It’s highly likely that you’ve heard about the concept of rent-vesting, but do you know what it actually takes to succeed with this strategy?
As an investing idea, this one is as old as the hills - some property investors have been using this strategy for years (if not decades) to get ahead in the property game.
But the concept of rentvesting has really taken off as the ‘big new trend’ in investing in the last few years as property values have risen strongly.
In a nutshell, it’s the concept of deciding to rent where you live (but can’t afford to buy) and buying an investment property where you can afford one.
In many cases, where you actually desire to live may not be a great choice for a long-term investment property.
It may be the case that your capital is better put to use in a market where there is better long term growth prospects, while you rent where you want (or need) to live.
The whole idea behind rent-vesting is to help everyday people leverage their money more efficiently, rather than deploying all of their dollars into their own home because ‘that’s the way we do it’.
Let’s say you live (or want to live) in a desirable inner city suburb of one of our major capital cities.
Even a smaller apartment is going to set you back a pretty penny in Sydney and Melbourne, while they’re a little more affordable in other capital cities.
For the sake of this example, we’ll assume a purchase price of $650,000 with a 10% deposit.
On a current principal and interest mortgage at 4%, that will cost you around $563 per week in mortgage repayments.
Factor in council rates, water bills, and maintenance and repair expenses, and you could be looking at a weekly obligation of at least $700 per week.
And this is before you hand over a cent for insurance, or utilities like electricity and internet access!
As a rent-vestor, you wouldn’t buy your own place to live in your desirable inner-city location.
You wouldn’t take out a 90% mortgage on a $650,000 that is unable to be deducted at tax time.
Instead, you would research the market extensively until you isolate a suburb that is ripe for capital growth – and invest there instead.
That suburb may be in a local neighbourhood, or it may be on the other side of the country.
The location doesn’t matter as much as the credentials: how has it performed in the past and what’s it likely to do in the future? What is local infrastructure like? The area in demand with tenants and are there any oversupply risks?
You can do all of this due diligence on your own, or you can employ an experienced buyer’s agent to do it on your behalf; either way, your goal is to find a quality property investment that is poised to grow in value and deliver long-term wealth.
The first benefit of rent-vesting is the ability to leverage all of your property expenses as tax deductions.
Let’s take our example above with the $650,000.
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In this hypothetical example, if the property was listed on the rental market, all of the ownership expenses become tax deductible…
- The mortgage interest of around $450 per week…
- The council rates of $60 per week…
- The strata fees of circa $80 per week…
- The property insurance, the repairs, the maintenance – all of it.
All tax deductible.
Assuming you were to receive a rental income of $450 ($500 minus property management fees), and factoring in the landlord goldmine that is depreciation, and this homeowner could be in a position to deduct a five-figure sum of property ‘losses’ (remember, deprecation is an on-paper loss) every year against their income tax.
So far so good, right?
When you choose to rent-vest, you may save money because you’ll be paying less rent.
Depending on the suburb you want to live in, you’ll likely end up paying less in weekly rental payments than you’ll be forking out in combined mortgage, rates and insurance fees every week.
Or, like an investor I know called Ashley, you may be successful in upgrading your lifestyle.
Ashley lived on the Gold Coast and snagged a renovated, waterfront four-bedroom home for $850 per week in rent. When he checked its background, he discovered it had been recently purchased by an interstate landlord for $1.15m!
Ashley was not in the position to spend $1.15m on a house.
But he could comfortably afford to spend $850 in rent, especially since he was no longer spending a huge chunk of his income on a bulky owner-occupier mortgage.
His previous home was now rented out and, as per our example above, he was leveraging the property’s income-producing status to enjoy a tax return worth several thousand dollars per year.
At face value, rent-venting is a fantastic strategy for getting ahead in the property game.
Of course there are other considerations we haven’t touched on – such as the psychology of renting, incentives such as the first homeowners grant, and the difference between feeling ‘settled’ in your own home versus not being able to put pictures on the wall in a rental.
Rent-vesting won't be the ideal strategy for every investor.
But if you’re just starting out or if you are prepared to think outside the box and do things differently to get ahead, then becoming both a landlord and a renter may be the most positive path forward.
Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.
Why not get the independent team of property strategists and buyers' agents at Metropole to help level the playing field for you?
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