Rentvesting is a strategy where you rent a place to live in a location you prefer and invest in properties elsewhere where the numbers make more sense.
The idea is that you get to live the lifestyle you want without compromising on location, while still building wealth through investing in real estate. In today’s market, rentvesting seems like a no-brainer if your goal is to grow wealth.
Renting allows you to live where you want without compromising your lifestyle, while investing in properties elsewhere helps you build your portfolio.
Yes, rents might go up, but if you’re making smart investments, the returns from your properties (cash flow from rent and capital growth) should more than cover any increase in your own rent. The key is to think outside the box and not just follow what everyone else is doing.
It’s all about numbers
Say you look into buying a house interstate and find some good options for about $500,000. In this case, you would need about $80,000 to complete the purchase (covering your deposit and purchase costs). If you live in a capital city, that same $80,000 likely wouldn’t be enough to buy a house where you want to live, so you opt to rent locally – let’s say in Sydney.
You now have two options: go ahead with the interstate purchase or put the $80,000 in a term deposit while you continue to try to save for a deposit on a local property. (Another option would be to invest the $80,000 in the stock market, but I’ll keep this comparison simple). Let’s see how those options are likely to play out.
If you shy away from making the interstate purchase, the $80,000 sits in a term deposit earning about 4 per cent annually. So, in year one you would have made $3,200 before taxes. After five years, your deposit would be worth $97,332 due to compound growth.
Your goal was to have enough funds to put down a deposit on your home, which over those five years will also have increased in value. So, you’re no closer to your goal.
The rentvestor way
If you choose the rentvestor option, instead of just saving your money, you’ve still entered the property market. After one year at the same rate of growth (4 per cent), the $500,000 property is now worth $520,000. The $80,000 you put towards the purchase has now produced a return of $20,000 in 12 months!
You would have outperformed five years’ worth of compounding growth in just one year. After five years at this same growth, the house would be worth $608,326, meaning the $80,000 invested is now returning $108,326. You could then look to sell that property and, after all costs, would still have a larger deposit for your house in Sydney.
Let me take this further with another example. Take Parramatta, a popular suburb in Sydney, Australia. The median house price for Parramatta is about $1.55 million, and units go for about $630,000. If you buy a unit there, you will see minimal growth over time because there is a huge supply. If you instead take that $630,000 and invest in a house in Dubbo, for example, you could see much stronger growth due to lower supply and higher demand.
Plus, if you’re currently renting in a surrounding city suburb, you’re likely paying less in rent than you would in mortgage repayments if you bought a similar property.
Learn more about property investment in the book Retire filthy rich with real estate: Your step-by-step guide to building wealth through property by Ravi Sharma.
How rentvesting affects borrowing capacity
When you buy a home to live in, that property isn’t generating any income – and this can actually reduce your borrowing capacity. If you rentvest and purchase an investment property instead, that property’s rental income can help maintain or even improve your borrowing capacity. This is crucial if you’re looking to build a property portfolio, because it allows you to keep expanding without maxing out your borrowing limits.
Things get interesting when you repeat this across three to five properties. The numbers multiply and this is how the rich get richer. I learnt this from experience. I knew I was on the right path because everyone else was following what they had heard was the ‘right way’. Rent has also been increasing over the years I’ve been holding my properties and, through buying well, I’ve also experienced rental growth.
Through following a similar process, your properties could soon become cash flow positive, meaning you can use this income to offset your daily expenses. The potential rewards here are very fruitful.
This is an edited extract from Retire filthy rich with real estate: Your step-by-step guide to building wealth through property by Ravi Sharma, available now at all leading retailers. Learn more at searchproperty.com.au