The family home problem (and what is rent vesting)

When you're considering the future of your family, one of the most significant decisions you'll face is the balance between upgrading your family home and investing in property. This dilemma often involves a trade-off between the emotional comfort of a larger, more beautiful home and the long-term financial benefits of building wealth through property investments. It's a problem faced by many, particularly as your family grows, and your housing needs change.

But what if there’s a way to avoid choosing one over the other? Enter rent-vesting, a strategy that offers a way to invest in property while maintaining flexibility in your living situation. This approach allows you to rent the home where you live, while using your finances to invest in properties elsewhere. It’s an option that works especially well for those who want to take advantage of investment opportunities without sacrificing their lifestyle. But like any financial strategy, rent-vesting comes with its own set of pros and cons.

The Trade-Off: Comfort vs. Financial Freedom

Many families find themselves at a crossroads when it comes to their primary residence. On one side, there’s the desire for more space, a better school zone, or a home that meets your growing family’s needs. For parents, the pull of providing a better living environment can feel urgent, especially if your children are reaching an age where personal space becomes a priority. The idea of upgrading to a larger home or adding another bedroom can feel like a step forward, offering immediate comfort and the emotional reward of achieving family milestones.

However, there’s a big financial question lurking in the background: how will this impact your long-term wealth? The reality is that over-capitalising on your family home can leave you with less room to build wealth through investments. If you sink too much of your resources into your home, you might end up with a lovely house, but very little outside it to fund your future. If the market is right and the property appreciates well, it can work out, but the risk is always there.

Investing in property, on the other hand, helps build long-term wealth, potentially creating streams of passive income that will serve you well in retirement. The problem is, that comes with sacrifices in the short-term, particularly when your family needs more space. In many cases, parents decide to delay upgrading their family home in order to focus on investments first—hoping to create the wealth that will enable them to enjoy a bigger house later.

Rent-Vesting: A Possible Middle Ground?

Rent-vesting offers a potential solution to this problem, particularly for younger families or professionals who want to enter the property market while maintaining their lifestyle. With rent-vesting, you can rent a home that suits your family’s needs now, while purchasing an investment property in a location that offers better financial returns. This approach enables you to enjoy the flexibility of renting—moving where you want, not worrying about repairs or maintenance—while simultaneously building wealth through your investments.

The advantage here is clear: flexibility. If you live in a city with high property prices, like Auckland, rent-vesting allows you to rent in an area that suits your family’s lifestyle while investing in a more affordable, high-return property elsewhere. It’s an opportunity to enter the property market without having to sacrifice your preferred lifestyle or location.

Take, for instance, someone living in Auckland who wants to buy but can’t afford the steep property prices in the city. By rent-vesting, they can purchase an investment property in a more affordable area, like Christchurch or Dunedin, where house prices are lower, and rents are still competitive. This gives them the chance to get onto the property ladder and start building wealth, without compromising on the quality of life they desire in the city they love.

The Emotional Side of the Family Home

While rent-vesting has clear financial advantages, the emotional side of the family home can’t be overlooked. Many people, particularly parents, want stability for their children. A rented home, no matter how well-suited to your needs, doesn’t offer the same control or permanence as owning a family home. The landlord could decide to sell, raise the rent, or ask you to move out when you least expect it. For families, particularly those with young children or teenagers, this lack of control can be a significant downside.

Moreover, the family home is often seen as a place where memories are made. It's a space where your children grow up, where you celebrate milestones, and where you feel a sense of pride and accomplishment. For many, it’s more than just a financial asset—it’s an emotional anchor. Therefore, the decision to rent rather than own can feel like a compromise, particularly if you're looking for long-term stability or want to customise the space to meet your family’s needs.

The Risk of Missing Out on Long-Term Gains

While the emotional reasons for upgrading your family home are understandable, it’s crucial to consider the financial consequences. For many, upgrading to a larger home means taking on a larger mortgage, which could delay your ability to invest in properties elsewhere. The risk here is that without a strategic investment plan, you might end up with a nice, mortgage-free home, but no wealth-building assets to sustain your retirement.

If you focus your financial resources on property investing, however, you might be able to achieve a better long-term outcome, even if it means living in a smaller or less ideal home for a time. Delaying the home upgrade and building a portfolio of investment properties could offer you greater financial security down the line. The key is to balance short-term sacrifices with long-term planning.

The Pros and Cons of Rent-Vesting

Rent-vesting certainly has its appeal, especially for those in expensive cities or those who want to maintain flexibility while investing. The pros include:

• Flexibility: Rent-vesting allows you to live wherever you choose, without being tied down to a mortgage in a location that may not be ideal for your lifestyle.

• Better Investment Options: You can invest in properties that offer higher returns, even if they’re not in the area where you live. This can help you build wealth faster.

• Affordability: Rent-vesting can make property investment more affordable by allowing you to buy in lower-cost areas while living in a location that fits your lifestyle.

But, like any strategy, it comes with its downsides:

• Limited Use of KiwiSaver: You can’t use your KiwiSaver for investment properties, which could delay your wealth-building potential.

• Slower Portfolio Growth: The ability to expand your property portfolio may be slower due to borrowing restrictions, such as the Reserve Bank’s loan-to-value ratio limits.

• Lack of Control: Renting means you may not have the control over your living space that you would have as a homeowner, which can be a significant downside for families.

Making the Right Decision for Your Family

The decision to upgrade your home, invest in property, or adopt a rent-vesting strategy ultimately depends on your family’s current and future needs. If your children are young, delaying the home upgrade in favour of property investment might make more sense. If your kids are older and you need more space, upgrading your family home could be a priority.

In the end, balancing immediate comfort with long-term financial planning is key. You can choose to over-capitalise in your family home for today’s comfort, or focus on building wealth through investment properties for a more secure future. Rent-vesting is one option that allows you to enjoy the best of both worlds, but it’s important to weigh all the pros and cons based on your unique circumstances and goals.

By considering both your emotional needs and your financial objectives, you can make a decision that will serve both your family’s immediate needs and your long-term financial security.