To Buy or Not to Buy: The Rise of Rentvesting

Written by Will Lucas

In the Australian property market, the age-old debate of renting versus buying has never been more pertinent. With skyrocketing house prices, especially in cities, many Australians are left wondering if they should commit to buying a home or if renting is a more viable option. Enter the concept of ‘rentvesting’—a hybrid approach that’s gaining traction. In this article, we’ll explore the pros and cons of buying versus renting, delve into rentvesting, and help you decide which path might be right for you.

The State of the Australian Property Market

Australia’s property market has seen a rollercoaster of trends over the past few decades. In recent years, significant price surges in metropolitan areas have made homeownership feel like an unattainable dream for many. As of 2024, the median house price in Sydney hovers around $1.6 million, and in Newcastle and Lake Macquarie they’re not too far behind at nearly $1 million. These prices have created a dilemma: is buying a home still a sound investment, or is renting a more practical choice?


The Case for Buying a Home

Building Equity: One of the most compelling arguments for buying a home is the ability to build equity. Each mortgage payment contributes to your ownership stake in the property. Over time, this can translate into significant financial security.

Stability and Security: Homeownership provides a sense of stability. You have control over your living space—no more landlords deciding to sell or raise rent, and the ability to change something about the property to suit your lifestyle. This stability is particularly important for families looking to settle down and establish roots in a community.

Tax Benefits: Homeowners can take advantage of various tax benefits, including capital gains tax exemptions when selling their primary residence. For those that decide not to buy a home, the alternative is usually investing in an investment property or shares. While these can be great options, the capital growth will be subject to tax, whereas all capital growth of your primary residence is tax free.

Long-Term Investment: Historically, real estate has appreciated over time, making it a generally sound long-term investment. While there are always market fluctuations and risks involved, many Australians view property as a comfortable investment.


The Case for Renting

Flexibility: Renting offers unparalleled flexibility. Whether you’re a young professional considering a move for work or someone who enjoys the freedom of travel, renting allows you to relocate with relative ease.

Lower Upfront Costs: The initial costs of buying a home can be daunting, including a deposit, stamp duty, and other fees. Renting typically requires a smaller upfront investment, making it a far simpler option when looking for your next home.

Maintenance-Free Living: Renters often have the luxury of not worrying about property maintenance and repairs. Landlords are usually responsible for keeping the property in good shape, which can save you time and money.

Predictable Finances: Since renters are usually not responsible for maintenance of the property and instead just have a stable expense (rent) that is predictable. It can allow for more precise financial planning without having to prepare for the next problem that needs fixing. This means renters can accurately determine the amount of money they can save or invest and have clearly-defined goals.

Investment Diversification: By renting, you can allocate your savings to other investments. Rather than tying your money up in a property that will likely be a ‘lumpy’ asset, you might choose to invest in stocks, bonds, or even a high-interest savings account. Hopefully, buying a home is a smooth-sailing journey and the property grows in value, but if one property makes up the entirety of your wealth you’re taking on a substantial risk. For example, if the suburb becomes undesirable or structural issues are found your entire financial position can take a significant hit all at once. Worst-case scenario here would be having to sell the property for less than you paid and still being required to repay the mortgage in full.


Understanding Rentvesting

Rentvesting is a growing trend among young Australians. It involves renting in a desirable location while purchasing an investment property in a more affordable area. This approach allows individuals to enjoy the benefits of living in a sought-after neighbourhood without the prohibitive costs associated with buying a home there.

Benefits of Rentvesting

Location Advantage: Rentvesting allows you to live where you want—perhaps closer to work or in a trendy suburb—while still building equity in a property located in a more affordable market.

Potential for Positive Cash Flow: If you choose an investment property wisely, it may generate rental income that exceeds your mortgage costs. This can create a positive cash flow, allowing you to enjoy your lifestyle while also investing.

Flexibility: Like traditional renting, rentvesting offers flexibility. If your circumstances change, you can choose to sell your investment property or move to a different rental. This can be especially beneficial for young people in dynamic career paths where they want the opportunity to move cities or even countries at ease.

Drawbacks of Rentvesting

Management Responsibilities: Owning an investment property comes with its own set of responsibilities, including finding tenants, dealing with maintenance issues, and navigating the complexities of property management.

Market Risks: Just like any investment, property values can go down. If you purchase an investment property in a declining market, it could lead to financial losses.

Initial Financial Strain: Rentvesting can require significant financial planning. You may need to maintain the costs of both rent and mortgage payments, which can strain your budget. It’s also important to plan for periods of vacancy in your investment property so that you are not adversely affected if and when this takes place.

Emotional Connection: Renting can sometimes feel less personal than owning a home. If you’re someone who values stability and the emotional connection to a property, rentvesting might not fulfill that desire.


First Home Buyers

If you’re weighing up the purchase of your first home, this decision can become more complicated due to a few special rules that might apply. However, these rules usually only apply to the purchase of a home to live in for at least 6 to 12 months. So these may not apply to an investment property purchase. Therefore, if you elect to purchase an investment property as your first home you’re essentially waiving your rights to these benefits.

First Home Super Saver

In Australia, you may be able to accelerate the savings process for a deposit by making voluntary contributions to superannuation and claiming a tax deduction for these contributions. If eligible, you may be able to add $15,000 to superannuation each financial year, up to a total of $50,000 (this would apply to each person if a member of a couple). The funds you added (not including compulsory employer contributions) can then be withdrawn to help fund your first home deposit (less some tax).

First Home Owners Grant

Each state and territory has their own grants and schemes for first home buyers in Australia. In NSW, you may be able to receive a cash grant of $10,000 if you purchase or build a new home. Additionally, all homes purchased for under $800,000 will be exempt from paying stamp duty, and a discounted rate will apply on homes up to $1,000,000.


Making The Right Choice For You

I spoke to a friend recently that sat in the middle of the above preferences because he wanted the security of being in the property market (ideally a place he could spend some time fixing up) but also thought in a couple years’ time that he might want the option of moving and didn’t want to go through selling and buying again so soon. We chatted about whether buying a home meant that he couldn’t rentvest in the future. He’s now bought a small home, using some of the First Home Buyer benefits and is living there for the foreseeable future. However, he plans to make a move at some point over the coming years, lease the home he’s bought and rent a new home for a period of time. Due to a special Capital Gains Tax rule, he will be able to treat his property as tax-free for the entire period he lives there plus another 6 years afterwards while he rents.

This is an extremely specific example, but it demonstrates that ultimately, the decision to buy a home or rent (or rentvest) depends on your personal circumstances, financial situation, and lifestyle preferences. There’s no one-size-fits-all answer in the Australian property landscape.

For some, the stability and equity of homeownership are worth the financial commitment. For others, the flexibility and lower upfront costs of renting—or the strategic advantages of rentvesting—may be more appealing.

As the Australian property market continues to evolve, it’s essential to stay informed and make decisions that align with your individual goals. After all, home is where the heart is, but it can also be a smart financial decision.

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The information in this article is general information and does not take into account any person’s individual situation. You should always do your own research, or seek professional advice to assist you in making an informed decision about what suits your needs.

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