Do you want to know if rentvesting is for you? Answer the following questions honestly:
- Are the prices in the neighbourhood you want to live in way too high?
- Are you staying away from being tied down to your mortgaged home?
- Would you rather rent?
- Do you want to give your property portfolio a great foundation in terms of growth and borrowing capacity?
If the answer is “Yes” to at least one of the questions, you might want to consider “rentvesting.”
What is rentvesting?
To put it simply, rentvesting entails buying an investment property that gives you a potential gain of capital growth and cashflow and lease a home in an area that you want to reside in, such as a hot suburb or street that has affordable rent but absurdly high purchase prices.
Two major advantages of rentvesting
- You can reside in an area you really like and enjoy the lifestyle you prefer.
- You take your first step towards your property investment initiative and begin growing your wealth.
This means someone is paying your mortgage (you use the rent money to pay the bank) while you live in a location you love.
Rentvesting is becoming popular among young professionals, mostly due to the fact that city and apartment living is compatible with their lifestyle. However, increasing property values is not letting them enter the market in that area.
In addition, an apartment may not be a good investment, thus leasing an apartment and buying another property type is better strategically as it could produce better lifestyle and investment gains.
Rentvesting explained in numbers
Here are two scenarios to provide a more detailed explanation of rentvesting.
Scenario 1: Purchase your own house
- You buy your own house for $500,000.
- You take a borrow 90% (including mortgage insurance), which means you owe $450,000.
- You borrow at an interest rate of 5% (today’s rates are lower, but let us use a conservative number)
- This means you have to pay $870,000 for a $500,000 property.
- Since there is no one renting, you pay the entire amount to the bank (not including overheads, like rates).
Scenario 2: Rentvesting
- You paid $500,000 for an investment property.
- You take out a loan for 90% of the amount (including mortgage insurance). This means you $450,000 in debt.
- You take out a loan at an interest rate of 5% (the current rates are lower, but let us choose a conservative figure).
- This means you have to pay $870,000 for a property worth $500,000.
- But if you get someone to rent the place and pay rent at 5% yield (which means the renter pays you 5% of the value of the property annually in rent), you earn a weekly income of $480, or $25,000 annually.
- The figure amounts to $711,360 earned by you from rent (after property management, excluding any rent increase), over the life of the loan, which is typically 30 years.
- By earning income through rent, you only have to pay the $158,640 over 30 years, not $870,000 (excluding overheads like rates).
- Obviously, you’re staying rent where you live, but you’re free to rent anywhere you like that you can afford.
Here are more benefits of rentvesting:
Wealth creation. You can build long-term wealth with your investment property through its potential growth and cash flow (paid mostly by your tenant). You can use the money to purchase your dream home later on or for additional investments to build a passive income stream.
Possible tax incentives. Rentvestors can avail of tax benefits, because they are investing in property, are not buying to live in it. Talk to your accountant or tax advisor for more information.
Limitless investing. You can purchase an investment property anywhere in Australia, or the world, with no limit. This allows you to pick the property you want to purchase and take part in a transaction with no emotional attachment, and in the end building an investment medium that will bring growth and cashflow, rather than emotional values like lifestyle and personal tastes.
Borrowing capacity. Subject to the type of property you bought, you can increase (or basically not decrease) your ability to borrow, and the banks may determine their debt at a higher amount than the amount that was borrowed because of the interest rates being able to change, in addition to property overheads. Read more details below under “When is rentvesting most effective?”
Lifestyle. Subject to rent to mortgage/property cost differences, you can live in the area you like or remain where you presently love without sacrificing your lifestyle. You can maintain your present lifestyle while growing your property portfolio.
Flexibility. With rentvesting, you can upsize, downsize or change locations without thinking about a mortgage. This is important when your personal circumstances change for the good or bad. Or the reason could also be travel or a change in location by preference.
The negatives of rentvesting
Incentives. Because of their nature, you may not be able to claim first home incentives and likely some capital gains tax benefits.
Ownership. While you are renting the property you live in, it is not fully yours. You might need permission from your Landlord if you want to paint the walls a different colour.
Dead money. While you are renting, you are paying someone else’s mortgage. This is more a mentality that you have to tackle.
When is rentvesting most effective?
Rentvesting is most effective when your investment property is cashflow positive, and can increase in value in years to come.
What is cashflow positive? Cashflow positive means the rental income or “yield” from your investment property is higher than its overheads (the costs of maintaining the property, such as interest on mortgage repayments, insurance, rates, etc.). This means you’re getting the money back every week you own the property, as when principal (or just interest) is paid you are paying yourself.
You can research for information on how to find a positive cashflow property, or a property that pays, you, or you can hire the services of a professional investment property specialist to help you get started on rentvesting.