Rent-vesting – What are the pros and cons?

Rent-vesting is a strategy where you rent the home you live in, and then buy investment properties elsewhere.

This approach is gaining popularity, especially among younger professionals.

Why? You can get the best of both worlds. You’re on the property ladder while still enjoying the flexibility of renting. But rent-vesting isn’t for everyone.

In this article, you’ll learn the pros and cons of rent-vesting and whether it could be a good option for you.

What are the pros of rent-vesting?

Let’s start with the pros:

Pro #1 – Flexibility and lower responsibility

One of the biggest advantages is that you’re not locked into living at a specific property.

This means you can rent wherever suits your lifestyle, but not at the cost of growing your wealth.

For example, Andrew Nicol, our Managing Director, was a rent-vestor for 15+ years.

He rented an apartment in Christchurch and loved it; he could move cities for work as he pleased without the responsibility of home ownership. If something broke, it was the landlord’s problem.

This freedom is very attractive for people who want to buy property without being tied down by them.

Pro #2 – Buy where do you get the best investment returns

Sometimes the best areas to invest in aren’t where you want to live.

Rent-vesting is the way around this. You can continue living in a property or community you love ... while investing in a more high-return property.

For instance, the apartment Andrew lived in would have been a terrible investment. Apartments tend to go up in value more slowly, and it required a lot of maintenance.

But he loved living there; it was a great place to live, but not a good long-term investment. That’s why it made sense for him to live there … but invest somewhere else.

Pro #3 – Buy more affordable properties

Similarly, rent-vesting can allow you to buy more affordable properties.

Maybe you live in Auckland, but you can only afford a home in Christchurch right now.

Or maybe you like to live in a more expensive area on Auckland’s North Shore, but you know there are much better investment options in South and West Auckland.

Buying a property shouldn’t always mean sacrificing your lifestyle or community.

Ed (our economist) bought his first property in Christchurch, but he lived in Auckland.

It meant he could buy a property $200,000 cheaper than if he had bought in Auckland.

Another investor Ben, was living in Auckland but moved to Dunedin to buy a property. He lived in it temporarily, then turned it into a rental and moved back to Auckland.

Later, he used the equity in the property to buy his first home to live in.

More from Opes:

• Rentvesting - How to invest in property while still renting (Podcast)
• Renting vs owning – Which is cheaper? (Article)
• Are you thinking like an investor or a homeowner? (Article)

What are the cons of rent-vesting?

OK, so now let’s discuss the cons:

Con #1 – Missing out on using KiwiSaver

A big downside to rent-vesting is you can’t use your KiwiSaver for an investment property. Well, not directly.

Sure, you can use KiwiSaver to help with your first home deposit, but you have to live in it for 6 months.

Some investors will decide to buy a property and use their KiwiSaver, then turn it into a rental after 6 months.

But that does mean you need to move into the property. If you currently live in Auckland and want to buy in Invercargill, you still need to move cities for 6 months.

That might mean you miss out on using your KiwiSaver, or you have to temporarily move cities.

What if you don’t use your KiwiSaver for your first property? Well, you still won’t be able to use it either when you eventually buy a home to live in.

That’s because you’ll already own a property, and generally you can only use your KiwiSaver if you’ve never owned a property before.

Con #2 – It can be harder to keep growing an investment portfolio

Building your portfolio as a rent-vester can be slower. That’s because of the usable equity you can access.

For example, if you buy a new build for $1 million as an investment and get an 80% mortgage, you'll have borrowed $800,000. But because the property is an investment, you can only borrow up to 70% of the value once it’s settled.

This means you have to pay off another $100k of the mortgage before you can borrow again.

And this can slow your ability to expand your portfolio; it all comes down to the Reserve Bank’s loan-to-value ratio restrictions.

Con #3 – Loss of control as a renter

If you choose to rent, rather than own, you lack some control over your living situation.

Your landlord could increase the rent, ask you to move out, or decide to sell the property.

And for those with families, this lack of control can be a drawback. I know someone who was issued an eviction notice 2 weeks before Christmas, which meant her eviction date was early February. She had to find a home for her family over the Christmas/summer break.

For this reason, you might not want to rent if you need stability for your children, or if you want to make alterations to your home, or welcome a family pet.

That’s why we often see rent-vesters as young professionals.

Is rent-vesting right for me?

Rent-vesting can be a flexible and profitable strategy, especially if you’re looking to enter the property market while maintaining your lifestyle.

It often suits people who live in cities where house prices are expensive. Places like Auckland, Wellington, Queenstown and Tauranga. If you live in one of these cities it might be easier to buy a cheaper property outside where you live.

Whereas if you live somewhere property prices are cheaper, for example Invercargill, house prices are more affordable anyway and buying a rental in a different city won’t give you the same advantage.

Keep in mind those trade-offs too, such as potentially missing out on your KiwiSaver or facing challenges when it comes to using equity to build your portfolio.

It’s important to weigh these pros and cons based on your circumstances and long-term goals.