By now you have probably heard the term “rentvesting”. A new phrase coined a few years ago, it refers to the home buying strategy of renting where you live and buying investment property in a different market in order to get on the ladder and build wealth.

The strategy has grown in popularity for first home buyers in recent years, because high property prices and decreasing borrowing power has made it harder than ever to buy an owner-occupier in their suburb or town of choice.

They figure that they may be priced out of the market, but that’s no reason not to build wealth in an area they can afford and where the numbers stack up. Especially with money in the bank being worth less every day due to inflation.

The bonus is that with some good growth and a rental return that enables positive gearing, their affordable investment property may score them enough equity to leverage into a dream owner occupier home sooner than they would have been able to save a deposit.

Others do it because they can rent a better place, in a better location, than they could

afford to buy, so they may as well enjoy a great lifestyle while still making investments.

New name for an old strategy

Long before someone came up with ‘rentvesting’ as a term for the concept, B.Invested founder Nathan Birch was “rentvesting” like crazy. Or as he put it…simply “investing” so that he could live life on his own terms as soon as possible. In fact, he spent a good decade buying investment properties and building equity, before he was able to use his earnings to build himself a dream home on a huge estate. He now has more than 200 properties with accrued wealth and income streams tied to inflation.

Deposit dilemma

One of the biggest hurdles for first home buyers in recent years has been saving a deposit.

For a long time, interest rates were super low, which made it hard to save at any kind of pace. It also allowed people to pay big for real estate, pushing prices higher.

Buyers were faced with the prospect of saving for decades to get a deposit, by which time

a couple of extra market cycles would have seen the goalposts move further and prices still out of reach.

Meanwhile, the deposit on an investment property in an affordable market has been much

cheaper. Investing in one at the right time may see you save a deposit for a future home much quicker in the form of equity.

You could also compound your gains by using equity leverage into more investment properties and then add the rental income to your kitty.

Investing opens borders

Rentvesting allows you to put your money where the best opportunities are, without having to worry about it being somewhere you want to live.

While you build your portfolio of positively geared investment properties, you can use your time as a renter to try a few different locations to see where you might like to buy in the future.

You might enjoy renting in a suburb that’s great for lifestyle and where it’s much cheaper to rent than pay mortgage repayments. You won’t have to pay the maintenance, stamp duty and holding costs on your rental property. You will have to pay those for any property you invest in, but will be able to claim a lot of those expenses on tax.

There will be downsides

Rental markets are currently very tough around Australia. If you do rentvest in this environment,

you may find it hard to find an available rental property. You might also experience large rent rises at the end of your lease by landlords looking to maximise returns.

Even if you find somewhere you like, your rental may never really feel like home as it belongs to someone else. All the more reason to invest wisely so you can escape the treadmill sooner.

As long as you are investing to build your wealth and have a clear strategy when it comes to what you want to achieve, you are better off than if you are renting and saving for a deposit, but getting nowhere.