.a.
80%
Flexible fixed investment loan
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.24%
4.68%
$0
$0 p.a.
90%
Investor loan with a small deposit option
Fix your investment repayments for 1 year. You can get this loan with a 10% deposit. Available in QLD, NSW and ACT only.
4.13%
4.14%
$0
$0 p.a.
90%
Available with a 10% deposit
Access a fee-free offset account and a special interest rate for investors.
4.14%
3.96%
$0
$0 p.a.
80%
Low fee investor mortgage
Investors can go from application to full approval in as little as 20 minutes with this innovative online lender.
4.18%
4.19%
$0
$0 p.a.
80%
Line of credit for investors
Investors can easily access their equity using BPAY, a debit Master Card or cheque book with this interest-only line of credit.
4.31%
3.95%
$0
$0 p.a.
80%
Rapid online application process
A variable interest-only loan for investors. Fast application, low fees, optional offset account. 100% online lender.
4.14%
4.17%
$0
$0 p.a.
80%
Competitive rate for investors
Investors can enjoy flexible repayment options and pay no application or ongoing fees.
3.94%
3.92%
$0
$0 p.a.
80%
Add an offset account for $10 a month
Lock in your interest rate for 2 years and enjoy flexibility, an optional offset account and a fast online application process.
4.29%
4.27%
$0
$198 p.a.
70%
Lock in your investment rate for 3 years
Fund your property portfolio with this fixed rate mortgage which includes a 100% offset account. 30% deposit required.
3.84%
3.91%
$0
$0 p.a.
80%
Flexible low fee mortgage
Enjoy a fast application process and flexible repayment options with this fixed rate mortgage for investing.

Compare up to 4 providers

Aussie Home Loans Logo

Enter your details below to receive an obligation-free quote from an Aussie home loans expert today

finder.com.au respects your privacy

Applications are subject to approval. Conditions, fees and charges apply. Please note that you need to be an Australian citizen or permanent resident to apply.

Credit services for Aussie Select, Aussie IQ and Aussie Optimizer products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 ("Aussie"), and its appointed credit representatives. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133 Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Optimizer products is provided by Perpetual Limited ABN 86 000 431 827 (Lender). Credit for Aussie IQ is provided by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502. Home loans issued by the Lender are serviced by Macquarie Securitisation Limited ABN 16 003 297 336, Australian Credit Licence 237863 (MSL).

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2018 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

By submitting this form, you agree to the finder.com.au privacy policy and the Aussie privacy policy.

Aussie Home Loans is both a lender and a mortgage broker, and offers a range of services.

  • FREE Suburb and Property Report with every appointment.
  • Access 3,000+ loans from over 20 lenders.
  • Get expert help with your loan application, including paperwork and eligibility.
  • Over 1000 brokers who are able to help you in your local area.

Aussie Home Loans Lender Logos

The Adviser’s number 1 placed mortgage broker 5 years running (2013-2017)

Image: Shutterstock

Adam Smith

Adam has more than five years of experience writing about the Australian home loan market.

Was this content helpful to you? No  Yes

Related Posts

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy.

2 Responses

  1. Default Gravatar
    DsalApril 4, 2017

    If I buy a property, rent it out for a while whilst renting another property myself, then later move in to my property, what are the tax implications? Will I be subject to CGT for the investment period of the owned property? How is it calculated if I don’t sell until a number of years later? Anything else I should consider?

    • finder Customer Care
      MayApril 4, 2017Staff

      Hi Dsal,

      Thank you for your question and for contacting finder.com.au – we are a financial comparison website and general information service, we are not mortgage specialists so can only offer general advice.

      Basically, in your case, the CGT you’ll pay will be worked out by comparing the number of days you lived in the property to the number of days you rented the property. You’ll also be partially exempt from capital gains tax. You can find more details about CGT on this page.

      If you need further advice on CGT, you can also speak to a property tax specialist.

      Cheers,
      May

Ask a question
Go to site