It can feel pretty hard in the current market trying to find a home to live in with some of those median house prices. But if you are priced out, you can consider a strategy that can allow you to go from 0 to 3 properties in just 3 years—whilst you are renting! This is called Rentvesting.
In this post, we will take you through a step-by-step process to build a $2,000 per month positive cash flow property portfolio.
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.
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 minimising 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 on 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 that 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 on to the steps to start your property journey!
Step 1: Get Your Deposit
This will be the hardest step for most people as property prices are increasing and lending requirements are tightening. 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 an undervalued property in an undervalued area.
Suburbs where you can get affordable houses
There are several Australian suburbs with mortgage repayments under $570 a week, which is below the median weekly rental of $570. The only catch is that you might need to take a bit of a drive to get to them.
You can buy a house for $160,000 in Collinsville, which is in the Whitsunday region. So, if you had an 80% LVR loan, you’d only have a weekly mortgage repayment of just $200, which is an absolute bargain.
Queensland has about 120 different suburbs where you can get a house for less than the median rent. South Australia’s got 97 spots, Western Australia’s got a handful. Funny enough, the ACT is the only place where you can’t buy a house for less than what it would cost you to rent.
So yeah, there’s just some interesting stuff here. Obviously, not everyone’s going to want to live somewhere Regional, but the general gist is that you know there are different opportunities if you widen your net.
So if you’re looking for a house and you find that you’re being priced out, sometimes it’s worth challenging your assumptions about where you want to buy and use rentvesting to your advantage!
How to save for the deposit
There are a few options available to generate the level of deposit you will need.
Saving is one of the best ways to get a deposit for an investment property. However, it requires some tightening of the belt. Acquiring a home deposit in 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 rule states that 50% of your income should be spent on essential living expenses, 25% on lifestyle spending, and the remaining 25% 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.
Saving for a 20% deposit based on different scenarios
Property Price | Deposit required (20%) | Monthly savings |
$200,000 | $40,000 | $3,303 |
$300,000 | $60,000 | $4,955 |
$400,000 | $80,000 | $6,607 |
These numbers may seem high, but they are not impossible.
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:
Person 1 | Person 2 | |
Salary | $ 100,000.00 | $ 60,000.00 |
Assessable income | $ 100,000.00 | $ 60,000.00 |
Tax payable | $ 24,946.63 | $ 11,046.68 |
Medicare levy | $ 2,000.00 | $ 1,200.00 |
Total tax | $ 26,946.63 | $ 12,246.68 |
Income after tax | $ 73,053.37 | $ 47,753.32 |
Combined AT Income | $ 120,807.69 |
For this couple, if they follow the 50/25/25 rule, their income will be split as follows:
Income split for the 50/25/25 rule
Living expenses | $ 60,403.35 |
Discretionary spending | $ 30,201.67 |
Savings | $ 30,201.67 |
This couple has the ability to save at least $2,517 per month.
For even faster savings, you could 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!
We 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 to 18 months.
The best way to make it easier to achieve any goal is simple – break it down into smaller, more manageable goals. So, if your goal is to save $40,000 for the year, you can break it down to 52 weekly saving targets of $769 each. 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.
Read more: Barefoot investor bank accounts explained.
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 especially with the state of the current market.
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
Buyer’s Agents are licensed professionals who specialise in searching, evaluating and negotiating the purchase of a property on your behalf. Think of them as real estate agents, 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.
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 long 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 that are 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 you get the property for the price you want. They can also 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.
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 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.
Process of working with a mortgage broker
The typical process when working with a Mortgage Broker at Hunter Galloway is as follows:
- Free initial assessment. In your initial conversation with your mortgage broker, you will have a chat about your situation, what you want to achieve, and your 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.
What is the best loan structure for rentvesting?
The best structure for your loan to make this rentvesting strategy work looks something like the following:
- Level of debt—80% loan-to-value ratio (lvr), which is actually a 20% deposit, to avoid lenders’ mortgage insurance. If you can get away with it, you can try for a 90% lVR (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 100% 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 instead of a fixed rate, which does not.
Read more: Mortgage broker vs bank.
Professional #3: Property Manager
Once you purchase the property, consider hiring a property manager. These are professionals who tend to the property for a fee. Their typical duties are those of a normal landlord while coordinating with your wishes.
Property Managers collect rent, pay necessary expenses, inspect the property on a regular basis and arrange for any maintenance or repairs to take place. They also help you find tenants, 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.
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.
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.
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.
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, not $400,000.
It’s important to know that offset accounts work differently to re-draw facilities. Re-draw facilities allow you to 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 in 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, every dollar you spend on interest will only reduce your tax bill by $0.39. Therefore, you spend $1 to get $0.39 back.
Comparison of offset account and savings account when Rentvesting
Savings account | Offset account | |
Nominal amount | $10,000 | $10,000 |
Interest rate | 2% | 4% |
Income Earned/Saved | $200 | $400 |
After tax | $122 | $400 |
Forgone tax deduction | $ – | $156 |
Net benefit | $122 | $244 |
As you can see, this works out to be more effective from a cash flow point of view.
Equity 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.
How equity helps you save up for your next property
Price | Mortgage | LVR | Additional equity | New mortgage | |
Property 1 | $260,000 | $200,000 | 77% | $8,000 | $208,000 |
This example assumes a property growth of 4%. As we have seen in the past couple of years, property growth can be much higher, up to 10+ %.
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.
You may be unable to rely on an increase in the property value, as it depends on market conditions. However, the one thing that you can control is your savings and the ability to generate 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.
Savings | $31,000 |
Investment equity | $ 8,000 |
Property surplus income | $ 4,500 |
Total deposit | $43,500 |
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 start diversifying your holdings already. Try not to have all of your investments held in one location and one property 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 work full-time and manage properties in different states.
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 about looking for another property based on their price criteria and potential to generate a positive cash flow.
Using the above deposit amount, you could afford a second property for $217,500. So, now your property portfolio will look something like the following:
Example property portfolio
Price | Mortgage | Rent | Repayments | |
Property 1 | $260,000 | $208,000 | $13,000 p.a. | $8,320p.a. |
Property 2 | $217,500 | $174,000 | $10,875 p.a. | $6,960 p.a. |
Assuming a rental yield of 5% and interest rates of 4%, our previous couple managed to save their deposit of $50,000 and, therefore, can purchase an investment property for $250,000.
| Price | Mortgage | Rent | Repayments |
Property 1 | $250,000 | $200,000 | $12,500 p.a. | $8,000 p.a. |
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.
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 offer better tax efficiency.
Towards the end of year three, your portfolio may have grown, allowing access to additional equity in two properties this time instead of one. You can start to see that using leverage, the more property you have, the more equity you can unlock as the value increases.
Price | Mortgage | LVR | Additional equity | New mortgage | |
Property 1 | $270,400 | $208,000 | 77% | $8,320 | $216,320 |
Property 2 | $226,200 | $174,000 | 77% | $6,960 | $180,960 |
Assuming growth in the property of 4%.
Assuming that both of your properties experience an average long-term growth in value of 4%, 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.
Savings | $ 31,000 |
Investment equity | $ 15,280 |
Property surplus income | $ 8,595 |
Total deposit | $ 54,875 |
Step 6: Buy Property Three
By this stage, you should be a pro at the steps involved in purchasing a property.
Work through your criteria again. Remember to diversify further towards 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, which will help 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 relatively undervalued.
By the end of year 3, your portfolio can look something like the following:
Price | Mortgage | Rent | Repayments | |
Property 1 | $270,400 | $216,320 | $13,520 p.a. | $8,653 p.a. |
Property 2 | $226,200 | $180,960 | $11,310 p.a. | $7,238 p.a. |
Property 3 | $274,000 | $219,200 | $13,700 p.a. | $8,768 p.a. |
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:
| Price | Mortgage | Rent | Repayments |
Property 1 | $270,400 | $216,320 | $13,520 p.a. | $8,653 p.a. |
Property 2 | $226,200 | $180,960 | $11,310 p.a. | $7,238 p.a. |
Property 3 | $274,000 | $219,200 | $13,700 p.a. | $8,768 p.a. |
Assuming a rental yield of 5% and interest rates of 4%.
Net equity | $ 154,120.00 |
Surplus income | $ 13,870.80 |
After another 10 years, the properties may look something like this (assuming you retain the interest-only loan).
| Price | Mortgage | Rent | Repayments |
Property 1 | $400,258 | $216,320 | $20,013 p.a. | $8,653 p.a. |
Property 2 | $334,831 | $180,960 | $16,742 p.a. | $7,238 p.a. |
Property 3 | $405,587 | $219,200 | $20,279 p.a. | $8,768 p.a. |
Assuming a rental yield of 5% and interest rates of 4%.
You can see that the real power of property is its growth potential over the long term. While this rentvesting strategy is only for 3 years (a relatively short time for a growth strategy), the best thing 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 who love the risk, why not buy more property? Or use your surplus income to diversify into other assets that can generate more income, like shares or bonds.
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. 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; 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 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. But with reinvesting, 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 will 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 rentvesting doesn’t require you 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 positively geared property. However, If rates start to rise off the back of the overall economy doing better, then the surplus income your property will generate will 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 involves 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 buy property in small mining towns with overinflated 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 lived 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 called ‘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, 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 other reasons a bank may give, then this rentvesting strategy will be difficult to implement.
You may be eligible to purchase your first property relatively easily, but the bank may decline your application for the second loan as soon as you apply.
Talk to a mortgage broker first to assess your overall borrowing capability. This will help you 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 to determine whether it is better for you to purchase a property or rent and invest. If you purchase a house, it uses the average mortgage repayments and costs of running the property compared to renting somewhere.
Whatever strategy leaves you with the most surplus income financially makes more sense!
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 that 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.
Unlike other mortgage brokers, who are one-person operations, we have an entire team of experts dedicated to making your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
More resources for homebuyers:
- Stamp duty calculator
- Master your borrowing power: 7 proven strategies
- The ultimate guide to refinancing your home loans
- Cross Securitisation vs. Alone Securities
- Negotiate the house price with a real estate agent (ADD LINK)
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.
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