Conversations with a Pug – What is Rentvesting?

 

 

‘Rentvesting’ is a relatively new term that is being used to describe the action of buying property in an affordable area, renting it out to pay the mortgage, while renting in an area that you would like to actually live in, or that makes more financial sense.

 

Identified as the “most common new buying habit” people rentvesting, or renting where they want to live and buying where it’s smart to invest.

 

Types of Rentvestors:

 

There are a couple of types of rentvestors. Young people utilising the strategy and saving for a first home and an increasing number of professionally employed people of any age taking advantage of tax breaks and creating wealth through property investment rather than ownership.

 

Tommy Lim also comments rentvesting allows numerous clients to remain ‘globally mobile’ – either pursuing valuable work experience or further studies in overseas markets such Hong Kong, London or in the United States.

 

Rent where you want to live….

 

Advantages of Rentvesting

 

  • Flexibility – Renting gives the flexibility not to be locked into an owner occupied mortgage. You are free to travel and move around or upsize should the family grow at any time.

 

  • Lifestyle – Rentvesting may be less financially straining by investing in a cheaper market, and gaining access to the various tax concessions currently available.

 

  • No compromise on location or size – Many first homes are not ‘dream’ homes and are often located where one can afford and further from work, amenities, family and friends. Also to fit a budget, various other features such as number of bedrooms, car spaces, bathrooms may be sacrificed.

 

  • Enter the market sooner – Instead of saving and saving to afford where one wants to live, they may be able to continue renting and enter a market elsewhere straight away. History shows that well selected property can quickly outperform average saving abilities.

 

  • Potentially better capital growth than local area – The desired suburb to live may not contain the performance of the property, may not produce the equity gain needed if the owner is looking to upsize in the future.
  • Tax deductions may lead to extra income to assist with rent – In today’s interest and tax environment, there are many investment properties that will produce a positively geared cash flow that may be used to supplement personal rental expenses.

 

  • Reclaim ‘dead’ rent money – If you are renting and not investing, then your rent money is notworking for you in any way. Investing in a property and receiving rent from a tenant will offset this ‘dead’ rent money and also provide some capital appreciation.

 

Disadvantages of Rentvesting:

 

  • At the mercy of a landlord – If the landlord decides to sell then you may be forced to move.

 

  • Can’t make alterations or renovations to your home – As you don’t own the property it may be harder to alter the dwelling to your taste or requirements.

 

  • Capital gains tax if sell – Currently if you sell an investment property there will be capital gains tax to pay on any profit (a 50% discount may apply on property held longer than 12 months). Owner occupied homes are exempt from any capital gains tax.

 

The Rentvestor Mindset

 

Before anyone can begin to rentvest they have to have an honest conversation with themselves about their relationship with debt and make the distinction between ‘good’ debt and ‘bad’ debt. In life it is very easy to spend more than we make through taking on debt such as car loans, credit cards and other ‘necessities’ sold to us by crafty marketing firms. Buying property requires people to take on what will probably be the biggest debt of their lives to date. It would be easy to add this debt into the same basket as the bad debt mentioned above, however, the big difference with property, or any well selected investment, is that the asset you have purchased should be appreciating in value, not depreciating like the latest iPad or BMW.

 

TIP: The required mindset for rentvestors has to include an understanding of both ‘good debt’ and the power of leveraging ‘other people’s money’ (such as the bank). It is also important to understand your risk profile, and select an investment property that is reflective of this in terms of the size of debt and location of the property.

 

After all, rentvesting is meant to enhance your lifestyle, not make it harder to sleep at night. The rentvesting concept may be counter intuitive according to norms requiring a thick skin to ward off the naysayers conditioned to a life more ordinary.

 

If you have made the decision that rentvesting is the smarter strategy for your situation, then it is important to do your research on the investment in order to reap the best results and reduce risk. As we all know not all property is created equally, but there are basic fundamentals you can look for to ensure consistent, stable growth and less risk.

 

 

 

 

‘Top-down’ approach – The 3 levels of Key Investment Drivers

 

Macro: The Marco level assesses Australia as a whole and its various capital cities. The big driver here for people looking to grow their wealth quickly is market cycle. You need to invest counter-cyclically or buy at the bottom rather than the top of the boom. Often this will go against what the media and other people are telling you to do and takes courage to invest in this subdued period. However, if the market exhibits the other macro drivers it is sure to improve and benefit those investors who got in early.

 

Micro: Micro level drivers relate to suburb specific factors. Two favourites are vacancy rates and affordability. If there are low vacancy rates, excess demand and affordability through strong incomes and low interest rates then it creates an advantageous market for price growth.

 

Property: The final, Property level is where it is important to assess the specific dwelling and its match for the local demographic. For example, it would not be advised to buy a one-bedroom unit in a suburb removed from accessible amenities and known for families that desire houses. It will lack demand and therefore growth. Instead, look for features that will attract owner occupiers as this is the group of future purchasers buying with emotion and pushing values up. Conversely, avoid high-rise and investor only developments, as these can be more volatile and restricted in growth.

 

 

 

Conclusion

Skyrocketing house prices and the desire to still enjoy our lifestyle is creating the emergence of ‘generation rent’. Those who want their money to work harder will be considering the new age of rentvesting. Within the rentvesting strategy there are the obvious downsides such as not being able to paint the walls your favourite colour and having to move if the property is sold, however those items seem a small price to pay for taking control of your financial future by creating wealth, freedom and flexibility. This is especially important as these benefits created by rentvesting could also include growing your deposit to buy that dream home later on down the track, not to mention extended holidays or even early retirement.

Are you ready to get off the fence and capitalise on the lowest interest rates in history to rent your way to the top of the property ladder?

 

My Very Best To You Always,

Frank ‘The Bank’ Barragan

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