My wife and I are very lucky to rent overlooking the beautiful Sydney Harbour, only a moment’s walk to the beach. As I was sitting out on our deck, watching the boats sail past and considering how fortunate we were, I realised that we were the only young couple under 60 in our building! And no, we haven’t snuck past the body corporate of an over 55s complex nor are we significantly more wealthy than others our age. I began to think, why do people wait till they retire and then live where they want to live? Why waste the best years of their lives, sacrificing their lifestyle only to live somewhere that compromises an ideal living arrangement and lifestyle? Hence, why I am part of the growing Generation Rent!
The benefits of Rentvesting!
It dawned on me that the majority of people are living where society has told them they need to live or where their budget has forced them to go. We have been told to save to buy our own homes, then work hard all our life to pay it off, and hope that you don’t need to upgrade or move at any stage! This is what has been considered the societal norm until recently when the median house price in places likes Sydney started to exceed $1m and require an individual on an income of $130,000 to support the mortgage. With average wages still hovering around $80,000, something just doesn’t add up!
It became apparent that we had a different mindset compared to many others our age. Sure, we could change strategy and sell some investment property and go and buy and house further out in the suburbs like many of our friends have done. They save and save to get the required deposit, then move out to a suburb they can afford, buy a home only to spend the next 30 working in the hope of pay it off. Sounds like something a previous generation would be content with, as it was just what you did back then.
This got me thinking. Why are young Australian’s so down about the property market? Why do so many of them see it as an unattainable joy of times past? So many things from our parents and grandparents generations are completely obsolete…black and white TV, polaroid cameras, the fax machine! Everything has changed, so why on earth are some still trying to implement the same archaic strategies when it comes to home ownership? There is another way! It’s called Rentvesting. Live where you want to live, and buy where it’s smart to invest. This is how people are renting their way to the top of the property ladder!!
What is Rentvesting?
Rentvesting is a relatively new term used to describe the action of buying in an area that you can afford, which has the best growth prospects, and paying the mortgage through renting it out and claiming some tax deductions along the way. This gives you the ability to continue living where you actually want to live – your favourite suburbs, near the beach or close to work and near the shops and amenities which match your lifestyle. A recent Mortgage Choice survey found a 1/3 of first home buyers have now decided to invest rather than to buy a place to live in. It may sound strange, but it’s no mystery. These young people are savvy Rentvestors, investing in a lifestyle that suits them today rather than tomorrow.
Rent where you want to live
Is Rentvesting a fit for me?
Those who find benefit in Rentvesting can have a variety of Investor Profiles. An Investor Profile is your unique situation –what your short and long term financial goals are, what your income level is, your risk profile, what your current assets and liabilities are, where do you want to actually reside? Anyone who wants to gain flexibility without compromising on size or location, get in to the market sooner rather than later, or take advantage of tax deductions should be considering Rentvesting.
The next consideration would be whether you can get behind the rentvestor mindset. Buying property is most likely the largest purchase you’ll ever make. This means it will also be the largest amount of debt you’ll undertake. This is where understanding the difference between good and bad debt is paramount.
With Rentvesting, we are looking at good debt through leveraging other people’s money i.e. the banks. Property is categorised as ‘good debt’ because similar to any well selected investment, the asset you have purchased should be appreciating in value. Bad debt is a different story and would be loans taken on for depreciating assets such as the latest BMW. There is much debate as to whether your principle place of residence is defined as good or bad debt. While it is an appreciating asset, it can still be considered a liability since it is not income producing, another benefit of taking advantage of rentvesting.
In addition to debt, it’s important to invest where it makes sense for you and your risk profile. Your investment should reflect this in terms of its price, location and cashflow. Rentvesting is meant to enhance your lifestyle after all. Keeping you up at night because you’ve overextended yourself would be counter intuitive.
Advantages of Rentvesting
No need for concessions or sacrifices – Not interested in adding an hour to your commute? Or buying a tiny flat or a “fixer upper”? Many first homes are not ‘dream’ homes and are often located where one can afford and further from family, friends, work and amenities. Various other features such as number of bedrooms, car spaces, and bathrooms may be sacrificed for owner occupiers as well.
Adaptability – renting ultimately offers you the ability to adapt. Flexibility to grow your family, to take a job in another state or even overseas. Renting is also a get-way to try on a suburb before you buy and building equity in that well considered investment property can often be the catalyst to potential home ownership in that ‘dream location’ later on down the track
No need to wait – Enter the market straight away where you can afford. You may not have to continue waiting and saving to start benefiting from property ownership. History shows that well selected property can quickly outperform average saving abilities. In fact, $60,000 in a savings account earning 3% interest per annum will increase to $80,635 in 10 years’ time. Alternatively, using that same $60,000 to purchase a $450k investment property with a conservative capital growth of 5% per annum… you’d be looking at $382,002 or an extra $620 per week income over those 10 years.
Tax deductions – Combined with rental income, various tax concessions available to investors can actually assist in paying loan interest and expenses and create a positively geared cashflow. This extra income may make renting even more affordable or help save for your next investment property.
Recoup ‘dead’ rent– make sure your money is working for you. Renting without owning any property is causing you to pay ‘dead’ rent money. Having a tenant paying a mortgage for you means that the ‘dead rent’ is being offset and providing some capital appreciation.
The sacrifices of buying a place to live
Disadvantages of Rentvesting
No cosmetic changes – you may not be able to paint the bedroom your favourite colour and change the tiles on the floor in the bathroom. Renting would mean you are less able to make cosmetic personal changes to the residence.
Selling – if the owner decides to sell you could be forced to move
Capital gains tax if sell – owner occupiers are excluded from having to pay capital gains tax, whereas investors currently pay a capital gains tax on any profit (a 50% discount may apply on a property held longer than 1 year).
We have been conditioned to buy where and what we can afford… work our whole life to pay it off, and hopefully retire somewhere nice where we actually want to live. It doesn’t have to be this way! For the younger generations of Australia, it’s time to revaluate our relationship with home ownership and property investment. Join generation ‘now’ and live the best years of your life where you want to live, investing profitably, and making your money work smarter through the strategy of Rentvesting.