Unlock the secrets to rentvesting in South Melbourne

What rentvesting means for South Melbourne renters

Rentvesting is buying property to rent out while continuing to rent somewhere else. The approach has become common in South Melbourne, where apartment rents can absorb a large proportion of household income but property prices in suburbs an hour further out remain within reach for buyers with stable income and a deposit.

The tension shows up most clearly in pre-approval conversations. A couple renting a two-bedroom apartment near Clarendon Street might be approved to borrow enough to purchase in Melton or Pakenham but fall short of what they need to buy in their own postcode. Rentvesting lets them enter the property market without leaving the suburb they prefer to live in.

How lenders assess a rentvesting loan application

Lenders treat a rentvesting loan as an investment loan, not an owner-occupied loan. That distinction affects the interest rate, the deposit required, and the way rental income is calculated in serviceability.

Most lenders apply a discount to forecast rental income, typically accepting 80 per cent of the rental amount. If a property is expected to generate $450 per week in rent, the lender credits $360 per week in the serviceability calculation. At the same time, lenders include the full amount of your current rent as an expense. If you pay $650 per week to rent in South Melbourne, that figure is deducted from your available income when the lender calculates how much you can service.

Consider a buyer with gross household income of $140,000 who pays $650 per week in rent and holds no other debts. The buyer wants to purchase an apartment in a suburb where rental yield is 4.5 per cent. The lender assesses rental income at 80 per cent, applies the serviceability buffer, and deducts the buyer's existing rent and living expenses. In many cases, the borrowing capacity under an investment scenario is lower than it would be for an owner-occupied purchase, even though the buyer's income has not changed. The lender's concern is that the buyer must service both the mortgage and their own rent simultaneously.

Investment loan rates and deposit requirements

Investment loan interest rates sit above owner-occupied rates, typically by 0.20 to 0.40 percentage points depending on the lender and the LVR. The difference flows through to repayments and total interest cost over the life of the loan.

Lenders also apply a lower maximum LVR to investment lending. Where an owner-occupier might borrow up to 95 per cent of the property value using LMI, most lenders cap investment loans at 90 per cent LVR, and some tighten that further to 80 per cent depending on the applicant's financial position and the property type.

From February this year, APRA's DTI lending limits apply separately to owner-occupier and investor lending. Each lender can approve up to 20 per cent of new investment loans to borrowers with a DTI ratio of six times gross income or more. Buyers with high incomes relative to the loan amount are unaffected, but rentvesting applicants stretching to service both rent and a mortgage can find themselves closer to that threshold.

Tax treatment of rental losses under current legislation

For properties held before 12 May last year, rental losses remain fully deductible against salary and wage income. If the interest on your loan, property management fees, council rates, insurance, and maintenance exceed the rental income you receive, that loss reduces your taxable income in the same financial year.

For established properties purchased after 12 May last year, losses are only deductible against income from residential properties, including capital gains. Excess losses carry forward to offset residential property income in future years. New builds purchased after that date are not affected by the change and continue to allow full deduction of losses against all income.

The distinction matters when comparing purchase options. A buyer looking at an established apartment in Footscray and a newly completed apartment in the same suburb will face different tax treatment if both properties run at a loss. The timing of your purchase and the classification of the property as new or established determines which rule applies.

Capital gains tax changes from July last year

From 1 July last year, the 50 per cent CGT discount on residential investment property was replaced by cost base indexation and a 30 per cent minimum tax rate on gains accruing from that date. Investors index the cost base in line with inflation and pay tax only on above-inflation profit.

For new builds, both the old discount method and the new indexation method remain available, and the investor chooses the more favourable treatment at the time of sale. This dual treatment adds another variable when comparing new and established stock, particularly in markets where land value growth has historically outpaced inflation.

Where rentvesting delivers long-term value

Rentvesting works when the buyer prioritises building equity and securing a foothold in property ownership over living in the property they own. The value is in the asset accumulation, not in the immediate lifestyle outcome.

In our experience, rentvesting suits buyers who expect their income to grow, plan to upgrade or relocate in the medium term, or want to remain in a location for work or family reasons while property prices in that area remain out of reach. The home loan structure used in the initial purchase can be adjusted over time as circumstances change, and many rentvestors eventually convert an investment property to owner-occupied or sell and purchase elsewhere.

The approach also works for buyers who value the flexibility of renting. South Melbourne renters can move between buildings, test different streets, or relocate closer to a new workplace without the friction of selling and buying. That flexibility has a financial cost in the form of ongoing rent, but for some buyers the trade-off is worthwhile during a particular phase of life.

What rentvesting does not solve

Rentvesting does not deliver the same borrowing capacity benefits as owner-occupied purchase. Lenders apply more conservative serviceability settings to investment loans, and the need to service both a mortgage and rent limits how much you can borrow.

The strategy also does not eliminate the risk that your investment property underperforms. A suburb an hour from South Melbourne might offer lower entry prices, but capital growth depends on employment, infrastructure, and housing supply in that area. Rental vacancy rates, tenant demand, and the quality of the local rental market all affect the income your property generates and the ease with which you can re-let between tenancies.

Rentvesting also requires you to maintain two properties: the one you own and the one you live in. Maintenance, repairs, and property management fees apply to the investment property, while rent continues on your own residence. The dual obligation can stretch cash flow, particularly in years when both properties require significant expenditure at the same time.

For buyers who can purchase in the area where they want to live, owner-occupied purchase typically delivers stronger long-term financial outcomes. The combination of lower interest rates, higher borrowing capacity, and the eventual elimination of rent when the mortgage is repaid gives owner-occupiers a structural advantage. Rentvesting is a second-best strategy when the preferred option is not yet within reach.

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