Rentvesting

Background James, a 30-year-old marketing professional, was eager to enter the property market. Living in a vibrant city where property prices were prohibitively high, he was priced out of buying a home close to work and his social circles. Instead of waiting years to save for a deposit in the city, James considered “rentvesting.” This strategy involves renting a home in a preferred location while buying an investment property in a more affordable area. 

Strategy

 James decided to rent a two-bedroom apartment in his desired suburb near the city, where the rent was high but still manageable. Simultaneously, he purchased a three-bedroom house in a regional town, about 100 kilometers away, where property prices were significantly lower and rental yields higher. He found tenants for the house almost immediately, using the rental income to cover his mortgage repayments. 

Benefits

1. Location Flexibility:  By choosing to rent where he wanted to live, James didn’t compromise on his lifestyle. He could enjoy the city’s amenities, live close to his office, and maintain his social connections without the burden of owning an expensive city home. 

2. Capital Growth: The investment property in the regional town was located in an area experiencing rapid growth. Property prices in the region were rising steadily, providing James with strong prospects for long-term capital appreciation. 

3. Rental Income: His investment property provided a steady rental income that covered most of his mortgage repayments. This created a situation where the property essentially paid for itself, while also delivering potential future returns. 

4. Tax Benefits: As an investor, James could claim tax deductions for expenses related to the investment property, such as mortgage interest, maintenance, and depreciation. This further boosted the financial viability of his decision to rentvest. 

5. Lower Entry Costs: By purchasing an investment property in a regional area, James needed a much smaller deposit compared to what would have been required in the city. This enabled him to get onto the property ladder sooner. 

Considerations and Challenges with Renvesting Strategy can include

 1. Dual Costs:  While rentvesting allowed James to enter the property market, he still faced the dual financial obligation of paying rent for his city apartment while managing his investment property’s mortgage. In some months, especially if his investment property required maintenance or had vacancies, his cash flow could become stretched. 

2. Distance from Investment Property: Managing a property that was located far from where he lived was another challenge. James had to rely on a property manager, adding an extra layer of costs and dependence on third parties to handle tenant issues and property upkeep. 

3. Market Risk: While the regional town showed signs of growth, there was always the risk of a market downturn in that area. If property values stagnated or dropped, James could face difficulties in building equity or selling the property at a profit in the future. 

Conclusion

Rentvesting allowed James to live in his desired location while building wealth through property investment. The benefits, such as flexible living options, rental income, and potential tax advantages, outweighed the challenges of managing two separate financial obligations. However, careful consideration of market conditions, distance, and cash flow management were key to ensuring the long-term success of his strategy.