Rentvesting
Rentvesting has been a word that has popped up a lot in recent times due to the sky-rocketing housing prices, especially in Sydney. It’s definition is, “The process of renting where you want to live while owning a property where you want to invest”. The term has been around for quite some time now but has most recently gained popularity from the extreme housing affordability issue in Sydney. Many people are feeling locked out of the housing market as prices in the areas they want to live become increasingly unaffordable due to super low interest rates and increasing population growth.
Demand is outstripping supply in Sydney as the city’s population is increasing by approximately 2000 per week. Rentvesting differs to the traditional “Great Australian Dream” approach, but it may well be the optimal path forward for Australians wanting to build wealth through property.
Apart from not compromising on lifestyle, rentvestors stand a chance to build wealth faster through a well oiled investment property portfolio rather than through their principle place of residence. While many people perceive rent money as dead money, the idea of lining your landlord’s pockets every month may prove to be a more feasible strategy. Building an asset base independently from owning the home that you want to live in can help compound your wealth at a much faster rate. If you are looking to get ahead and are struggling to get into the property market where you want to live, maybe it’s time to reconsider your options.
I have used reinvesting as part of my investment strategy for over 10 years now. I do not plan on purchasing the home that I want to live in anytime in the near future. I rent a luxury inner city Sydney apartment, which I can claim a portion of my rent as a tax deductible expense (home office) through my companies. I pour all of my savings into my businesses and income producing investment properties located in different markets to Sydney such as The Central Coast and Newcastle. I am also able to claim the majority of overheads on these assets as tax deductions as they are business related expenses.
If I owned my own home, all of my cash would be tied up in the property, which would not leave me much change to invest and I would not be able to claim any of my expenses on tax. The icing on the cake is that I can take advantage of the lifestyle benefits of living in the heart of the city being close to my business locations, airport, restaurants and shopping precincts. Plus, the famous eastern suburbs beaches aren’t too far away either!
Buying an investment property, or any property for that matter is one of the biggest financial decisions most people will face. This raises the questions of what and when do you buy? The first thing that should be established is what is your budget/borrowing capacity? This will determine what markets you will have the ability to purchase in. Also if you are investing for the long-term, such as 20-30 years, then it would be safe to say now is the best time as Australian property tends to go through 7-10 year cycles. Historical data shows that 30 years of holding property can lead to true ultimate wealth in the future. Even if you purchase in a hot market today, I’d say in 30 years time you would be glad you made the decision to buy now!
If researched and planned correctly, rentvesting can be a great way to enter the property market and grow wealth whilst not compromising on lifestyle. For example, lets say you have a $2 million budget to buy a property. If you bought a place to live in, your mortgage repayments would be around $10k per month. Alternatively, you could buy 4 x $500k properties all returning around $10k per month in income whilst also appreciating in capital value over time. Most expenses are tax deductible, while expenses on your $2 million home are not. You can rent a $2 million property for around $6k per month, as once properties start to climb above the $2 million mark, the yields start to drop off and work in the favour of renters. If you run a business then you may even be able to claim a portion of the rent on tax. It’s important seek professional help and speak to a property consultant to know your budgets and what benefits you can take advantage of from your own individual situation.
Holding investment properties in markets such as The Central Coast and Newcastle works for me as a business model and investment strategy. I wouldn’t want to necessarily live in these areas but they perform well when looking at the numbers. Sky-rocketing Sydney house and apartment prices and the desire to still live in the city, has forced me to implement the reinvesting strategy creating a flexible lifestyle. There are some downsides with reinvesting such as not being able to renovate or alter the property to your personal preference or having to move if the property is sold, however it is a small compromise at the end of the day when it comes to building wealth and maintaining your desired lifestyle.
