The Rentvesting Real Estate Strategy

Recently, I sent a room full of wealthy investors into cardiac arrest when I explained to them that I was a renter, despite having a property portfolio worth around $25m.

After sharing the story with our clients, I was bombarded with questions about the specifics and numbers that make it all work for me.

Let’s break “rentvesting” into 3 parts

• The 3 responses I generally get

• The 10 reasons it works for me

• The 4 reasons it won’t work for some

And yes… you read that first paragraph correctly…

In fact, I haven’t lived in my own place for over 25 years and honestly, I’m not sure if I ever will.

Usually these statements elicit looks of utter confusion. Interestingly, there’s generally 3 responses and they can tell me a lot about that person’s own real estate investment strategy.

The Three Responses I Generally Get

1. No response

There are a lot of people who just don’t care. They are too busy leading their own lives. They generally have no interest in what I do and many feel as though property investing is unattainable, so why should they care about a real estate investment strategy?

2. “Why?”

When someone asks, “why?”, they are generally interested enough to be curious, though not quite educated enough to understand that there are always contrarian ideas and approaches that can help people reach their goals. I find there are a lot of people out there who are simply looking to “keep up with the Jones'” and are just looking to make excuses to justify why they are where they are in life, rather than thinking about where they could be.

3. “How?”

This is generally the response of someone very interested in getting ahead themselves and are curious about alternate approaches and whether or not it can work for them. Almost every wealthy person starts with this question, though I can definitely tell a lot about younger people when they lead with this as well.

There’s Always Been a Stigma Around Renting

“Renting is something only poor people do”“People only rent when they can’t afford to buy”

Ever heard these statements?

It’s definitely not the case anymore, although what these statements mean is that rental yields are much lower on more expensive properties than they are on more affordable and in demand ones.

The 10 Reasons It Works for Me

1. My money works harder elsewhere.

I invest in $1-2m units in Sydney’s blue-chip suburbs that give me around 3-4% rental yield. That’s a much better return for my money than sinking it all into one home.

2. I can rent a more expensive home for less.

I’m renting homes worth $5-10m for about 1-2% of their value in rent. High-end properties tend to have a lower rental yield because the market for tenants is smaller – so I live in a great place for a fraction of the cost.

3. $2,000 a week in rent might sound like a lot…

But let’s break it down. If I rent a $5m home, I can instead use that capital to buy 5 x $1m properties that rent for $750/week each. That brings in $3,750/week in rent. So I own $5m of real estate either way, but by renting, I pocket an extra $1,750 per week – that’s $91,000 a year.

4. Tax perks.

Because all my properties are investments, I might get tax deductions on mortgage interest, strata fees, and other expenses. With a home loan, I’d lose those deductions.

5. Capital gains tax? Not my problem.

People say you save on Capital Gains Tax when you sell your home (as compared to selling an investment property), but if I never sell my investment properties, I never pay CGT. My strategy is to hold, so CGT isn’t something I worry about.

6. Moving is a positive experience.

Whenever we move, we end up in a better property in a better suburb. So if a landlord asks us to leave, we see it as an upgrade opportunity.

7. Moving is easy – and fun.

We take a holiday while the removalists pack and unpack. Then the cleaners come in and make everything perfect. That extra $91,000 a year (from rent collected) more than covers the cost of movers, cleaners, and a holiday.

8. Worried about decorating? Don’t be.

Most landlords won’t mind if we want to change light and door fittings, repaint the property or even recarpet at our own cost (which is what I have done in the past). And with the money I’m saving, I don’t think twice about spending $5,000 or $10,000 to make the space feel like home. I’ve even put in a pool heater and seriously considered replacing the kitchen of previous properties I’ve rented! Can you imagine the confusion of the owner when I said I’m happy to do it at my own expense?

9. “Rent money is dead money.” Really?

Only if you’re not investing elsewhere. The key is making sure your money works harder for you.

10. Diversification is key.

Owning a portfolio of affordable, in-demand, blue-chip properties is much less risky than tying up all your money in one high-end property. There’s always a market for median-priced properties, and banks agree – they’re more cautious when lending on a single expensive asset.

Arbitrage

The beauty of this strategy is the arbitrage of rental yields between affordable, high-demand properties and more expensive, low-demand ones. Sure, the tax perks help, but that’s not why I do it. It’s all about smart investing.

So that’s “Rentvesting”. Investing where you get the highest returns and living where it makes you happiest.

There’s a very big caveat though… Rentvesting doesn’t suit everyone.

The 4 Reasons it Won’t Work for Some

1. What about your partner/spouse?

If your partner/spouse is not on board, the additional wealth will still not cover the marriage counselling or divorce. Sounds like a joke, but I’ve seen it before.

2. Where do you want to live?

This strategy certainly kicks into a higher gear in specific areas. It simply doesn’t work for people craving a specific lifestyle, or wanting to live in an area where the numbers don’t stack up.

3. How is your portfolio structured?

What does your portfolio look like? Rentvesting may not suit depending on your borrowing capacity, investment approach, where you are on your property journey and a whole bunch of other reasons.

4. The financial “tipping point”

Rentvesting kicks into overdrive as property values increase. The more expensive the property is, the less people there are looking to rent. The numbers don’t stack up when you have to pay a higher rent for a lower value property.

In some areas, that tipping point can be quite low, as demand drops off quickly as property values rise. However, in other areas, that tipping point can lift quite significantly.

I have one client who lives in an area of Sydney where a $3m family home is renting with a 5% yield! That’s because there is still very high demand for properties in the area of this type. However, in the same area, a property worth $10m is renting for a less than 2% rental yield.

Should You Rentvest?

The bottom line is that rentvesting isn’t for everyone. However, for others like me, it can be the key to accelerating your property portfolio much faster than using other strategies. The only way to know is by doing your numbers in fine detail, speaking with your partner or family and getting expert advice.

Rentvesting isn’t a guarantee of success. It’s just another tool to consider in your property investing tool box.

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