Over the past few weeks we have seen article after article published about Rentvesting — the pros, cons and why you should start parking your bags but does it make sense for most young property investors?
Let’s start at the beginning, what is Rentvesting?
In short, Rentvesting is Living Where you want, but Investing in property you can afford. With property prices in Sydney and Melbourne ballooning to record highs over the past 3–4 years it is getting harder and harder for young investors to get into the Australian property market — but we don’t think it needs to be. Say for example in Sydney where the median house price is over $1M, if you bought it with a 20% deposit your principle and interest repayments would be around $1,078 per week.
If instead of buying it you could rent the same place place for $700–800 per week you could invest the shortfall. In this example the difference of $1,112 per month could be invested into another property, stocks or diversified funds.
This is dumb, why would you not want to buy a home?
In previous generations the so called ‘great Australian dream’ was getting a dog, owning a home with a backyard and chucking a few shrimp on the barbie… The reality is now younger Australians (i.e. anyone under 40) are more often than not opting to travel, see the world, have the flexibility to move around rather than getting into several hundred thousand dollars in debt.
And don’t forget housing affordability.
- In Brisbane property prices are 6times the average household income.
- In Sydney property prices are around an astounding 12.2 times the average household income!
Instead of putting all your eggs into the one basket you could instead invest the money and rent somewhere else, have lower living costs (i.e. not pay as much) and still invest in places where you can afford.
Practically what this means is based off the average income/home prices if you buy a home in Sydney you’ll use 50–60% of your income to pay it off — compared to Brisbane which is just above 30% of your income. It’s a big chunk of your everyday income that you would need to use to pay back the banks interest, when you could be spending on generating wealth.
Alright, so what are the tax benefits?
With investing in property there are tax and gearing benefits — specifically in Australian property there are negative gearing benefits which means:
- Negative gearing means that the interest you are paying on the loan is more than the income. As a result you are making a loss.
- Neutral gearing means that the interest you are paying on the loan is equal to the income.
- Positive gearing means that the interest you are paying on the loan is less than the income. As a result you are making a profit.
In the case of negative gearing, if you are making a loss with an investment property you could potentially use it to reduce your taxable income and therefore tax payable. This is an entire topic on its own which we won’t cover today, but could be something you can discuss further with your accountant.
Overall the largest advantage of Rentvesting is having surplus income that can help you invest in other assets, and diversify where you have your wealth parked.
Hold on, I thought rent money was dead money?
It comes down to a break even and the numbers in your situation — but this type of thinking could lead you to believe interest is also dead money. And having a big mortgage, means there are big interest repayments. If you are renting and its costing you $6,000 but you could buy an equivalent place that will only cosy you $4,000 a month its better to buy.
And when you own a place, also remember there are other costs involved with holding the property — with units and townhouses as the owner you pay body corporate, rates, maintenance fees and insurance. This could be an additional $700 a month if you look at all the costs payable over a year. So instead of $4,000 it could be $7,000.
Ok… so I’ve just skimmed this article, what are the take aways?
- Rentvesting is a different way to approach buying property.
- Rentvesting allows you to live where you want, and invest where you can afford.
- With Rentvesting you can potentially have a lower living cost base, and invest what is left over. This free’s up your cash flow to invest in other things instead of just paying down a mortgage.
- It can allow your flexibility and choice around lifestyle, if you want to travel or move places.
- Rent money isn’t necessarily dead money — interest without tax advantages is equally dead money.
This article originally appeared on The Rentvesting Podcast. If you want to subscribe to the podcast checkout Itunes or Soundcloud.