Rentvesting: Strategy to go from Zero to 3 Properties [In 3 Years]

“Rent money is dead money.” we are sure you have heard this before. But it is not true. Renting, when done properly and with a goal in mind, can actually help you buy properties.

In this post, we are going to take you through a step-by-step process to build a $2,000 per month positive cash flow property portfolio. This strategy will help you go from 0 to 3 properties in just 3 years—whilst you are renting! This is called Rentvesting.

You will be happy to know that this is a non-technical rentvesting property investment guide. So. if you’re not super financially savvy (like I was when I started out), you’ll love this simple step-by-step guide.

Here’s what we cover:

• What is the Rentvesting Strategy?
• Step 1: Get your deposit
• Step 2: Find (and buy) your first property
• Step 3: Work towards saving for your next property
• Step 4: Find (and buy) property 2
• Step 5: Building deposit for property number 3
• Step 6: Find (and buy) property 3
• Step 7: You’re earning $2,000 per month
• Bonus step: Where to from here?
• Bonus: Rentvesting Calculator (Rent or Buy Calculator)
• Bonus: Rent money is not dead money – the numbers.
• Bonus: Benefits of rentvesting
• Bonus: Risks of rentvesting
• Time to get started…

Let’s get started.

What is the Rentvesting Strategy?

Rentvesting is about living where you want but buying where you can afford. It’s a fairly new investment philosophy that’s come around with people that want to still happily invest but not sacrifice their lifestyle and flexibility to travel. 

Rentvesting is really about minimizing your rental expenses and then investing that surplus amount of money in building your wealth instead of staying in the suburbs and chipping away at a mortgage for 30 years.

As we have mentioned above, this strategy is accelerated and will allow you to own 3 investment properties within 3 years.

We know you are busy so we won’t waste your time with any pie-in-the-sky dreams. This strategy is followed by many people, and we will also give you tips on how to save time and some financial headaches in the long term.  

The good news is that almost ANYONE can do this—you just have to be disciplined! You need the discipline to make your savings work for you by removing your emotions and spontaneous purchases which aren’t in the budget.

Our rentvesting strategy leverages both time and money to get the most out of your ability to accumulate wealth. Leverage your time by getting professionals to do the legwork for you and reduce your stress. Leverage your money to help maximise returns and deductions.

Please remember that the information on this site is of a general nature and does not take into consideration your individual financial situation.

Now that you have the basics, let’s move onto the steps to start your property journey!

Step 1: Get your deposit

This will be the hardest step for most people as property prices increase and lending requirements tighten. However, it can be achieved for those who really want to make it happen.

A general rule of thumb is to aim for around 20% of the property value as a deposit. A 20% deposit can be a lot of money so it is better to start out with an investment property with a lower value than if you were purchasing a home to live in.

For example, if you live in an area where the property is overvalued, then getting a 20% deposit on, let’s say,  a $1,000,000 property means you will have to raise $200,000—which may be hard to reach in a 12-month timeframe. So, aim for a property that is undervalued, in an undervalued area. 

There are a few options available to generate the level of deposit you will need: 

• Home equity.If you have equity in property that you already own (either your home or an existing investment property) then you may not need to save anything further. You have the ability to access any extra equity in a property, all the way up to 80% of the current valuation. This process involves a refinance or your personal place of residence, or investment property to create an additional investment loan. If this option is available then happy days, you can most likely shorten the time period to purchase your next 
• Savings. This one requires some tightening of the belt, so to speak. To acquire a home deposit in a period of 12 months is a great feat, but it is possible. One of the best strategies is to implement the 50/25/25 Budget Rule! This is where 50% of your income is spent on essential living expenses, 25% is spent on lifestyle spending, and the remaining 25% is spent on savings. It will take some time to get used to, but once it becomes a habit, it will become easier. This is your key to the rentvesting strategy and any future wealth-building strategy.

You need to plan to invest for your future. This will take some time, but it is worth it. 

Let’s use an example to explain this a little better.

The following are different amounts you will need to save monthly to achieve different levels of deposit within 12 months, assuming the funds are kept in cash and are earning around 2% interest.

I know these numbers seem high but don’t give up. Your ability to save is not your capability to save. Everyone is capable of saving, but your experience with money and habitual behaviours may hamper your ability to save. This is where you need to shift gears and get into saving mode.

There will be a few ‘sacrifices’ on those otherwise discretionary spending but what is more important to you, a coffee or your dream of getting an investment property?

There is a trend toward “YOLO” living, where saving money takes a back seat compared to living large in the moment. The rise of AfterPay and other “Buy Now, Pay Later” services are an example of how our younger generations are focusing on short-term gratification over long-term financial security. Have a look at the historical household saving rates:

Pre-GFC household saving rates were at their lowest in the past 40 years. This was the prime example of a spend-spend culture where the average rate was 0% in the early 2000s. This was a massive decline from 30 years ago when the average household savings rates were almost 20%.

This rate has risen since the shock of the GFC as households have become more conservative (due to previous losses). The lockdowns during the pandemic saw household saving rates up to 23.6% (the highest they’ve ever been), but they’re dropping back down. Household saving rates were down to 13.6% as of January 2022.

The increased Savings Rate during COVID-19 showed us that we can save a lot of money, but we often choose not to. But if you’re really motivated to get an investment property then you should know that you can do it.

Let’s have a look at a working example. Take a couple where one earns $100,000 and the other $60,000. They have around $20,000 currently saved and want to buy their first investment in a 12-month period. Their incomes look like this

For this couple, if they follow the 50/25/25 rule their income will be split as follows:

This couple has the ability to save at least $2,517 per month. For even faster savings, why not cut down on the dinners, coffees and other items which may seem small, but when regular, add up to thousands per year without you noticing! I know that some households may not be on these levels of income, and that is okay. It doesn’t mean that you can’t still implement a rentvesting strategy that works for you. You can either purchase a lower valued property, requiring a lower deposit or extend the saving period out to 18 months.

Tracking your goal!

I know I am not alone when I say that some of my goals for 2021 were my goals for 2020, which were also some of my goals from 2019. The best way to manage to achieve any goal is simple – break it down into smaller goals that are more achievable. So, if your goal is for the year, why not break it down to 52 saving targets. This is the number I use when looking at savings. So if you need to save $40,000 for a deposit, break it down into small chunks. This allows you to use 52 lots of saving $769 which can be easily tracked and managed.

Use an excel sheet to track your goal each week. Get your target in place and track and adjust along the way.

Another great way to get to this goal is using technology to automate your savings. Set up monthly direct debits from your pay into a separate savings account. This will allow for the out of sight, out of mind mentality to enable you to generate your savings.

Step 2: Finding your first property

Now that you have your deposit in place, it is time to look for your first property. This can be a daunting step for most people and the more daunting it feels, the less likely you will take the plunge, especially if this is your first home purchase. 

The solution is simple.  Outsource to a professional!

The three most important professionals you should get are Buyer’s Agent, Mortgage Broker and Property Manager. 

Professional #1: Buyers’ agent

 A rise in the demand for property has brought a new type of professional called Buyers’ Agent. Buyer’s Agents are licensed professionals that specialise in searching, evaluating and negotiating the purchase of a property on your behalf. Think of them as a real estate agent but instead of helping you sell a property, they help you buy one.

Rather than trying to do all the research yourself about which is the best area for growth, low vacancy rates or best rental yields, buyers’ agents have all of this information on hand as it is what they do day-to-day.

Getting a Buyer’s Agent can also help remove emotion from the purchase. Remember, an investment should have no emotional or sentimental value to you.It is not for you to live in but for you to get into the property market at an attractive price and with good potential for rental returns.

How much deposit you have managed to save will be the ultimate decision on what price you should be looking at when making the purchase.

Typical process when working with a Buyer’s Agent:

• Strategy. The first step is to explain what your criteria for the property are, so they can help formulate the overall plan. You need a clear picture of what you are after regarding your budget, rental income, vacancy rates, and your timeline of owning the property.  A property should be viewed as a long-term investment rather than a short-term one. Anything can happen in the short term but the property should increase in value over the longer term, typically 5-7 years.
• Research. Next, the agent should help educate you on the key suburbs you should target based on your criteria. They typically have access to a large database which the average individual has trouble accessing.
• Shortlist. Based on your criteria the agent will summarise a few properties which will be the best fit for your situation. They typically have an extensive network of sales agents to help find suitable properties.
• Agree on a property. Once you have found the ideal property, the agent will do a valuation on the property to give a clear indication of the current market value. This helps to gain a true understanding of what the property is really worth, not what it is being sold for. This will avoid the pitfall of paying too much for a property.
• Negotiate and secure. The last step is where the buyers’ agent can really add value. By having them do the negotiation, they can help get the property for the price you want. They help you avoid making an emotional purchase and spending more than you should.. They also help coordinate the required pest and building inspections and facilitate the exchange of contracts.

There will be costs involved in hiring a Buyer’s Agent, and it’s typically a commission based on a percentage of the purchase price. While nobody likes to pay for things, getting an agent can save you a lot of money, in addition to preventing you from purchasing a property in an area that is unlikely to give you any returns on investment.  As the saying goes, you get what you pay for.

Professional #2: Mortgage broker

Now that you have your property in mind and your deposit ready to go, you need the finance. This is where a mortgage broker comes in handy. A mortgage broker works as an intermediary between yourself and the banks when it comes to borrowing for a mortgage. 

The major benefit of a mortgage broker is that they are working for you, not the banks. Basically, they do all the legwork for you and provide a quick and easy comparison between your lending options. They can also help provide some advice on how to best structure a loan and make repayments to reduce the life of the loan.

The typical process when working with a Mortgage Broker at Hunter Galloway: 

• Free initial assessment.  In your initial conversation with your Mortgage Broker, you will have a chat about your situation, what you are wanting to achieve and reasons for getting a home loan.

• Gather financial information. The Mortgage broker will gather data such as incomes, assets and supporting documentation. 
• Credit analysis: The credit analyst will review your documentation to assess your chances of getting your home loan approved 
• Information is sent to the bank or lender. Your loan application is sent to a number of lenders to see who can get you the best rate and structure for the finance.

The best structure for your loan to make this rentvesting strategy work looks something like the following:

• Level of debt—80% (20% deposit) to avoid lenders’ mortgage insurance in most cases. If you can get away with it, you can try for a 90% level of debt (10% deposit).
• Repayments—Interest-only payments are better, not only from a cash flow point of view to help you continue saving but also from a tax deductibility point of view. Any principal repayments are not tax deductible.
• Offset account—having a genuine offset account against your property will help save interest repayments while still allowing access to the funds to purchase property number 2.
• Variable rate—this allows flexibility of additional repayment as opposed to a fixed rate which does not.

Professional #3: Property manager

Professional #3: Property manager

Once the property is purchased, think about hiring a property manager. These are professionals who tend to the property for a fee. Their typical duties are those of a normal landlord whilst coordinating with your wishes.

Property Managers collect rents, pay necessary expenses, inspect the property on a regular basis and arrange for any maintenance or repairs to take place. They also help to find tenants for you, so you don’t have to worry about getting the property filled every few months.

If you are living in another state or just time-poor like most of us, it is worth having someone deal with the day-to-day running of the property.

Let’s have a look at an example of this. Our couple from before have managed to save their deposit of $50,000 and therefore can purchase an investment property for $250,000.

Assuming a rental yield of 5% and interest rates of 4%.

From this first property, this couple will have upwards of $4,500 surplus income to put towards the next deposit.

Step 3: Work towards your next property

Congratulations, you should have your first of three properties.

The next step is to work towards property number two!

It is now time to work out your current cash flow and place a target on your next property goal. The whole point of the first property was to get into the property market and generate a positive cash flow. This is why a deposit of 20% was recommended. Due to the positive cash flow that this property should now be yielding, you should be able to accumulate either a larger deposit within the same time frame (12 months) or the same deposit in a shorter time.

In addition, the first property should also be getting tax deductions on the mortgage repayments (which should be interest only to maximise the deductibility) and depreciation (depending on when the property was built or renovated). This will  reduce what you are paying the tax man.

How to save for the second property?

If your structure on the investment loan for property one is set up correctly, you should have what is called an offset account. This is a transaction account linked to the loan on the investment property. As the name says, any funds that you have in this account  go towards offsetting interest that would be otherwise payable.

A simple example of this is, let’s say you have a loan of $400,000, but have $100,000 sitting in your offset account, then the bank would only charge you interest on $300,000 and not $400,000. 

It’s important to know that offset accounts work differently to re-draw facilities. Redraw facilities allow you access extra repayments you’ve made on your home loan The major benefit is you can access the funds at any time, just like a regular savings account.

So, why save your funds into an offset account? The major reason is that it will save you interest payments. Even though these will be tax deductible, it is better to forego a tax deduction and save the interest instead. In other words, a deduction is only as good as your marginal tax rate. If you earn $100,000 per annum, then every dollar you spend on interest will only reduce your tax bill by $0.39. Therefore, you spend $1 to get $0.39 back.

As you can see this works out to be more effective from a cash flow point of view. Using current rates, an interest-bearing facility will earn you maybe 2% income per year, while a loan will cost you 4% of interest per year. The net benefit for you in this situation would be either earning $122 after tax or saving $244 off your after-tax funds by foregoing tax deductions.

Leverage can be your friend as well. Depending on what property prices have done in the time period between purchasing the first property and looking to buy your second property, you may be able to unlock 80% of the equity by which the first property has grown. In the following example, after 12 months, property 1 has grown in value, allowing access to 80% of the growth to be used as further funds for a deposit.

This example assumes a growth in the property of 4%. As we have seen in the past couple of years, property growth can be much higher, up to 10+%.

The way this works is when you are ready to purchase property two, have property one revalued. If its value has increased, refinance your loan to access the additional equity. In this example, you would have another $8,000 to put towards a deposit for property two. This is again where the loan structure plays vital importance. If you had fixed your loan, there would be breaking costs involved in this process which could negate any gains made.

This being said, there is no guarantee that property will increase every year, there may be stagnant years depending on the area, but on average, it should increase by at least inflation.

You may not be able to rely on an increase in the property value as it depends on market conditions. But the one thing that you can control is your savings and generating a positive cash flow on the property.

The following is a little summary of where you could be after 12 months using the combination of your savings, surplus income from the property, and the potential of unlocking some further equity.

Step 4: Find (and buy) property 2

Now that you have property 1 under your belt and have built up your next deposit, it’s time to look at property 2.

For this property, it is important to already start to diversify your holdings. It is important not to have all of your property held in one location and in one type because if that market drops, then 100% of your investment will be exposed.

This is where property managers are really worth their weight in fees. Without them, it is almost impossible to buy and manage properties in different states than where you live whilst still working full time.  

Again, how much deposit you have acquired will determine what price you can look at for property 2. 

Let’s continue with our previous couple. They now have (another) 12 months of savings, plus surplus income from their property plus the potential to unlock some extra equity.  

They have talked to their buyers’ agent to look for another property based on their criteria of price and the potential to generate a positive cash flow. 

Using the above deposit amount, you would be able to afford a second property for $217,500. So, now your property portfolio will look something like the following:

Assuming a rental yield of 5% and interest rates of 4%.

Depending on your situation, it may take you more or less time to save for the deposit on property 2, and that is okay. This is just an example, and if you really have to, you can delay the second property purchase by a few months.

As you are beginning to see, this is a ‘rinse and repeat’ strategy. Once property 2 has been purchased, it is back to the drawing board (so to speak) to start accumulating a deposit for property number 3.

Step 5: Building deposit number three

From two positively geared properties, you should have some additional savings capability. Based on this example, this couple has created an additional $8,595 in surplus income from the properties.

Remember to save your deposit effectively! This means placing these funds into an offset account against one of the investment properties. Remember, while this won’t earn you an income, it will save you repayments at a higher rate and offers better tax efficiency.

Anything that you can save is just as good as something you earn and spend.

Towards the end of year three, your portfolio may have grown, allowing access to additional equity in two properties this time instead of the one. You can start to see that using leverage, the more property you have, the more equity you can unlock as the value increases.

Assuming growth in the property of 4%.

Assuming that both of your properties experience an average long-term growth in property of 4% then you can unlock a further $15,280 in equity from these towards your next deposit. As previously mentioned, there is no guarantee that this will occur, but given the current state of the property market there’s a good chance that you will continue to see growth in the value of your properties.

Step 6: Buy property three

By this stage, you should be a pro at the steps involved in purchasing a property.

Just remember the key to building a portfolio is outsourcing to professionals if you are time poor like so many of us.

Work through your criteria again. Remember to try to diversify further towards either a different area or type of property. Based on the above example, you should have around $54,875 in deposit for the next property. This will allow for the purchase of a property in the vicinity of $274,000 helping to generate a better rental return than property two. Also, remember you still want to look for something that is positively geared, and the best way to do that is to find something that is relatively undervalued.

By the end of year 3, your portfolio can look something like the following:

Assuming a rental yield of 5% and interest rates of 4%.

Step 7: You’re earning $2,000 per month

You can now call yourself a mini-mogul! You can see that if you put your mind to it you can achieve your goals.

Your overall position after 3 years:

Assuming a rental yield of 5% and interest rates of 4%.

After another 10 years, the properties may look something like this (assuming you retain the interest-only loan).

Assuming a rental yield of 5% and interest rates of 4%.

You can see that the real power of property, any growth investment is the growth potential over the long term. While this rentvesting strategy is only over a 3-year period (relatively a short time period for a growth strategy) the best thing that you can do is keep these properties for the long run.

Where to from here?

Well, this is all up to you! For those of you who are slightly more conservative, start paying down your loans. For those of you who love the risk, why not buy some more property? Or use your surplus income to start diversifying into other assets which can generate more income as well, like shares or bonds.

I would suggest either starting to pay down the debt to help increase your overall net equity along with positive cash flow position due to some of the risks laid out below!

Bonus: Rent money is not dead money – the numbers.

So is rent money dead money? It really comes down to the figures. Let’s do the maths. 

Say you earn a salary of $70,000 per year and are paying rent of $400 per week in a desirable location like Hamilton in Brisbane. That means you would spend $20,800 per year on rent.

If you decided to buy that same property at $600,000 and 4.50% interest, you would be paying $24,300 per year in just interest payments. Add the mortgage repayments to that, and you could be paying closer to $36,000 per year. 

We haven’t even started talking about other costs of owning a property like council and water rates, insurance, maintenance, and strata fees if you own a unit. These costs alone can add another $4-5k per year. So in effect, buying the property rather than renting it would cost you an extra $10-20k without any tax offsets or advantages.

In this case, it would be better to rent and then invest the $10-20k in property elsewhere or in other assets. This allows you to get the best of both worlds—lifestyle and smart investing.

Bonus: Benefits of rentvesting

Rentvesting has a lot of benefits:

Lifestyle does not change

The first and most important benefit of rentvesting is that your lifestyle does not change and if it does, it will be just a slight adjustment. You can rent in a million-dollar neighbourhood and invest in a property in a cheaper neighbourhood.

With rentvesting, you can live in the city, or you can live near your work, whilst investing in the surrounding suburbs or another city—because you can…

Getting into the market quicker 

As we mentioned before, saving a 20% deposit for a house might take a very long time especially if you live in Sydney where the property prices are above $ 1 million dollars. But with rentvesting you can save a deposit for a cheaper property, allowing you to get into the property market faster.

You can choose where you want to invest (diversification).

With the traditional way of buying a home, you obviously have to buy where you are going to work and live, and you generally have to live in that house for the next 30 or so years. But with rentvesting, the possibilities are endless. You can live in Sydney and buy a house in Adelaide! So in Sydney, you will be close to your friends, great cafes and all the  stuff you enjoy—whilst your property in Adelaide will be gaining you equity. Just remember to get a property manager.

Since with rentvesting you don’t have to live at the property you are buying, you can also choose to diversify and invest in commercial property rather than buy a house. You can even buy a unit if you want—just be aware of extra costs like strata fees.

Tax Benefits

An investment property gives you tax benefits you would not get when you buy a house. 

Bonus: Risks of rentvesting

As with every strategy, there are risks involved. Luckily most of the risks involved in rentvesting can be mitigated. So here are the risks:

Interest rates may rise. 

In low-interest rate environments, it is quite easy to have a property that is positively geared. However, If rates do start to rise off the back of the overall economy doing better, then the surplus income your property will generate will start to decline. Depending on how much rent you can get, it may even become negatively geared and cost you money. This is why paying down debt is an important strategy in preparation for interest rate movements.  

Banks usually stress test at around 7% in interest rates when assessing your servicing ability on a property. This means they determine whether or not you will still be able to make your repayments if interest rises to 7% before they give you a loan. So if you got the loan, it probably means you are able to handle an interest rate rise. 

Property prices may decline

This rentvesting strategy is using leverage/debt to piggyback off the growth of a property. This does create a risk if property prices decline and you are left with more debt than your properties are worth. This is why we are recommending starting out small in an undervalued area. 

A good example of what not to do is buying property in small mining towns with over-inflated property values as some people did.. They bought all their property in the same area for more than it was worth and the only reason people were living in the area was to get ‘stuff’ out of the ground.

 As we saw, when the price of this ‘stuff’ dropped and profit margins began to decline, companies moved out of the area, and property prices dropped as heavily as the commodity prices. This movement is referred to as volatility and is often referred to as ‘market risks’. This is dependent on the supply and demand relationship.

There are ways to mitigate this risk though. Buy property in diverse areas to spread your risk. Buy in different states and even different types of property. Instead of only buying residential property, you can diversify into commercial property. Keep in mind that you make money on the buy, so look for something that is undervalued and then unlock its true potential.

Job or income loss

Your ability to save is reliant on your income-producing ability. If you lose your job, get sick or go on unpaid maternity leave, then the rentvesting strategy may fall apart. It is important to protect yourself as much as possible from loss of income. You can purchase Income Protection Insurance to make sure that if you suffer an illness or accident, income is still coming in. It is harder to protect against job loss. So, if you work on contracts or have low job stability, this strategy may not be for you.

Inability to get a loan 

If you have a bad credit history or are having difficulty obtaining a loan from a bank due to income, assets or any number of reasons a bank may give then this rentvesting strategy will be hard to implement. 

You may be eligible to purchase your first property relatively easily, but as soon as you apply for the second loan, you may be declined by the bank.

Talk to a mortgage broker first to assess what your overall borrowing capability looks like to avoid running into this problem halfway through the rentvesting strategy!

Bonus: Rentvesting Calculator (Rent or Buy Calculator)

With the Rentvesting Calculator, you can let the numbers do the talking and help you decide. Live where you want, and invest where you can afford.

This calculator uses your individual situation and calculates whether it is better for you to purchase a property or to rent and invest. If you purchase a house, it uses the average mortgage repayments and costs of running the property, versus if you were to rent somewhere. 

Whichever strategy leaves you with the most surplus income financially makes more sense to do!

Check out this calculator to see whether you’d be better off renting or buying: Renting vs Buying Calculator

Time to get started…

We hope you now feel as pumped as we do about building your investment portfolio! Just remember this Rentvesting strategy is just the beginning of your wealth building future!

Our team here at Hunter Galloway is here to help you buy a home in Brisbane. Nathan & Jayden Vecchio are Senior Mortgage brokers who specialise in making your home journey easy.

Unlike other mortgage brokers who are just one person operators, we have an entire team of experts to help make your home loan journey as simple as possible.

If you want to get started, please click on the button below to get a free assessment and we can book a time that suits you.

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General advice warning. The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.