Page 4 - Newsletter Issue 9 - January 2020

What is rentvesting?

Rentvesting—which sees buyers rent a property where live in, you are exempt from paying capital gains tax (CGT) if
they want to live an buy an investment property in a you sell it. Whereas if you sell your investment property, you
suburb they can afford—is a growing trend across are liable to pay tax on the profit you make,” Kingsley says.
Australia, challenging traditional thinking about home Giving up on a dream-The “Australian Dream” dictates that
ownership. people buy a house and make it their own by adding personal
touches. Rentvestors are still renting, so don’t have the same
Rentvesting is a way forward for people who want to break
into the property market, without sacrificing their lifestyle. freedom and need the landlords permission to make
substantial changes.
Ben Kingsley, the CEO of specialist property advisory firm
Empower Wealth and co author of The Armchair Guide to Less Control- As a renter, the landlord has rights and control
Property Investing, says in capital cities, particularly in over the property, which can create uncertainty for tenants.
Sydney and Melbourne, there’s a significant price difference The “what will people think?” worry-Rentvesting goes against
between the cost to buy and the cost to rent. With the entrenched norm in Australia of living in “your own”
rentvesting , investors can get the best of both worlds home, so rentvestors can expect peer pressure from family
because they can afford to rent where they want to live and and friends who just don’t understand their decision to
put their “spare” funds to work by buying elsewhere and continue to rent.
renting that property out.
“Let’s say you could afford to buy in inner Melboure and the WHICH IS BETTER—RENTVESTING OR BUYING-TO-LIVE IN?
mortgage repayments to do so were $3250 per month, yet if To investigate which strategy can potentially get a better
you were to rent a similar property in the same location, it return, Kingsley looks at an example of an investor named
would cost you $1750. You would have a ’spare’ $1500 a Matt, who is 27. He’s an engineer earning $75,000 per year
month to invest, “he says. “The trick of course, is that you and has been living at home while he saves for a deposit.
must invest the difference (not just spend it) to build your He’s been diligent with his money and saved $70,000. His
wealth for this strategy to work.” parents have seen his hard work and are willing to chip in
$30,000, so he can get on the property ladder sooner. This
The pros and con’s of rentvesting
means he has a total deposit of $100,000. But even with this
For many, rentvesting is a compromise they can live with deposit , his budget isn't enough to buy a house in inner city
when it comes time to make the call between buying or Melbourne, which is where he wants to live. So, is it better
renting. But is the strategy simply a compromise or can it be for him to rentvest?
even more; a smart, long term wealth-creation strategy?
Kingsley breaks down the pros and cos of rentvesting to work The reality is, if Matt were to buy to live, the maximum
that out. amount he could borrow would be $415,000, based on his
income and living costs. So, if he put down all of his savings
as a deposit (minus upfront costs to buy), his maximum
THE PROS purchase price would be $495,000.
Lifestyle—Kingsley says if its too expensive for someone to “But here’s where it gets interesting; if Matt were to rentvest
buy where they want to live, they have the option of renting instead, he could use the rent he receives, plus his own
through rentvesting. “There are many reasons why you may money, to increase his borrowing power. In this case, the
want to live in a particular area; better schools, a safer maximum amount he could borrow would be increased to
neighbourhood, a bigger house, or proximity to lifestyle $520,000, which brings his maximum purchase price to
amenities and perhaps family.” $570,000,” Kingsley explains.
Wealth Building—Because rentvestors save on mortgage But why increase borrowing power? Kingsley says while
repayments and invest the savings into one or more people shouldn't overstreatch themselves, if they can borrow
investment properties, they build wealth. Its “all care, no more money from the bank, they can typically purchase a
responsibility”. Rentvesting delivers the perks of being a better property. A better property is, of course, a better
tenant; the main one being the notion of “all are, no investment asset, which means it should deliver a better
responsibility”, Kingsley says. Unlike owning, any issues with return over time, he says.
a rental property are ultimately the landlords responsibility
and maintenance costs comes out of their pocket, not the But what about all that money spent on rent? If Matt chose
rentvestors’. to rent with his mates in his dream location, then he would
be forking out $12,000 per year instead of buying his own
Ability to go with the flow—Renting gives people the place. But that overlooks that he will also be receiving rent—
flexibility to live in a variety of places and property types, so almost $21,000—from his new investment property. “This is
they’re able to “go with the flow” a lot more than if they important to realise, because it means he can hold a higher-
owned their own home, Kingsley says. Given the high cost of value asset and, even with the added costs to hold the
selling and then re-buying property, this option is not always investment property, Matt will be in a more solid cashflow
financially sensible for traditional investors. position than if he just bought his own, lower priced
Tax Benefits—With an investment property, its possible to home,”Kingsley says.
initially claim holding costs, plus depreciation costs each But no one wants to live in a share house forever, right?
year. In additions, some of the initial costs, such as stamp
“It’s unlikely that Matt will stay living in a share house with
duty, conveyancing and lending fees can also be claimed,
depending on the situation. his mates for 20 years and so much could have happened by
then; he might’ve met his future life partner and started a
family or he might’ve used the equity in either scenarios to
THE CONS buy another property, or he may have increased his rent, so
Loss of full capital gains tax exemptions- There are negative he could afford to rent an apartment on his own,” Kingsley
tax consequences of rentvesting. “If you own the house you says.