A good way to enter the property market is through 'rentvesting,' says an economist. This is how it works.

• Buying a home elsewhere while renting out one's primary residence is known as "rentvesting."
• However, there are a few considerations to make before jumping in.

While some renters dream of buying a home and becoming landlords, others wish to remain tenants even as they purchase property.

Danielle Hale, chief economist at Realtor.com, explains that rentvesting involves renting one's primary residence in a city and purchasing an investment property elsewhere to be let out as a short- or long-term rental.

If you reside in a city where home prices are beyond your budget, it can be a beneficial approach to enter the property market, as suggested.

Here's why housing inflation remains stubbornly high: The choice between selling your home or renting it out. Homeowners typically spend nearly $55,000, according to a report.

Renting out a property from a distance can be challenging, and first-time homeowners may find rentvesting more difficult than purchasing a property they plan to reside in.

Hale advised considering and researching certain costs before getting involved.

When 'rentvesting' can make sense

Hale suggested that rentvesting could be a viable option for someone with a high income in a major city where rents and home prices are both high. These individuals may have the means to save but find it difficult to afford a home in their metropolitan area.

Hale stated that they would search for a more affordable market to invest in, hoping their savings could contribute to a substantial down payment.

In the first quarter of 2024, small investors, defined as those with up to 10 investment properties, accounted for 62.6% of all investor purchases, according to a recent report from Realtor.com. This represents the highest percentage of small investor activity in the data's history, dating back to 2001.

Hale stated that the data does not differentiate between small investors who are rentvestors and those who own their primary residence or a secondary rental property.

"Although big investors are gaining traction and increasing their presence in the single-family home market, they still represent a small portion of the overall landlord population in the United States."

Some shifts in the market in buyers' favor may also benefit rentvestors.

Since March, the lowest level of 30-year fixed-rate mortgage rates has been recorded at 6.85%, according to a new analysis by Redfin, a real estate brokerage site.

According to Daryl Fairweather, chief economist at Redfin, someone with a $3,000-a-month budget can now spend an additional $20,000 on a home with the same budget.

Rentvesters seeking a mortgage will find lower rates to be "welcome news," but it's crucial to remember that rental prices are decreasing due to increased supply on the market.

Fairweather stated that it may be challenging to fill the property with a tenant if there are other options nearby that are renting for lower prices.

"Although rents are increasing slightly, this is not happening as quickly as some might expect. In fact, in certain areas with high levels of new supply, rents are actually decreasing," she stated.

5 questions to ask yourself before rentvesting

Rentvesting can lead to homeownership, but it's important to weigh the pros and cons before taking that route. Consider these five questions:

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

Be mindful of the short-term rental regulations in the town, city, and state you're interested in, as some areas have rules that restrict or prohibit rental activity. As you focus on specific properties, be aware that some homeowner's associations and condo or co-op boards may have rental restrictions.

2. Do I need to hire a property manager?

To become a landlord, you could either manage the property yourself or hire a property manager to act as an intermediary between you and the tenant.

According to a report by Buildium, a property management software company, approximately 55% of small-portfolio rental owners hire a property manager because they reside far from their rental property. The report was based on a survey of 1,885 property management professionals conducted in May and June 2023.

The cost of hiring a property manager varies based on the location and services provided, with fees reaching up to 25% of the monthly rent price, according to Apartment List.

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

Purchasing a property entails more than just covering the down payment, closing costs, and monthly mortgage payments. It is also essential to account for property taxes, insurance, and maintenance, among other associated expenses.

Understanding the potential future changes in dollar figures is crucial, especially in unfamiliar areas.

Before deciding whether renting out your home is sufficient to cover your expenses, you must evaluate all the relevant factors.

4. How much competition will you have?

Renting properties may be more competitive in the current market, particularly in areas with a high number of new builds, according to Fairweather.

"Pay attention to rental trends," said Fairweather.

While rent prices are rising in coastal areas, they are decreasing in regions like the South, which is beneficial for renters. However, this news is not positive for property owners, according to Fairweather.

5. Can you afford a vacancy?

High vacancy rates can be a disadvantage of short-term rentals, according to Hale.

During slower periods, you may have to pay for two monthly housing expenses: the rent of your primary residence and the mortgage payment for your investment property.

Can you afford the monthly mortgage payment of approximately $2,647 on a typical $400,000 U.S. home with the current 6.85% mortgage rate, as stated by Redfin?