What is rentvesting and how it helps renters buy a home

Not all renters who want to buy a home dream of breaking their lease. Some want to remain renters even when they become landlords.

According to Daniel Hale, chief economist at Realtor.com, the concept behind “rentvesting” is when an individual rents out a primary residence in one city, then buys an investment property somewhere else and rents it out as a short- or long-term rental.

“This can be a good way to get into the real estate market,” she says, especially if you live in a city where home prices are beyond your budget.

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Homeowners typically spend about $55,000, according to the report.

That said, being a landlord in remote areas can be difficult, and for first-time home buyers, rentvestment may be more difficult than buying a property to live in.

“There are some costs that you definitely want to research and consider before you move in,” Hale says.

Hale said Rentvest could be an option for people who earn relatively high salaries working in big cities where rents are high and home prices are even higher. These people may have savings room in their budget but believe buying a home in a metropolitan area is too expensive, he said.

“So they’ll be looking for cheaper markets where they can put their savings towards a down payment,” Hale said.

According to a recent report from Realtor.com, small investors, or those with 10 or fewer investment properties, accounted for 62.6% of investor purchases in the first quarter of 2024. This figure represents the highest percentage of small investor activity in the history of the data, which dates back to 2001.

Hale said the data doesn’t necessarily distinguish whether small investors are rentvesters or not, nor does it identify whether they own a primary residence or a second rental home.

“There’s a lot of concern about big investors entering the single-family home market and competing with homeowners,” she said. “Large investors are stepping up and taking a growing share, but they still represent a relatively small percentage of the overall homeowner population in the U.S.”

Market changes that favor buyers could also benefit rentvesters.

Mortgage rates for a 30-year fixed rate mortgage fell to 6.85%, the lowest since March, according to a new analysis from real estate brokerage site Redfin.

“Someone with a $3,000 a month budget can buy $20,000 more in housing with that same budget,” said Daryl Fairweather, chief economist at Redfin.

She said the fall in interest rates would be “welcome news” for renters looking for a mortgage, but it would be important to remember that rental prices would fall as more supply comes onto the market.

“If there’s a cheaper property across the street, it might be harder to get a tenant,” Fairweather said.

“Rents are rising slightly, but not as rapidly. If anything, rents are falling in areas where there’s been a surge in new supply,” she said.

RentVest is an opportunity to become a homeowner, but anyone wanting to take on that path should consider all the pros and cons. Ask yourself these five questions:

1. Will this strategy work for the property I want to buy?

Be sure to review the short-term rental regulations in the towns, cities, and states you are considering. Some areas may have rules that limit or prohibit rental activity. As you narrow your search to specific properties, keep in mind that homeowners associations and condominium or cooperative boards may also have regulations that restrict rentals.

2. Should I hire a property manager?

If you want to be a landlord, you can either manage your house or apartment yourself or hire a property management company to act as an intermediary between you and your tenants.

About 55% of small rental property owners hire a property management company because they don’t live close to their rental units, according to property management software company Buildium’s State of the Property Management Industry report. The site surveyed 1,885 property management professionals in May and June 2023.

But hiring a property management company comes at a cost. The cost varies depending on factors like the location of the property and the services offered. According to Apartment List, property management company fees can reach up to 25% of the monthly rent, depending on the specifications.

3. Can you afford all the costs associated with homeownership?

Buying real estate involves more than just the down payment, fees, and monthly mortgage payments — you also need to consider expenses like property taxes, insurance, and maintenance.

Especially in areas you are less familiar with, it’s important to have a clear understanding of what the dollar figures currently stand and how they will change over time.

After assessing all the factors involved, you can determine whether renting out your home will be enough to cover your expenses.

4. How much competition is there?

Fairweather said entering the rental market now could mean increased competition from other landlords and rental agents, especially in areas such as the South where new builds are on the rise.

“Keep an eye on rental trends,” Fairweather said.

Rents are rising in coastal areas, but falling in other areas, including the South, which is good news for renters, “but not good news for property owners,” Fairweather said.

5. Can I get space?

Short-term rentals have perks, like having the property to yourself and flexible pricing based on seasonal demand, but they can also have drawbacks, such as high vacancy rates year-round, Hale said.

During economic downturns, you may find yourself paying two monthly housing costs: rent for your primary residence and a mortgage on an investment property.

According to Redfin, the monthly mortgage payment for a typical $400,000 US home is about $2,647 at the current mortgage rate of 6.85%. Make sure you can afford to pay this amount on top of your monthly rent.