Rentvesting in Australia: buying an investment while you rent

You want to stay near work or family, but buying there is out of reach. Rentvesting gives you another path: keep renting where you live and buy an investment somewhere you can afford. I'd start with the gap you need to cover each month, because you'll still have your own rent to pay.

It may suit you if buying a home in your preferred area is out of reach and you're comfortable being both a tenant and a landlord. If you want certainty about where you'll live, or have little spare cash for vacancy and repairs, compare buying a smaller home to live in or continuing to save first.

You buy a property intended for tenants, arrange an investment loan and continue renting your own home. The investment doesn't need to be in the same suburb or state, but distance adds practical questions about management, inspections and local costs.

Choose a property with a rental market you understand and a budget that works after expenses. A lower purchase price can help you get started, but leave room for vacant weeks and avoid relying on price growth to make the plan work.

Compare those trade-offs with buying a home to live in. Moneysmart's property investment guide is a useful starting point for the costs and risks.

Write down your own rent and living expenses, then prepare a separate budget for the investment property. Include mortgage repayments, management, rates, insurance, levies, maintenance and a vacancy allowance.

For example, $600 a week in rent is $31,200 over a fully paid year. Allowing for 4 vacant weeks reduces that to $28,800. With mortgage repayments of $3,000 a month, you pay $36k a year.

That's $7,200 a year, or $600 each month from your other income, before rates, insurance, repairs and your own rent. Add those costs before deciding whether the property fits your budget.

Use your proposed loan quote, lease or rental appraisal and property-specific costs to build your own budget.

Keep a reserve outside the purchase costs. If an appliance fails or a tenant leaves, the lender still expects the mortgage payment.

A 20% deposit generally avoids lenders mortgage insurance (LMI). With a smaller deposit, you may be able to use a professional waiver or a general no LMI offer. Other loans charge LMI or a lender's own risk fee. The option needs to cover investment purchases and the property you want.

For a $600k investment, a 20% contribution towards the price is $120k; 10% is $60k. Duty, legal work, inspections, lender charges and the reserve come on top. If LMI is financed, include it in the loan and repayments.

Our investment-loan guide explains equity, deposits and loan structure. Check the relevant state's duty and land tax rules when buying interstate rather than applying Queensland costs to every property.

The Australian Government 5% Deposit Scheme is for an eligible home you’ll live in. It doesn't fund a property you plan to rent out while living elsewhere. You generally need to move in within 6 months of settlement, or the occupancy certificate for a new build, and keep living there while the guarantee supports your loan.

Buying an investment first also changes your options for a later home purchase. Under the Scheme's first home buyer rules, you must not have held a property interest in Australia in the 10 years before signing the new home loan agreement. Both borrowers must meet that test on a joint application. It includes investment properties and land, even if you never lived there.

The 10 years isn't counted from the day you bought the investment. If you still own it, you still have a property interest. After selling, the look-back period still includes the years you owned it. Check the ownership dates before counting on the Scheme for your next purchase.

The Single Parent Stream has a different ownership test. Previous ownership can be accepted, but you must have no other property interest when your new home settles. You also need to meet the single-parent or legal-guardian criteria and buy a home to live in. It isn't an investment-purchase scheme.

Grants, duty concessions and shared-equity programs have their own ownership and occupancy rules. You may lose access to one program and still qualify for another. We can help you compare the support available before you decide which property to buy first.

Compare the support you could receive on a home you occupy before committing to rentvesting. A profession-based LMI waiver is a different option: some allow investment purchases, depending on the lender, your role and whether you choose principal and interest or interest only repayments.

The lender won't necessarily use all the expected rent in your borrowing calculation. It may cap the annual rent at a percentage of the property's value, use only part of that amount and allow for expenses. It then assesses your other income, debts and ongoing rent. Those steps can make a high-yield property less helpful to your borrowing power than the listing suggests.

Rental yield is annual rent divided by the property's value. A lender may cap that yield before counting a percentage of the rent. Here's how a $600 weekly rent can become about $369 a week in the borrowing calculation.

You would still receive the rent your tenant pays. The lower figure affects the bank's borrowing calculation. That is why we check the address, rent and loan together before you rely on a high advertised yield. Our investment-loan guide shows how rental-expense allowances can reduce the assessed amount as well.

Your own rent doesn't disappear because you've bought an investment. Be clear about where you'll live and what it costs. The lender may ask for the lease, statements or other evidence of that arrangement.

The same property can support a different loan amount at another bank. We compare the full application so you can see the effect on the purchase you have in mind.

Check the lending before relying on a nightly rate. Income from short stays can need a longer record of receipts, and a lender may count less of it or decline that income or property type.

Ask a local property manager for a standard rental estimate too. It gives you another way to test the budget if bookings are quiet. Include cleaning, platform fees, utilities, furnishings and vacant nights, and check council and body corporate restrictions.

Investigate comparable sales and rents, vacancy, employment drivers, transport, condition and local supply. Speak to property managers about likely tenants and the work needed before leasing.

Check building and pest reports, flood information, approvals and body corporate records where relevant. A high advertised rental yield can come with higher repair costs or weaker tenant demand.

Avoid choosing a suburb because someone promises it will be the next hotspot. Our valuation guide explains how to assess the property itself.

Discuss ownership and loan structure with your accountant before signing. Tax treatment depends on the property and how borrowed money is used; owning an investment doesn't make every related payment deductible.

An offset holds cash separately from the loan. Redraw is access to extra repayments already made, and using redrawn funds privately can affect interest deductibility. The ATO's rental property guidance explains the records and income you need to account for.

Interest only repayments may improve short-term cash flow, but the balance remains outstanding and repayments can increase later. Compare the full cost and the payment after the interest only period with principal and interest from the start.

Start with what the first property is costing you now. Use actual rent, repairs, insurance, rates and loan repayments. If you're regularly drawing on savings to cover it, solve that gap before adding another commitment.

For the next purchase, have your broker reassess the current property values, total debts, income the lender can use and cash needed for the deposit and costs. A higher valuation may create borrowing options, but you still need to afford the extra loan.

You can use the deposit-saving guide to rebuild cash and the investment-loan guide to review the structure. Set the next purchase date after the numbers work, rather than trying to meet a fixed portfolio timetable.

Some lenders limit how much of the income used in their assessment can come from rent. This can affect your next purchase even when the properties are tenanted and you have equity. Ask whether the lender has a rental-income limit and whether it applies to your position.

Bring the rent, expenses and loan details for every property, along with your wages or business income. We'll compare how the total position supports the home you want next. If you plan to move into an investment you already own, its rent will stop, so the new budget needs to work without that income.

If you later sell, allow for selling costs and any capital gains tax. If you move in, tell your lender and insurer and get tax advice about the change in use.