Getting on the property ladder in your dream suburb and ideal location can sometimes be tricky, but to make things easier many kiwis are now choosing to ‘rentvest’.

Rentvesting allows you to rent one property to live in yourself, while simultaneously purchasing an investment property and renting it to someone else. Ideally, a ‘rentvestor’ gets to enjoy the capital gains on an investment property while living where they actually want, allowing them to cash in and upsize to their dream home later on.

As you’re buying an investment and not a first home – you can buy in more affordable areas, and when purchasing your property you can assess it as an investment, looking only at its ability to turn a profit.

Bayleys Director of Property Management Will Alexander says an increasing number of people have opted to rentvest with affordability, and commute times playing a big part in the decision.

“Within Auckland, for example, a lot of people buy somewhere, but then rent in the school zone they prefer, because they need to get their kids into certain schools. Or it happens a lot to get closer to work so people can avoid the heavy traffic.”

“There's lots of developments around the outskirts of Auckland, like Kumeu, Huapai and Flatbush. A lot of those houses are getting purchased, but the owners are living closer to the city in an apartment.”

HOW DO I GET THE MOST BANG FOR MY BUCK?

Rentvesting suits a range of incomes, but financially it works the best in locations where rent payments are able to offset mortgage repayments. Young people priced out of inner-city locations or young families where superior locations are important could significantly benefit from rentvesting.

Will Alexander says the most important thing to do before you dive in, is crunch the numbers.

“It’s all well and good thinking that it stacks up, but if you're typically buying in an area that might not have strong capital gains, because it's a little bit more affordable - you have to be careful.”

“The whole concept is about getting on the property ladder, but is it also about cash flow? Is it getting a good yield, or is it capital gains?”

Alexander says when you’re crunching those numbers it’s important to be conservative too.

“Budget accordingly, like calculating takings for 48 weeks of the year of rent, not 52 which is 92% occupancy and allows for any vacancies in that time.”

WHAT ARE THE PROS?

Alexander says there are many positives to rentvesting, with the most obvious being the fact that it gets you on the property ladder.

“Which is great and therefore exposes people to capital gains. As we know, capital gains aren't taxed, so there’s lots of upsides there, and the bright line test has also been changed from 10 years back down to two years.”

“So you've got the opportunity to realise those capital gains in a shorter amount of time.”

It also offers a lifestyle you may not have had access to before.

“It allows you to live where you want and need to live, and potentially balances that cost out.”

“Whatever the rent is that you're getting from your investment property will probably be less than where you're renting, but once you factor in the capital gains you could get from a sale, it should even out.”

As a tenant in someone else's property you’re also not responsible for its upkeep, maintenance or potential body corporate fees, even though you're still responsible for that in the investment property you do own.

“It’s not as though you are having to take a step back because you've now become a tenant. The rules are very pro-tenant now, and it's still a good living arrangement.”

WHAT ARE THE CONS?

Despite all the positives, Alexander says there’s still a few things to be aware of, especially since most people will buy in an area where the capital gains might not be as significant, or could take longer to materialise.

“So one of the cons is the unknown. You're also subjecting yourself to a market that can go down, and we're seeing that a lot at the moment with people who bought at the height of the market in 2022, and they’re negatively geared now.”

While you might not be responsible for maintenance in your rental, there is still the wear and tear to consider on the investment property you own.

“You’re not the ones living in it, but you’re still responsible for its upkeep..”

There’s also a risk if the landlord of the property you’re renting needs the home back.

“You potentially may lose the tenancy because the owner is going to do a renovation or move back in. Depending on the tenancy type on your investment property you may then not be able to move back into your own home quickly.”

It’s also good to keep in mind that because the property you’re buying is an investment, you’ll also require a higher deposit.

WHAT’S THE BEST KIND OF PROPERTY TO RENTVEST IN?

First and foremost, the first thing to look for in property is finding a cash flow neutral asset. With a property like that, you may be able to cover your mortgage repayments with rental income alone, which will make paying rent and owning a property at the same time much easier.

When it comes to the type of property, Alexander says new properties are a smart investment.

“They're really well built, and meet all of the requirements in the current building act, as well as healthy home standards. So right off the bat, you are getting a property that doesn't need remedial work to bring it up to a rentable standard.”

“You've also got warranties for things like whiteware, or defects in the building. Typically, these types of properties are in close proximity to others, so you've also got other people always looking out for your property too.”

Alexander says land is also a sensible thing to consider when it comes to purchasing a rentvestment property.

“At the end of the day, probably one of the most valuable things is land. So land banking to a degree, and buying a slightly older house, on a bigger section, in a good area, is not a silly thing.”

“The type of title is also important. Freehold is great, but if you are considering a cross lease you need to do your research on this form of ownership and get some sound advice from your lawyers.”

It’s also important to get the proper advice if you have your eye on an apartment to invest in.

“That's obviously a common thing because that’s what a lot of people can afford. But you've got to make sure you do your due diligence on the condition of the building, body corporate etc.”