The American dream might be to own your own home, but that doesn’t mean you necessarily have to live in it. Increasingly, Americans are renting in one (often pricey) location and then buying an investment property in a more affordable place. Dubbed “rentvesting,” this practice is taking off across the country. “I had a young couple as clients who lived and worked in Springboro where the real estate market is prohibitively expensive for many first-time homebuyers,” says Mike Wall, a real estate agent in Ohio with eXp Realty/EZ Sell Homebuyers. “Despite their high earnings, they could not afford to buy a home in the city without significantly compromising on size or location.”
Instead, the couple purchased an investment property in the rapidly growing suburb of Kettering. This allowed them to officially become homeowners—and start building equity—and also to plan for future income through rental yields.
Similarly, Chantay Clark Bridges, a real estate agent with eXp Realty of California, in San Ramon, sees this happening on the West Coast.
“I have one client renting in Holmby Hills, but they own a huge investment property in Big Bear Lake that they secured for under $300,000,” she says. “I have another client renting in Calabasas and owning an investment property in Palm Springs, which they snagged for a similar price. Their draw was to catch Coachella-bound and other vacationers.”
Why ‘rentvesting’ is on the rise now
“Rentvesting” was coined by Mynd, a real estate technology company, which found in a 2022 study that 43% of millennials and Gen Z were considering buying an investment property. Two-thirds of them said they believed this was a smart financial move. Of those surveyed, 72% said they would buy a property in a different state than the one they live in.
Why the willingness to purchase far afield? Not surprisingly, it’s mostly about the money.
The national median list price rings in at $424,900, according to the latest Realtor.com® data. Mortgage rates remain high, as well, hovering around 7%—a far cry from the historic lows of 2.65% in January 2021.
“For younger residents of big cities where real estate is particularly pricey, buying an investment or vacation property in a nearby but much more affordable area can be a way to begin to build equity without sacrificing big-city living,” notes Danielle Hale, chief economist of Realtor.com.
For example, “buying the typical home in the New York City metro area requires more than $200,000 in income,” she continues, citing a recent housing trends report. “Home prices in Buffalo and Rochester are considerably lower. Purchasing a typical listing in these areas, which are less than six hours from the city, requires less than $100,000 in annual income.”
That cost comparison can reveal why rentvesting is so appealing.
“Everyone is looking for affordability,” says Cara Ameer, a real estate agent with Coldwell Banker, licensed in California and Florida. “Many buyers are totally shut out of the immediate areas where they live and work. They have money saved up and qualify for a loan, but can’t afford to buy where they live, so they look elsewhere.”
Another reason rentvesting is rising could stem from the many renovation reality TV shows focused on house flipping and home design, from “Home Town” to “The Flipping El Moussas.”
“Millions are watching these shows,” says Bridges. “Many showcase alternative ways to be a part of the real estate game. It makes the average person want to play, too. Rentvesting gives them an avenue.”
The upsides of rentvesting . . .
There are some major advantages to rentvesting. First, this practice allows a person to enter the world of homeownership, which can be a key way to build wealth. You begin to build equity and might enjoy tax breaks, too.
Also, the purchased property can bring in passive income, uplifting your financial situation and diversifying your financial portfolio.
“Right now, we are seeing a lot more of people buying properties specifically for short-term rentals, like Airbnbs,” says Seamus Nally, CEO of TurboTenant, in Fort Collins, CO. “Having these kinds of properties can be a fantastic way to make consistent profits.”
Rentvesters can get someone else to pay the mortgage and possibly even cover part of their rent (depending on how much they can rent out the investment property for), says Ameer. “Plus, they realize the benefits of appreciation in an asset, just like investing in stocks or mutual funds.”
Rentvesting can also be an enjoyable lifestyle choice.
“My family and I spend most of the year overseas. We move every few years,” says rentvester G. Brian Davis, founder of SparkRental based in Willow Grove, PA. “Our priority is flexibility to move as we like, not painting the walls bubble-gum pink or planting the perfect garden.”
What’s more: Renters get to delegate maintenance and repairs on their primary residence to the landlord.
“I haven’t lifted a finger at my home in nine years,” says Davis.
. . . and the downsides of being a rentvester
Granted, it’s not all easy living as a rentvester.
First, you have two streams of money going toward housing: the place you rent and the place you own. That can prove challenging to keep up with unless the property you own is consistently rented at a good profit margin.
Plus, there’s some delayed financial gratification given the money you’ve put down on your purchase.
“You take an initial ‘loss’ when you buy a home, based on the closing costs,” says Davis. “To make homeownership worthwhile, you need to build enough equity in your home to more than cover those two sets of costs. That takes years of owning the home, and not everyone wants to commit to living in a home for years.”
That rentvestment property also brings a set of obligations, timewise and moneywise. If you are renting it out, you need to commit to being a landlord or hire a property manager. The responsibilities include screening tenants, addressing paperwork and chasing rent payments, and making repairs.
Also, if you are renting in an expensive area, you might find that your monthlies there rise faster than income from the property you own, leaving you with a shortfall.
The future of rentvesting
It’s hard to say whether the practice of rentvesting will grow or dwindle in the years ahead. If the cost of buying a primary residence in major cities stays high, frustrated potential buyers might continue to look elsewhere for alternatives, says Hale.
In fact, according to real estate pundits, the practice could expand.
“We very well may see this trend rise in the coming years,” says Ameer, “even to where people own a home in another state versus a different neighborhood and rent that out. Some are already doing this now.”
Indeed, the staying power of rentvesting might prove to be strong.