Over the last five years, the Sydney and Melbourne real estate markets, in particular, have experienced a boom like none we've ever seen before. Where, in the past, the most common Aussie dream was to be able to grow up and buy our own property, make our own home, that dream has gradually disappeared as property prices have continued to rise, and household incomes have not kept up.

Despite the challenges, many Australians still aim to buy property as a means to build security for themselves and their families in the future. To do this, many families make big compromises, relocating to more affordable cities or even regional centres; buying smaller places; or giving up on the idea of a house in lieu of an apartment. But most recently, a different option has really started to become popular; rentvesting.

What is rentvesting?

The term 'rentvesting' is one of those common examples of Australian English -- that combination of two words to create a new term that is basically self-explanatory.

Rentvesting simply means to buy a property in an area that is affordable and within budget and to rent it out to help cover repayments, while at the same time renting a home to live in an area that is more convenient for your lifestyle and work. Taking this approach is a good way to get a foot into the market, without having to make some of the big compromises others have made in the past. It's also a way to take advantage of some of the much lower prices in outer suburbs or regional areas.

The positives of rentvesting

If you are in a position, like many first home buyers, where properties in the area you want to buy in, are financially out of reach, renvesting can offer a lot of positives.

  • Live where you want to live -- maintain your lifestyle, find a location close to the facilities you use most and the entertainment you like most, and don't compromise on enjoying life for the next thirty years while you pay off your property.
  • Get into the market -- having a foot in the market is absolutely a positive, but not all opportunities are equal. Finding a property you can afford is definitely important, but if it is to be a worthwhile investment, it needs to meet more criteria than just being priced at the right dollar figure. Of most note, making sure the property has features and is in a condition that will enable a strong resale at some point down the track, should be one of your first concerns. Right now, this property is a rental investment, but in the future, it will be an opportunity to raise the money you need to buy a home you want to live in or to invest in properties that give you a stronger return. If the property is in a poor condition or is lacking what it needs for resale, it offers no real advantage.
  • Enabling multiple investments -- sometimes multiple cheaper investments can be of more value in the future, than one more expensive investment now. Buying something affordable that doesn't unreasonably extend your budget, means you can pay it off faster, build equity and invest further.
  • Buying is forced saving -- though you will still be paying rent, you will be forcing yourself to save by taking the rent you are paid for your property and putting it straight into repayments, building equity in your investment.
  • The rent makes repayments easier -- though negative gearing has its benefits, the larger the gap between the rental income and the mortgage repayments, the tougher paying off a home can be. Having a strong rental return that covers most of your mortgage repayments means you can buy a property and largely feel no effect on the rest of your life.

The negatives of rentvesting

  • The gap -- the very nature of rentvesting means you are buying a property likely far under the value of any property you would ideally like to buy in the area you want to live in. While in the beginning this is not an issue, if your longer-term plan is to build equity and sell the property in order to fund a house you really want, you may find there is still a significant gap between what you have and what you need.
  • The financial loss -- the reason a lot of Australians don't want to rent forever is essentially that they consider it a waste of money, years of payments with nothing tangible to show for it at the end. When rentvesting, you will likely be in a situation where you are spending on rent and also covering the gap between your mortgage and investment property income. Though you will have a house to show at the end of the process, you will still have years of rental payments that are contributing to someone else's mortgage instead of your own.

Is it right for you?

Whether or not rentvesting is right for you is very personal; it depends a lot on you, your finances, what you want, and also the property you want to buy and rent.

To determine if it's the right choice, you need to get out your pen and paper and do some maths. While everyone will be aiming for different outcomes, you will have aim for your investment; it may be to rent it forever and you build equity, to invest again; it may be to sell it off when it appreciates and buy the house of your dreams; regardless, you need to determine if the property you've selected will facilitate the aim you have.

In doing the math, you need to work out your initial outlay, the costs as you progress, your income trajectory, the likely appreciation trajectory of the property and also of a property you would like to buy in the future. Is the property you're looking at going to get you to where you need it to?