Rentvesting: The Pros and Cons for Legal Professionals

Rentvesting means buying an investment property while continuing to rent where you live. You enter the property market in an affordable area while maintaining flexibility in your living arrangements, which appeals to many legal professionals who work long hours in CBD locations but cannot afford nearby property.

Why Legal Professionals Consider Rentvesting

Rentvesting allows you to build equity in a property market you can afford while renting close to chambers or your firm. Many barristers and solicitors rent near the courts or city offices where parking, commute times, and proximity to colleagues matter, but those same areas often have median prices well beyond reach on a single income or early in your career.

Consider a commercial lawyer renting in Surry Hills while purchasing an investment property in a regional centre or outer suburb. The rental yield on the investment property may cover most or all of the mortgage repayment, while the lawyer maintains lifestyle flexibility and avoids a two-hour daily commute.

The strategy works when rental income offsets borrowing costs and the investment property increases in value over time. The main risk is holding two properties in your servicing calculations - your rental payment where you live and the mortgage on the property you own - which reduces your borrowing capacity for future purchases.

How Lenders Assess Rentvesting Applications

Lenders treat rentvesting applications as investment loans, not owner-occupied lending. Investment loans typically attract interest rates 0.10% to 0.30% higher than owner-occupied rates, and lenders assess rental income at 80% of the actual rent to account for vacancy and maintenance costs.

Your rental payment where you live is included in full as an expense, which differs from owner-occupied lending where the lender excludes your current rent once you purchase. This dual-expense treatment means your borrowing capacity is lower than if you were buying a home to live in. A litigation lawyer earning $150,000 who pays $650 per week in rent might borrow $550,000 for an investment property, compared to $650,000 if buying an owner-occupied home and eliminating the rental expense from servicing.

Deposit requirements are the same as any investment purchase - typically 10% plus costs, though legal professionals may access LMI waivers depending on the lender and their role. Some lenders offer LMI waivers for lawyers on investment lending up to 90% loan-to-value ratio, which reduces the upfront capital required.

Tax Treatment and Cash Flow Considerations

Investment properties generate tax deductions that owner-occupied properties do not. You can claim loan interest, property management fees, council rates, insurance, depreciation, and maintenance against your rental income. If expenses exceed income, the loss reduces your taxable income, which matters more at higher marginal tax rates.

A solicitor earning $180,000 pays 39% tax on income above $135,000 (including Medicare Levy). If the investment property generates a $10,000 annual loss after rental income, that loss reduces taxable income by $10,000 and saves $3,900 in tax. The net cost of holding the property is $6,100 after tax, not $10,000.

Cash flow still matters. The tax benefit arrives when you lodge your return, but mortgage repayments, strata fees, and rates are due throughout the year. Rentvesting works when rental income covers most of the holding costs and your salary comfortably services both rent and mortgage repayments. It does not work if you are relying on a tax refund to meet monthly expenses.

Structuring the Loan for Rentvesting

Most rentvesting borrowers use a variable rate loan with an offset account. The offset account linked to the investment loan allows you to park savings and reduce interest charges without making extra repayments that you cannot redraw for tax purposes.

If you make additional repayments directly onto an investment loan and later redraw those funds for personal use, the interest on the redrawn amount is no longer tax deductible. An offset account avoids this issue - funds remain separate from the loan, so you can deposit and withdraw without affecting deductibility.

Some legal professionals use interest-only loans for investment properties to minimise repayments and maximise cash flow, particularly if they plan to purchase an owner-occupied property within a few years. Interest-only terms are typically available for up to five years, after which the loan reverts to principal and interest unless you negotiate an extension.

When Rentvesting Creates Problems Later

The main issue with rentvesting is what happens when you want to buy a home to live in. Lenders assess your ability to service both the existing investment loan and the new owner-occupied loan simultaneously. If your income has not increased or rental income is marginal, you may not have enough capacity to borrow for a second property.

In a scenario like this, a solicitor owns an investment property with a $500,000 loan and $450 weekly rent. At 80% rental income, the lender assesses $360 per week as income, which is $18,720 annually. The loan repayment at current variable rates is around $3,200 per month, or $38,400 annually. The property runs at a loss, which reduces taxable income but also reduces assessed income when applying for a second loan. The solicitor may need to sell the investment property, increase their income, or rely on a partner's income to proceed with an owner-occupied purchase.

Another issue is capital gains tax. If you sell the investment property to fund an owner-occupied purchase, you pay tax on the capital gain since you never lived in the property. Owner-occupied homes are exempt from capital gains tax, so rentvesting removes that concession. For a property held more than 12 months, you receive a 50% discount on the gain, but the tax liability can still be substantial depending on your income and the property's appreciation.

Rentvesting vs Buying Where You Can Afford

Rentvesting suits legal professionals who value location flexibility, expect income growth, or plan to relocate interstate or overseas within a few years. It does not suit borrowers who want to eliminate housing costs quickly, plan to start a family and need space, or cannot comfortably service both rent and a mortgage.

Buying an owner-occupied property in an affordable area builds equity faster because every repayment reduces the loan and increases your ownership stake. You also avoid paying rent, which is a permanent expense with no equity benefit. If you can tolerate a longer commute or a less central location for a few years, buying where you can afford often leaves you in a stronger financial position than rentvesting.

The decision depends on how long you plan to stay in your current city, whether your income will increase predictably, and whether you prefer ownership or flexibility. Rentvesting is a valid strategy when the numbers work and your priorities align with the trade-offs, but it is not inherently superior to buying an owner-occupied property in a less central location.

Loan Structure and Pre-Approval for Rentvesting

Before committing to rentvesting, obtain home loan pre-approval based on your actual rental expense and the expected rental income from the investment property. Pre-approval confirms your borrowing capacity and avoids surprises when you find a property.

Some lenders assess rentvesting applications more favourably than others, particularly for legal professionals with stable income and career progression. Lender policies vary on how they treat rental income, whether they allow 90% lending on investment properties, and what interest rate they apply. Comparing loan products across lenders is necessary because a 0.20% rate difference on a $500,000 loan is $1,000 annually, and that compounds over the life of the loan.

If you plan to buy an owner-occupied property within two to three years, structure the investment loan to maximise future borrowing capacity. That means using an offset account rather than making extra repayments, keeping the loan on principal and interest rather than interest-only if your capacity allows, and ensuring rental income is strong enough to support the holding costs without relying entirely on tax deductions.

Call one of our team or book an appointment at a time that works for you to discuss your rentvesting scenario and loan structure.

Frequently Asked Questions