Rent-vesting is a strategy where you will buy and invest in a rental property, most probably from regional or rural areas and rent a property to live in that fits your lifestyle. Let’s say you want a place of residence, especially in the Central Business District (CBD), but can’t afford the property, you will just rent it.
Rent-vesting has a chance of investment income and profit if done correctly. You can utilize this income to rent and live in an affordable property that fits your type of urban lifestyle.
Rent-vesting is a lifestyle in itself. Not being tied to a principal place of residence means you have the flexibility to choose wherever you want to live, depending on your mood or work conditions. You can rent for the property itself, or you can rent for the services available around the property, or you can rent for the lifestyle provided for the property. It may be hard to admit that you can’t afford to sustain the lifestyle and the place of residence for the long term, but it can help to rent and try to get a taste of the living conditions you may not usually get to have.
To put it into perspective, there are two options available for investors who want to rent-vest, either use their allocated budget to buy one investment property or divide it between investing in two to three more properties. Having one suitable investment property that can dish out high rental income that can fully support the rental property you want to live in can be beneficial, especially when you can still save some of that income after. But it’s also helpful to have two or three other investment properties for security from vacancy rates and certainty that you can at least pay a portion of your rent with the income from these properties. Diversifying your investment property portfolio mitigates risk, and you can even pace your investments. When you rent-vest, you can start with a new investment property and then later on buy more properties to ease your rent in the future. Simply aim for high-growth suburbs that can have 4-5% (or higher) rental yield. However, take note of the suburban area because some properties in highly urbanized and/or CBD areas would have a lower rental yield than rural properties.
What are the possible problems and concerns when it comes to rent-vesting?
As much as it sounds easy to invest in residential property, the first hurdle an investor must analyse and overcome is checking financial capability. Next, is ensuring that the property matches the investor’s capability. Is the potential investment property within budget and workable, especially in the investor’s favour? Are the savings able to cover the deposit that most properties require for purchase.
Another issue can arise when you become emotionally attached to the place you rented. It’s not wrong to be attached to a temporary place of residence because, as time goes on, you’ll eventually create significant memories, and there’s always a reason why you wanted to live there in the first place. The issue with a rental property is that you don’t own it and do not have full guarantee or control over it. The property owner can increase the rent or sell it without prior notice.
As mentioned earlier, renting a property you naturally won’t be able to afford on its own is not wrong. Living to get the experience and be able to cross off a few things from your bucket list is understandable. But at the end of the day, you have to get your priorities straight for the long run. There will come a time that you would want to have a sense of normality, stability and permanence where you don’t want to move from place to place. It’s hard to grow when you’re rent-vesting, especially when you want to adopt pets for companionship or eventually have a family.
If you are rent-vesting or interested in starting to rent-vest, it’s best to plot out your scheme for years. You can consider rent-vesting for 3-5 years, but what about the next 10-20 years? Rent-vesting is where you want to rent property to buy the lifestyle. But once you’re settling down and building your own lifestyle, that’s when you want to buy the property for yourself and the future. Although it’s not uncommon that there are families that grew even when they were rent-vesting, it’s not recommended if you don’t have a good strategy in place.
Possible factors considered when buying an investment property can still apply when you rent a property for yourself. Rent-vesting when you have a family may be harder too as it’s not just the lifestyle that you need to consider, but proximity to schools as well and possibly a nearby public transportation you can utilize if you only have one car. When you have pet/s, you may expect your rental application to be rejected because there may be unwritten notification that the rental property doesn’t allow pets. People themselves can cause unwarranted damage to the rental property but adding the risk factor of animals is not what most passive investors would want to handle. There are a few rental properties flipped and managed by investors to specifically cater families with pets, but they usually charge a premium price for it.
What to do – rent-vesting or buying PPR?
One factor that determines your choice is your level of energy, basically how much can you endure when it comes to your home. Having a principal place of residence (PPR) brings security that you don’t have to worry since you have a roof over your head. Rent-vesting satisfies your desires of wanting to live differently and somewhere else each time. Both lifestyles are reasonable and can be sustainable in its own right.
Buying a property can be expensive and a lot of people have to apply for a loan just to afford their PPR. With rent-vesting, you don’t need to take out a loan just to pay for rent because you can depend on the rental income from your investment properties. PPRs don’t have as much chances for tax deductions unlike rent-vesting. But since you’re investing on multiple properties, you may need to pay for the property upkeep which can be pricier than the upkeep of PPR. In the far future, if you’re interested to sell your PPR after 10-15 years so that you can settle on a new place, then the profit from tax free property sale will pay just as much or even more compared to the rental income from investment properties. When investment properties are sold, there will be a charge for capital gains tax.
Remember that it is your decision whether you choose to rent-vest or to focus on a principal place of residence (PPR). Rental and residential properties are both assets which would have varying levels of responsibilities. Whether you choose to invest in your PPR or you rent-vest will depend on which strategy suits you best.
If you’re worried about allocation of funds, it’s better to seek financial advice that can help in plotting out your plan of action, and what you can do to somewhat ensure positive cashflow whatever investment you’re making.