What a horrible mash-up of words. Rentvesting? Rent-Investing? Rentvestor?
While the term itself doesn’t sit well with me, the underlying principles defiantly do and I think a ton of millennials could benefit from it, so listen up muchacho’s!
What The Hell Is Rentvesting?
Put simply ‘rent where you want to live, while you invest where it makes sense’
If you’re a citizen of Sydney or Melbourne, you may know about the incredible median house prices.
The stock standard formula for buying a house used to be:
- Get a good job
- Save enough money for the deposit
- Buy house
- Pay off the loan
- Live happily ever after
But as the great Bob Dylan once said
The new formula is now this:
- Get Arts degree
- Skip smashed avocado for 6,363 days
- Pay your deposit
- Spend the rest of your life paying off your loan
- Enter death blissfully knowing your financial situation will not follow you to the afterlife
I kid I kid.
But the point I’m trying to make is that the old school conventional way of buying a house in our two biggest cities doesn’t work anymore for the majority of people without financial help from their parents or inheritance.
This is because the game has changed! It ain’t what it used to be when ma and pop were hunting for a house.
Can Rentvesting Help?
As I have already explained with my Rent vs Buy article, renting is cheaper 90% of the time.
And if you live in either inner Melbourne or Sydney, this becomes 110% of the time.
So instead of taking on a mortgage in either of these two cities, why don’t you rent for a few years and invest where it makes sense to do so.
Rentvesting can get you into the housing market without the financial stress when buying in inner Melbourne and Sydney.
How Does It Work?
One rentvesting example might be ‘Harry Hipster’ from inner city Melbourne complaining that the housing market is rising faster than he can save for a deposit.
Harry desperately wants to enter the property market but cannot save enough for the deposit and is unsure if he will be able to make mortgage repayments without at least a 20% deposit. Caution Harry is also extremely hesitant about the Melbourne market being in a bubble and is worried that prices could come crashing down just after he has bought.
He has been very cautious of a potential crash for more than a decade now and year after year he has seen friends and family around him buy real estate and increase their wealth. He’s sick of being on the side lines but can’t afford to buy in inner Melbourne.
Harry discovers rentvesting and decides to take his savings and invest interstate where the property market is more affordable. The collected rent would cover the majority of costs associated with the investment with plenty of upside for capital growth.
Rentvesting has allowed Harry to get into the property market without the mortgage stress he would have had if he had bought in inner Melbourne. Furthermore, if Harry’s financial situation changes he can adapt quickly.
If Harry gets a raise, he can move into some place more luxurious. Maybe he loses his job? No worries, he can move somewhere more affordable until he finds his feet again. None of these luxury can be had once you lock yourself into a mortgage that you’re paying for. The investment property is an asset not a liability. The mortgage on the IP is not paid for by Harry, he has tenants that are paying that loan off for him.
After a few years Harry may decide to sell the IP getting back his savings plus whatever capital growth occurred during the years and use this money as a down payment for an inner Melbourne house. The entire time, Harry was in the property market and benefiting from whatever gains occurred instead of missing out on the sidelines. Harry was also not under financial stress and had the flexibility to live wherever he wanted to based on the circumstances he was in that year.
With the two biggest cities in Australia being more expensive than ever, more and more Australians are struggling to get their foot into the property market. Rentvesting can be used to get into the market without having the stress of paying a mortgage yourself.
Rent where you want to live, invest where it make sense.
My partner and I are rentvestors and have no plans to buy a house to live in anytime soon. This gives us the flexibility and freedom that we want this time in our lives. When circumstances change, we have the flexibility to adapt.
Are you currently rentvesting? Why? Why not?
Thoughts and feelings in the comment section below.