What is rentvesting? Rentvesting is a not-so-new (but relatively new to the average property buyer) investment strategy that has you rent where you want to live and invest in property elsewhere. Often where purchase prices are more affordable and rental yields are generally higher. Giving you financial stability without sacrificing on lifestyle.
Where I can afford to rent
Where I can afford to buy
Key benefits of rentvesting
Depending on the value of the property you want to live in, it can be much cheaper to rent than buy. Let’s look at an example. If you want to raise a family in a house on the Northern Beaches of Sydney, the median price of a moderate 4-bedroom family home is close to $2 million. To purchase this, you would need a $200,000 deposit, $90,000 in stamp duty and approximately $10,000 in additional legal and administrative fees, to be paid upfront. Then servicing the mortgage would require roughly $10,000 per month. However, you could rent that same property for around $1,200 per week (or $5,000 per month) and put that $300,000 to work elsewhere. This could potentially afford you 4-5 investment properties, each around the $500,000 mark. Based on today’s interest rates, these properties would be neutrally geared – meaning the rent would cover the cost of the mortgage. Take this one step further and incorporate some of the value-add strategies we’ve spoken about previously, such as granny flats or subdivisions, and looking nationally for high capital growth regions. With this approach, your investments could more than likely be positively geared – paying more income than the cost of the mortgage. Allowing you to either pay down the debt faster or further subsidise your rent. This also then requires a lower overall portfolio value to support your lifestyle where you currently live, thanks to the higher yields on your investments. If you’ve paid off a $1.5 million portfolio, the rental income could be around $1,700 to $2,000 per week – enough to cover your rent and support the repayments on an additional investment.
There can be better taxation and cost-saving implications with rentvesting. Firstly, any repairs or improvements made to the properties you own are 100% tax deductable. Secondly, negative gearing taxation law can protect you from any rental income loss by allowing you to offset those losses against your regular income tax (this is dependent on your individual circumstances). Plus, if you run a business from home you could potentially write-off a percentage of your rent as a business expense. An often-overlooked cost-saving benefit of renting is that paying for repairs on the large family home you live in is the responsibility of the landlord (given they’re not caused by your own fault or negligence). This can be a big plus, especially when it is a larger house you’re in.
Rentvesting can give you a better lifestyle or work-life balance and increase flexibility in a number of ways: i. Living closer to work and having a supplementary income can shave down commute times and eventually give you the capacity to work less (or maybe even not at all). ii. Residing close to parks, beaches, restaurants, infrastructure, quality schools and other attractions can vastly improve your lifestyle without making huge financial sacrifices. iii. Greater mobility means that you’re not tied to one home or place. If your family outgrows the space you’re currently in, just pack your bags and find a bigger rental. Regional, interstate or international career opportunities also have one less roadblock. In either case, we understand that these high value properties generally deliver a lower rental yield. This means you either need to go through the heartache of trying to sell or continue contributing to the short fall in the mortgage not covered by your rental income, meanwhile paying rent elsewhere yourselves.
When doesn’t rentvesting make sense?
As we mentioned, when considering a property north of the $1.5 million mark, rentvesting can often be the smarter option. But generally, when looking at properties below $1.2 million (and especially those below $1 million), purchasing is likely to be the better option.
Also, if you have inadequate capital or quite poor credit history, it may be worth sucking it up for the short-term and purchasing an owner-occupied home where you can afford. The goal would then be to pay as much of the mortgage down as quickly as possible to get to a position where the rent at least covers the remaining repayments. This can then open a greater realm of opportunities for your next steps.
Drawbacks of rentvesting
While rentvesting definitely has plenty of upside, there are still some drawbacks – particularly when you have a family.
For most people, some small degree of uncertainty is acceptable. But knowing that you can be given as little as four weeks’ notice to vacate the home you live in, should the owners return or sell the property, can be a little too much for some. When kids are settled into schools and have a network of friends within the immediate neighbourhood, it can be a big ask to uproot all of that.
Depending on how (in)flexible your landlord is, making even minor adjustments to the home can be an astringent process. Painting your daughter’s bedroom wall, adding a veggie garden, mounting a TV / stereo or even trimming some overgrown trees can all be gated by endless email correspondence and red tape.
Whatever stage you’re at in your investment and/or home-ownership journey, rentvesting is a powerful tool to have in your armoury. However, there is some finesse in knowing how and when to use it and is not necessarily appropriate for everyone. So, remember to weigh up your options and do your calculations to make an informed decision on what’s best for you.
For advice on building a rentvesting strategy, getting your foot on the property ladder or taking the next steps in your investment journey – get in touch with The Investors Agency.