‘Rentvesting’ can help you buy a home. Can it work for you?

You’ve been living and working in Calgary and bought a nice, affordable home. You fall in love with someone living in Toronto, or find your dream job in Vancouver.

Now, you’re moving to a place where homes are unaffordable, and renting is the only option if you want to live there.

A light bulb goes on — you’ll rent out your place in Calgary (your primary residence) in an effort to keep building equity, then rent something that works with your budget in your new city.

That’s “rentvesting.”

A riff off this example is the flip scenario — renting in an expensive real estate market and purchasing a residential home elsewhere for considerably less money that you set up as an investment property from the get-go. 

The reason the rentvesting strategy is so popular is because owners get to build equity, and in some cases where the homes are less expensive and the rents are high, positive cash flow is achieved as another source of income. 

Though rentvesting seems like a fresh new Reddit trend, it’s not. Historically, it’s one of the most common ways investors make their foray into real estate investing. Let’s break it down.

Who is the rentvesting strategy for?

It’s suitable for people who have flexibility in their budget, and have subsequently saved a good-sized down payment (or have put down a good amount of money on a less-expensive home whereby the mortgage payments are manageable).

Typically these folks earn fairly well, have a solid credit score, and can qualify for a modest mortgage. They also have a higher-than-average tolerance for risk, and aren’t too fussed about the idea of owning an investment property elsewhere, or potentially managing tenants or maintenance matters from a distance should they choose not to hire a property manager. 

How does the rentvesting math work?

This is where a budgeting spreadsheet can come in handy.

You’ll plug in your sources of income up front. Money from your day job, benefits, support payments and the rental income from the property you own (or soon plan to own). My advice on projected rental income is to use comparables from realtors or real estate websites. Don’t just guess what this will be.

Next, plug in your expenses for the rent you will now pay, add in regular costs for groceries, debt payments, cell and internet, memberships and more. Now, add the specific costs related to your investment property including the mortgage (do use an actual quote from your mortgage broker as this estimate and not just from a random website), property taxes, insurance, utilities, etc., and earmark money for a rental-unit reserve fund (more on that later).

When the total income is offset by the expenses, you’ll get a clear picture of the money you have left over — hopefully it’s a surplus that can amplify your savings and improve your quality of life in a meaningful way. If the math reveals you’re in a deficit, this will lead to debt and your rentvesting strategy should be reconsidered.

Risks to consider before diving into rentvesting

Vacancy, tenants and repairs: There will be vacancies as tenants come and go. The trick is to minimize the duration of the vacancy. The costs for the mortgage, insurance, taxes, utilities, etc., won’t stop, though. A good strategy for rentvesters is to save up a reserve fund to cover off these costs during a vacancy, and it’s also a good idea for one-time repairs and irregular maintenance costs. Sometimes the tenants can be tricky to deal with, or are hard on your property. It’s good to consider how you’ll handle these situations while still adhering to the local landlord tenant rules. 

Rates and costs shifting: Though interest rates are softening, no one has a crystal ball. Interest costs for the mortgage will change, as will the costs for operating the property — utilities, condo fees, taxes, etc. What would happen if it started costing you 20 per cent more to operate the property, but the rent you’re collecting only inched up a few per cent? Do you have the financial flexibility and for how long could this scenario go on? Would this force you to compete in the short-term rental market (or is that your plan regardless)? Note that municipalities have varying bylaws around short-term rentals and you’ll want to be crystal clear about what you can and can’t do with sites like Vrbo or Airbnb.

A turn in the real estate market: If the real estate market where you own decreases in value, the value of your property might decrease alongside others in the market. Typically holding the property for the long-term (seven years or more) enables you to ride out the ups and downs. However, you won’t know exactly how the market will perform, much like the investment market. Generally speaking, over many decades, real estate in Canada has risen in value.

Rentvesting is joining other flashy trends like loud budgeting and soft saving, but isn’t for everyone. It takes a lot more money and a lot more discipline to execute this strategy. Think about your total financial picture, how comfortable you are with risk and if your long-term goals can still be achieved if you do head down this path. A professional financial planner or money coach can help with this analysis.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star