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Not every renter wanting to buy a home dreams of ditching their lease. Some wish to remain tenants even as they become landlords.
The concept behind “rentvesting” is that an individual rents their primary residence in one city and then buys an investment property somewhere else that they let out as a short- or long-term rental, according to Danielle Hale, chief economist at Realtor.com.
“It can be a good way to get into the property market,” she said, especially if you live in a city where home prices are out of your budget.
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That said, becoming a landlord at a distance can be tricky, and rentvesting may be trickier for a first-time homeowner than buying a property they intend to live in.
“There are some costs involved you’ll want to make sure that you research and consider before you get in,” said Hale.
When ‘rentvesting’ can make sense
Rentvesting may be an option for someone who has a relatively high income from a job in a major city where rents are high and home prices are even higher, said Hale. She said these individuals might have room in their budget to save but find it too expensive to buy a home in their metro area.
“So they would look for a less expensive market where their savings might be able to translate into a nice down payment,” said Hale.
Small investors, or those with up to 10 investment properties, made up 62.6% of investor purchases in the first quarter of 2024, according to a recent report from Realtor.com. That figure represents the highest share of small investor activity in the data’s history, going back to 2001.
Hale said the data does not necessarily distinguish whether the small investors are rentvestors. It also doesn’t specify whether they own their primary residence or a second rental home.
“There’s a lot of concern about big investors getting into the single-family home space and competing with owner-occupants,” she said. “Although big investors have been making headway and growing their share, they’re still a relatively small share of the overall landlord population in the United States.”
Some shifts in the market in buyers’ favor may also benefit rentvestors.
Mortgage rates have dropped to 6.85% for a 30-year fixed-rate mortgage, the lowest level since March, according to a new analysis by real estate brokerage site Redfin.
“Somebody with a $3,000-a-month budget can now spend $20,000 more on a home for that same budget,” said Daryl Fairweather, chief economist at Redfin.
He said lower rates are going to be “welcome news” for rentvesters looking for a mortgage. But it will be important to keep in mind that rental prices are coming down as more supply comes on the market.
“They might have a hard time filling it with a tenant if there are other properties down the street that are renting for less,” said Fairweather.
“Rents are going up a little bit, but not all that quickly, and they’re actually falling in parts of the country where a lot of new supply is coming online,” she said.
5 questions to ask yourself before rentvesting
While rentvesting can be an opportunity to become a homeowner, those who want to try that path must consider all the pros and cons. Here are five questions to ask:
1. Does this strategy work for the property I want to buy?
Take stock of the short-term rental regulations of the town, city and state you’re considering, as some areas can have rules that limit or even prohibit rental activity. As you narrow your search to particular properties, be aware that some homeowner’s associations and condo or co-op boards can have regulations limiting rentals, too.
2. Do I need to hire a property manager?
If you want to become a landlord, you could either manage the home or apartment on your own or hire a property manager to serve as the middleman between you and the tenant.
About 55% of small-portfolio rental owners hire a property manager because they don’t live near their rental property, according to the State of the Property Management Industry Report by Buildium, a property management software company. The site polled 1,885 property management professionals in May and June 2023.
However, hiring a property manager comes at a cost, which depends on factors such as the property location and services provided. Property manager fees can reach up to 25% of the monthly rent price, depending on the specifications, according to Apartment List.
3. Can I afford all the costs associated with homeownership?
Buying a property goes beyond affording the down payment, closing costs and monthly mortgage. You must also consider property taxes, insurance and maintenance, among other expenses.
Having a clear understanding of what those dollar figures might look like now and how they might change over time is key, especially in an area you’re less familiar with.
After you assess all the factors involved, then you can figure out whether renting out the home is enough to cover your expenses.
4. How much competition will you have?
You may have more competition with other landlords or rentals if you’re getting into the rental market right now, said Fairweather, especially in places like the South, where more new builds are becoming available.
“Pay attention to rental trends,” said Fairweather.
Rent prices are increasing in coastal areas. But in regions like the South, they’re coming down. That’s good news for renters, “but not good news if you’re a property owner,” said Fairweather.
5. Can you afford a vacancy?
Short-term rentals include perks such as the ability to use the property yourself and more flexible pricing based on seasonal demand. But high vacancy throughout the year can be a drawback, said Hale.
In slower periods, you could end up paying for two monthly housing payments: the rent price of your primary residence and the mortgage payment for the investment property.
The monthly mortgage payment on the typical $400,000 U.S. home is about $2,647 with the current 6.85% mortgage rate, according to Redfin. Check to make sure that you can potentially afford this on top of your own monthly rent.
