<Erin Delahunty, June 20 2019>
Rentvesting is a way forward for people whowant to break into the property market, without sacrificing their lifestyle.
Ben Kingsley, the CEO of specialistproperty advisory firm Empower Wealth and co-author of The Armchair Guide toProperty Investing, says in capital cities, particularly in Sydney andMelbourne, there’s a significant price difference between the cost to buy andthe cost to rent.
With rentvesting, investors can get thebest of both worlds because they can afford to rent where they want to live andput their “spare” funds to work by buying elsewhere and renting that propertyout.
“Let’s say you could afford to buy in innerMelbourne and the mortgage repayments to do so were $3250 a month, yet if youwere to rent a similar property in the same location, it would cost you $1750.You would have a ‘spare’ $1500 a month to invest,” he says.
“The trick of course, is that you mustinvest the difference (not just spend it) to build your wealth for thisstrategy to work.”
The pros and cons of rentvesting
For many, rentvesting is a compromise theycan live with when it comes time to make the call between buying or renting.But is the strategy simply a compromise or can it be even more; a smart,long-term wealth-creation strategy?
Kingsley breaks down the pros and cons ofrentvesting to work that out.
The pros
Lifestyle
Kingsley says if it’s too expensive forsomeone to buy where they want to live, they have the option of renting throughrentvesting. “There are many reasons why you may want to live in a particulararea; better schools, a safer neighbourhood, a bigger house, or proximity tolifestyle amenities and perhaps family.”
Wealth building
Because rentvestors save on mortgagerepayments and invest the savings into one or more investment properties, theybuild wealth.
It’s “all care, no responsibility”
Rentvesting delivers the perks of being atenant; the main one being the notion of “all care, no responsibility”,Kingsley says. Unlike owning, any issues with a rental property are ultimatelythe landlord’s responsibility and maintenance costs comes out of their pocket,not the rentvestors’.
Ability to go with the flow
Renting gives people the flexibility tolive in a variety of places and property types, so they’re able to “go with theflow” a lot more than if they owned their own home, Kingsley says. Given thehigh cost of selling and then re-buying property, this option is not alwaysfinancially sensible for traditional investors.
Tax benefits
With an investment property, it’s possibleto initially claim holding costs, plus depreciation costs each year. Inaddition, some of the initial costs, such as stamp duty, conveyancing andlending fees can also be claimed, depending on the situation.
The cons
Loss of full capital gains tax exemptions
There are negative tax consequences ofrentvesting. “If you own the house you live in, you are exempt from payingcapital gains tax (CGT) if you sell it. Whereas if you sell your investmentproperty, you are liable to pay tax on the profit you make,” Kingsley says.
Giving up on a dream
The “Australian dream” dictates that peoplebuy a house and make it their own by adding personal touches. Rentvestors arestill renting, so don’t have the same freedom and need the landlord’spermission to make substantial changes.
Less control
As a renter, the landlord has rights andcontrol over the property, which can create uncertainty for tenants.
The “what will people think?” worry
Rentvesting goes against the entrenchednorm in Australia of living in “your own” home, so rentvestors can expect peerpressure from family and friends who just don’t understand their decision to continueto rent.
Which is better – rentvesting orbuying-to-live?
To investigate which strategy canpotentially get a better return, Kingsley looks at an example of an investornamed Matt, who is 27.
He’s an engineer earning $75,000 per yearand has been living at home while he saves for a deposit. He’s been diligentwith his money and saved $70,000. His parents have seen his hard work and arewilling to chip in $30,000, so he can get on the property ladder sooner. Thismeans he has a total deposit of $100,000. But even with this deposit, hisbudget isn’t enough to buy a house in inner-city Melbourne, which is where hewants to live. So, is it better for him to rentvest?
The reality is, if Matt were tobuy-to-live, the maximum amount he could borrow would be $415,000, based on hisincome and living costs. So, if he put down all of his savings as a deposit(minus upfront costs to buy), his maximum purchase price would be $495,000.
“But here’s where it gets interesting; ifMatt were to rentvest instead, he could use the rent he receives, plus his ownmoney, to increase his borrowing power. In this case, the maximum amount hecould borrow would be increased to $520,000, which brings his maximum purchaseprice to $570,000,” Kingsley explains.
But why increase borrowing power?
Kingsley says while people shouldn’toverstretch themselves, if they can borrow more money from the bank, they cantypically purchase a better property. A better property is, of course, a betterinvestment asset, which means it should deliver a better return over time, hesays.
But what about all that money spent onrent?
If Matt chose to rent with his mates in hisdream location, then he would be forking out $12,000 per year instead of buyinghis own place. But that overlooks that he will also be receiving rent – almost$21,000 – from his new investment property.
“This is important to realise, because itmeans he can hold a higher-value asset and, even with the added costs to holdthe investment property, Matt will be in a more solid cashflow position than ifhe just bought his own, lower priced home,” Kingsley says.
Crunching the numbers
Kingsley ran the numbers for Matt’ssituation to compare the decision to buy-to-live versus rentvest, and not justfrom a cashflow position, but also a net worth position…
But no one wants to live in a share houseforever, right?
“It’s unlikely that Matt will stay livingin a share house with his mates for 20 years and so much could have happened bythen; he might’ve met his future life partner and started a family or hemight’ve used the equity in either scenarios to buy another property, or he mayhave increased his rent, so he could afford to rent an apartment on his own,”Kingsley says.
But the point is; when comparing the buyversus rentvest decision, it’s important to consider the full financial impactand this is done by forecasting over the long term.
If Matt was to rentvest, in 20 years, hiswealth position would be looking quite solid. He would be receiving $46,650pain rent (on a property that’s predicted to keep growing in value) and he wouldbe mortgage free, Kingsley says.
“The biggie is that he would be financiallybetter off to the tune of $380,000 over 20 years if he went against the grainand chose to rentvest.”
So, is rentvesting the way to go?
Rentvesting works best when there’s anoticeable difference between what it costs to buy versus rent in the samearea.
Kingsley says ultimately, it’s more suitedto those on higher incomes, because earning more generally results in a higherborrowing power. But it’s also something a younger person can consider if theycan’t afford to buy where they really want to live and are happy to take aroad-less-travelled.
But every investor is different and peopleshould always get independent financial advice.
