Only an estimated one-third of millennials in the U.S. own property, according to data from the U.S. Census Bureau. Would-be homeowners are continuing to have to fight against stagnant wages, rising home prices, and now soaring interest rates as well.
A whole segment of the younger population is now known as "generation rent." Still, they're taking some of the things working against them and turning them into a new approach to property ownership called rentvesting.
What is Rentvesting?
Rentvesting refers to buying an investment property and renting it out, typically in an affordable or up-and-coming area. Then, you continue to rent the primary place where you live in the location you prefer.
Investing in property isn't new, but more young people today are opting to hold off on buying their own home as a primary residence instead of investing in rentals.
The trend originated in Australia's major cities, but it's also become popular in the United States.
There are benefits to rentvesting. One is that you can live where you want. You may not be able to afford to buy a home in your desired neighborhood or even city right now, but when you stay a renter, you can potentially afford it. Then, you're also putting your money to work as an investment.
Eventually, depending on your financial goals, when you're a rentvester, you might sell the property you earned an income from and then use that money and savings to buy the home you want.
Rentvesting changes the traditional path to homeownership, but with the hurdles to buying a home, that may be needed for some.
Some real estate experts describe rentvesting as balancing a lifestyle choice and building long-term wealth.
If things go according to the plan, the house you buy while you're still a renter will go up enough in value to be your ultimate springboard to your own home.
You're starting to build equity even if you can't afford the home you want. Depending on your situation, you could also live in the house eventually. Still, even if you don't, there's a high probability the value will go up, so you might get the equity to borrow against the property, even if you don't sell it.
What About the Downsides?
Rentvesting certainly isn't easy. You're dealing with multiple properties, and you have to keep your landlord happy while also being a landlord and keeping your tenants happy.
It's not simple to be a landlord, so you have to be realistic about the time you can dedicate to managing the house. You'll have to set aside money if there are unexpected expenses along the way, which is often the case.
Lenders usually charge higher interest rates on investment properties. They may require a larger down payment too, but it could give you more flexibility to gain entrance into the real estate market.
What to Consider with Rentvesting
It's a big financial decision to rentvest. First, you have to ensure the investment makes financial sense. You have to factor in the down payment, closing costs, and monthly mortgage payments. In an ideal world, your monthly rental income covers the mortgage repayments, and you might even make a bit of a profit, but the world isn't ideal, so you have to make sure you have the income to cover any rough times.
Choosing the location is important with rentvesting. It may not be the neighborhood you'd personally love to live in, but it needs to hold appeal for some people.
Finally, as with any investment, think long-term. You want to make sure that you're at least going to be able to make back your upfront costs with the appreciation of the property. Consider at least a five-year timeline with this approach to investing and owning property; ideally, ten years is better.