Rentvesting Explained: Rent Where You Want, Buy Where You Can
Rentvesting is renting the home you live in while owning an investment property somewhere more affordable. It’s become common in expensive coastal and capital city markets, and few places illustrate the logic better than Byron Bay.
If you want to live in Byron Bay but the median sits far beyond what you can borrow, you have three options: leave, wait, or separate where you live from where you own. Rentvesting is the third.
How it works
You rent your home as a tenant, and separately buy an investment property you don’t live in, funded by a standard investment loan and serviced partly by its rental income.
The reasoning is that your lifestyle location and your investment location don’t have to be the same place. The suburb with the beach you want to walk to and the suburb with the best rental yield are rarely identical.
The numbers, honestly
Take someone renting in Byron Bay for $900 a week who can borrow around $600,000.
Buying in Byron: at a median well above $1.5 million, $600,000 doesn’t reach the entry point. The option isn’t available.
Rentvesting: they buy a $600,000 property in a higher-yielding area, rent it for around $580 a week, and continue renting in Byron.
Their weekly position combines the rent they pay, the shortfall on the investment property after rental income and costs, and the tax treatment of that shortfall. It is usually more expensive than renting alone and less expensive than owning in Byron would be, if owning in Byron were even possible.
For example, one of our clients was renting in the nearby Newrybar hinterland and wanted to purchase a property. Their borrowing capacity maxed them out at a $750,000 purchase, but the median home price in Newrybar is $3,700,000. Instead of purchasing where they lived, they bought an investment property in Ballina for about $650,000 that brings in $500 a week in rent. This allowed them to both purchase a property and continue to live in their same lifestyle location.
Details anonymised to protect our client’s privacy.
Why it suits this region particularly
The Northern Rivers has an unusually wide gap between lifestyle desirability and rental yield.
Byron Bay has among the lowest gross yields in regional NSW and high prices relative to achievable rent. Ballina, Alstonville, Wollongbar and suburbs further inland yield noticeably better while still sitting within the same region. Lennox Head sits between the two on both measures.
That gap is the entire rentvesting opportunity. You can rent in the expensive part and own in the part that actually stacks up as an investment, without leaving the area.
There’s also a workforce dimension. A lot of people here work in hospitality, health, education and trades, jobs located where the population is, not where the property is affordable. Rentvesting lets you stay near work.
What you give up
The main residence capital gains exemption. Your own home is generally exempt from CGT, but an investment property is not. If it grows substantially over decades, that’s a real cost, and it’s one of the biggest arguments against rentvesting.
Security of tenure. You’re a tenant. Leases end, landlords sell, rents rise. In a tight rental market that’s a genuine risk, and the Northern Rivers rental market is tight.
First home buyer concessions. Stamp duty concessions and grants generally apply to owner-occupied purchases. Buying an investment property first can forfeit these, though rules vary and some schemes have changed. Check current NSW eligibility and our guide to first home buyer loans before you commit.
Emotional ownership. You can’t renovate the place you live in, and you own somewhere you may never see. Some people find that fine; others don’t.
How lenders assess it
Investment lending is assessed differently to owner-occupied lending in ways that catch people out.
Your rent is counted as an ongoing expense. Rental income from the investment property is shaded, commonly by 20%, to allow for vacancy and costs. Servicing is tested at an assessment rate well above the actual rate. Investment loans typically carry a slightly higher interest rate than owner-occupied.
Existing commitments matter too. Consumer debt, car finance and HECS debt all reduce what you can borrow. If you already own a rental, the lender will want a rental ledger to verify the income.
The combined effect is that borrowing capacity for a rentvestor is usually lower than they expect. Working out what you can actually borrow before you start looking saves a great deal of wasted time.
Who it works for
It tends to suit people who are comfortable being tenants for an extended period, have secure income, are investing for the long term, and are clear-eyed that this is an investment decision rather than a home purchase.
It tends not to suit people who want stability of housing above all, are close to needing a family home, or would struggle to fund the shortfall if rates rose or the property sat vacant.
If a deposit is the obstacle rather than servicing, a guarantor arrangement is sometimes the better route than rentvesting.
Where to start
Before looking at property, find out what you can borrow as an investor, it’s a different number to what you’d borrow as an owner-occupier, and the gap surprises most people.
If you’re renting locally and wondering whether ownership is off the table, talk to us. It often isn’t. It just may not be in the same postcode.
Disclaimer for the foot of the page: This information is general in nature and does not constitute tax, legal or financial advice. Capital gains tax treatment and first home buyer eligibility depend on your circumstances, speak to a registered tax agent.
