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The road towards Financial Independence is as diverse as the people on it. There are variances in financial goals, discrepancies in lifestyle aspirations , and a huge range of investing strategies to choose from. Two such strategies are rentvesting and ETF investing. Let’s put the two side by side to see how each could help propel you on your FIRE journey.

What is rentvesting?

Rentvesting is an investing strategy that combines renting and investing. (Although, you probably could’ve predicted that from its portmanteau moniker!).

Rentvesters buy an investment property while renting their home, allowing them to enjoy the benefits of being a property owner and a renter.

They might hold an investment property (or multiple) in a location that’s more affordable, or one that has solid rental yield and capital growth prospects. It could be a regional or rural spot, or somewhere poised for growth. They then may live in their preferred area to take advantage of its lifestyle or proximity to work, friends or family.

What is ETF investing?

If you’re part of the Pearler community, you’re likely already familiar with ETF investing . But if you’re new to it, here’s a basic rundown.

‘ETF’ stands for 'exchange-traded fund’ – a type of investment fund that trades on the share market , much like individual stocks. ETFs aim to track the performance of specific indexes (like the S&P 500 or ASX 300 Index); sectors (tech, for example); or asset classes (such as bonds or commodities).

Many investors (including the ones here on Pearler) invest in a mix of ETFs to diversify their investment portfolio . They may also combine their ETF investments with individual stocks and other assets to diversify even further.

How does each strategy fit into Financial Independence?

Now to the very reason you’re here: how the two work in relation to Financial Independence.

In its most basic form, FIRE (‘Financial Independence, Retire Early) is all about building your savings and investments so you no longer have to rely on employment.

You might accumulate enough net worth that you can live off your savings, or develop a passive income strategy that covers your expenses.

Whatever FIRE looks like for you, both rentvesting and ETF investing could play a role. Both have the potential for strong growth over the long term, the opportunity to deliver passive income, and the benefit of diversification – a key attribute for a resilient long-term portfolio. Each strategy has its own advantages, too.

To help you better understand how rentvesting and ETF investing could be valuable (or not) to your FIRE investing strategy, below you’ll find the pros and cons of each.

How does rentvesting compare to ETF investing?

Cost of investing

• Rentvesting: Property is an inherently pricey investment. Even if you buy in a cheap area, your deposit will likely be tens of thousands of dollars (if not more). And that’s not taking into account other upfront costs. Think stamp duty; building and pest inspections; legal fees; and the cost of getting tenants in.

  
  Plus, when you’re a landlord, it’s up to you to pay for repairs, maintenance, property management, land taxes, insurance, and some utilities. When you’re looking for new tenants, you’ll also have to fork out for advertising and agent fees.
  

• ETF investing: ETFs are significantly cheaper investments. To invest in any share with Pearler – whether it’s an individual stock or ETF – you only need a minimum of $500 per trade. This means the barrier to entry is much lower than with property.
  ETFs are also usually low-cost compared to several other investments, like managed funds . For instance, they typically have lower expense ratios (i.e. fees) because they’re passively managed.

Liquidity

• Rentvesting: Property isn’t a very liquid investment. Buying and selling property can take a long time, and the buyer pool is much smaller than, say, selling on the stock market.
  
• ETF investing: You can easily buy and sell ETFs on the stock exchange, just like shares. You can also trade them at any time during the trading day. This makes them highly liquid investments.
  As long as you’ve got an investing account, you can get started with ETF investing instantly. And if you don’t, opening one with Pearler is incredibly easy. You can do so right here .

Passive income

• Rentvesting: An investment property can create a source of passive income via regular rental payments. These may be enough to cover the mortgage on your investment property. They could even be high enough to cover some of your day-to-day expenses, too. But, depending on the size of your mortgage (and current interest rates), the rent may be insufficient to fully cover mortgage repayments. In such instances, you will need to make additional contributions until the mortgage is paid off (or at least until the principal has shrunk).
  But, there is the possibility of going through periods where your property is untenanted. This could result in temporary interruptions to your passive income.
  
• ETF investing: Some ETFs pay regular dividends, establishing another source of passive income.
  The dividend amounts from ETFs tend to be smaller than those from individual stocks. This is for a few reasons, but largely because ETFs charge fees, and they’re diversified across multiple assets – thus diluting any dividend payments. They could be lower than rental payments, too. It's also worth noting that not all ETFs pay dividends; some instead focus on capital growth, with the idea that investors will sell them at a future date.
  Check out our guides to dividend-paying ETFs and how to find high-dividend ETFs for more info.

Capital growth

• Rentvesting: Depending on what and where you buy, your investment property may experience capital growth, potentially resulting in a profit if you decide to sell.
  However, property prices go through periods of growth and decline. If you sell during a downturn, there’s the potential for capital loss, whereby the value of your property goes down and you end up losing money on your investment.
  
• ETF investing: ETFs can also appreciate and depreciate. If the value of the underlying assets goes up or down, so too does the value of the ETF. This allows you to sell your share of an ETF to make a profit (or, on the flip side, make a loss).

Diversification

• Rentvesting: Real estate is another asset class, just like shares, bonds, and commodities. Investing in it alongside other assets can help diversify your portfolio. In contrast, investing in only one asset class in one area can result in concentration risk.
  
• ETF investing: Each ETF contains several holdings, often across asset classes, geographical locations, sectors, and more. This means investing in just a single ETF can give you instant diversification .
  Plus, ETFs offer exposure to a huge range of investments, such as equities, bonds, specific sectors, foreign and emerging markets , currencies, and commodities. Many of these are traditionally tricky to buy and sell individually, while the ease of trading ETFs makes investing in them much easier.

Risk

• Rentvesting: Your mortgage is subject to fluctuating interest rates, which could affect your repayments. As a result, you could see a drop in passive income if the gap between your mortgage and rental payments narrows.
  And let’s not forget that the property market goes through cycles, so capital growth isn’t a given. There’s always the chance of selling a property for a loss.
  
• ETF investing: Because they’re already diversified, ETFs provide some mitigation against potential losses. But they’re not totally zero-risk – no investment is.

  
  ETFs are subject to market volatility, which can impact their prices. Factors such as economic conditions, investor sentiment, and geopolitical events can all affect an ETF’s value, sometimes significantly.
  

Tax implications

• Rentvesting: There may be several tax benefits to owning an investment property – negative gearing being one of them. This is where the expenses associated with your investment property are higher than your rental income. Think property management fees, repairs, and so on. This loss can then be deducted from your taxable income.
  However, should you earn money from the sale of your property, you’ll be liable for Capital Gains Tax (CGT) . This tax is applied when you sell an asset and make a profit, with the capital gains added to your taxable income for that financial year. In regards, to passive income, you'll also need to pay tax on any rent you receive.
  
• ETF investing: There are still tax considerations with ETFs, including CGT. CGT applies to the sale of all kinds of investments, including shares. If you sell your ETF shares for a profit, you’ll be subject to CGT, too. You’ll also need to declare, and pay tax on, any earnings you make from dividends. With Australian ETFs, you can enjoy the benefit of franking credits, but these can be complicated, and worth discussing with a tax accountant.
  (Keep in mind that if you’ve held your property or shares for longer than 12 months, you may be eligible for a 50% CGT discount.)

Managing your investment

• Rentvesting: Taking on the role of landlord is quite a responsibility. The job has certain requirements, including keeping your property in good nick, ensuring repairs are seen to quickly, and maintaining the safety of the property. Hiring a property manager makes maintaining your investment property a heck of a lot easier.
  
• ETF investing: Managing your ETF portfolio is fairly straightforward. Once you’ve invested in ETFs, you can easily keep track of them via your broker’s platform, either online or through an app.
  It’s always worth staying vigilant by monitoring your portfolio, market changes, influences that impact the sectors you’ve invested in, and anything else that could affect your holdings.

Rentvesting – case study

Leslie is a 29-year-old engineer who’s embraced rentvesting as an investing strategy.

She’s got $80,000 to put towards her investment property and manages to secure a house in a regional area for $400,000. She’s borrowing $320,000 to buy the property and her mortgage repayments are looking to be around $2,050 per month.

Thankfully, demand for rentals in the area is fairly strong. She’s able to lock in tenants quickly with a decent rental yield of nearly 6% – or about $1,993 per month. This means that Leslie needs to cover the monthly mortgage difference of $57 herself, along with other costs such as strata, real estate agent fees, and any maintenance. Given the deficit in her mortgage, Leslie may be eligible for negative gearing benefits, so she seeks guidance from a tax accountant.

At the same time, Leslie chooses to rent an apartment in the city for $600 weekly. This is so she can be close to work and enjoy an inner-city lifestyle.

Over the next few years, capital growth in the regional area soars, allowing Leslie to sell the property for $500,000. She’s made a capital gain of $100,000, on .

ETF investing – case study

Amir is a 35-year-old teacher who has around $10,000 to put towards investing. His goal is to ultimately have enough to buy his first home .

Amir is a first-time investor and is a little nervous about entering the world of investing. However, he’s received a lot of insight on ETFs from his mates. So, he decides to dip his toe in the water by starting with ETF investing.

He spreads his money across different ETFs (mostly equity ETFs, including dividend-paying ETFs) and plans to hold on to them for at least a few years. He also intends to save $50 each week towards regular investments.

After four or so years, Amir’s ready to sell up. His ETFs have yielded an average annual growth rate of 7% and he’s also nabbed a bit of income from his dividend-paying ETFs. While it's normally advisable to hold ETFs for at least seven years, Amir has made a decision to sell based on his ideal timeframe, and the recent performance of his ETFs.

He sells his ETF holdings for just over $22,000 and has made about $800 in dividend income. He uses that money to continue investing in other ETFs, eventually getting enough money together to put a down payment on an apartment.

To figure out how your own money could grow through investing in shares, make sure to use our nifty investing calculators .

Can you do both?

Absolutely! As long as you can afford it, there’s no reason one can’t exist without the other. In fact, incorporating both into your investing strategy could offer more diversification and help propel you towards long-term wealth-building and Financial Independence.

Plus, like Amir, ETF investing (and share investing more broadly) could be used as a pathway towards a future home purchase .

That being said, investing in both (or even one or the other) isn’t necessarily for everyone. Weigh up the pros and cons of each option and think about whether it would suit your financial goals, investing horizon, and risk tolerance .

As far as rentvesting is concerned, there’s a much higher cost to get started, so you’ll need significantly more money set aside. Also consider whether you want to be a landlord. It’s not a role that should be taken lightly.

There’s no single approach to investing, so always do what’s best for you. And reach out to an expert – like a licenced financial adviser, and tax accountant or, in the case of rentvesting, a property adviser – for extra support.