Rentvesting in Sydney

 

rentvesting
rentvesting

 

Rentvesting summary of the following article.
This word in a nutshell is a neologism or a new word where other words are combined.
In essence, it is where a Sydney property investor realises they have little chance of obtaining a mortgage in a location they desire, so they rent in that same location with a smaller capital outlay.

And they flip the old style of investing/rentvesting models on their head, and now invest in an area outside of Sydney, for higher capital returns and use all the tax advantages the Australian government allows us, to reduce their tax.

They do this for a number of years until they have a decent portfolio and then they sell some of their earlier properties for a profit and now purchase their dream home in Sydney.

rentvesting calculator
rentvesting calculator

Rentvesting is the new trendy term, mainly in the Australia property market, which is built around understanding what consumers budgets are for long term capital growth.
Lets face it, not a lot of first time investors now days have the funds to invest in property especially in Sydney, when starting out with a desire to increase their ownership and long term wealth.

Land is seen as a decent claim or means for a safer chance at long term abundance than a myriad of other forms of assets over a long period of time.
The ace in the hole for using land and buildings as a form of nest egg to increase our long term wealth of any form of substance is its stability.

Compared to other commodities or goods, nothing comes close for long term increases in resource “enrichment” than a tract of land with a new house on it.

Is it cheaper to venture into using financing as an Investment into a house title in Sydney than merely renting ?

rentvesting pros and cons
rentvesting pros and cons

Why on earth would anyone choose to even consider renting an asset which is essentially owned by someone else, over the expenditure of purchasing a property ?
Unless one has received some form of large endowment its damn hard to place your smart money into property in Sydney right now.

Especially when overseas vested interests have pushed up prices.
As property prices continue to rise steadily, we need an ace up sleeve of sorts to counter this.
And rentvesting might be it !

It becoming increasingly difficult for first home buyers without decent funds, or holdings, to finally to break into the market, which invites some speculation on whether you should consider renting a house and if it is more affordable at least in the short term, than purchasing a property for a home.

The 2014 white paper by the Reserve Bank of Australia showed that there’s been very little difference between renters in the long-term economic riches of buyers since about 1954.

The paper paradoxically claimed that despite rising rents and a constant media obsession, in regards to local property prices and trends, renters and buyers can often end up very similar circumstances.

If a consumer was thinking of increasing their long term equity position by rentvesting, renting in an area that you like to live in, and invest in an area with high returns, then on paper, there is a good argument that your actual capital outlay, should mean you will come out in a better financial position than if you buy your own home straight away.

We normally think of a house as something we invest in, and a home is somewhere we live.

rentvesting meaning
rentvesting meaning

But does this mean it is worth a financial decision to rent or purchase realty in Sydney and follow the rentvesting ideals ?
We have to knuckle down and look at the hard data.

 

Owning the proverbial plot of land and calling it a home was at the very basis of the Great Australian Dream.
Due to the effects of increasing property prices in good old Sydney, the dream of many is going pear shaped.
How is it possible without an inheritance for first home buyers of any substance to buy when the median price is around one million dollars ?

Hence the investment term rentvesting appeared in our language.
The premise is relatively simple.
You arrange finance and a loan for an investment property outside of Sydney, and spend your money on renting in an area you cannot afford to purchase in at the moment.
And we hope your investment stake will advance steadily in value and outstrip inflation and of course your costs.

rentvesting tax
rentvesting tax

For example, the rentinvesting consumer was ready to take the plunge and purchase three bedroom house in Sydney’s south west, but the sale prices in the area mean these homes are out of your territory.

A rentvesting solution would be to rent where you decided to live, and then purchase a property in a suburb where prices are much more affordable.
Whilst always making sure something was put aside in case of any problems or shortfalls in your resources.

You always need a reserve stash as back up for a rainy day.

The estate you buy will then of course be rented out to help cover your own rental expenses and can if desired in the future be sold for a capital gain.

This wealth strategy, as a high probability road to riches and long term wealth allows one to have the lifestyle you want now, while at the same time building a property portfolio for the future.

Yes it appears counter intuitive but would you rather an investment in gold as your principle means of creating money ?
We did not think so.

Lets look at the revenue and the security of this methodology to build up a cache of assets and belongings.

Our mythical dream home leads to mortgage repayments of $4K a month.
But if you rent a home in the same type of area, rental payments could be $2.2K a month, leaving you with $1,800 per month to flutter at the races(joke) or to invest.

Many people have a hunch that their road to prosperity will not be thriving by renting.
The profusion of truisms like “rent money is dead money” can be a mental road block for many people today.

At the end of the day rentvesting is just a ways and means of long term prosperity using property.

Let us now check out the advantages and disadvantages of this mindset.

We are now entering the property market sooner than we normally would have following conventional advise.
And are now a fully fledged rentvesting practitioner.

And most importantly, since we are investing outside of Sydney, we are entering the market with a lower deposit, as opposed to waiting several more years whilst saving to buy that special dream home we have had our eye on.
Live the lifestyle you want now.
Thats the goal of rentvesting !

If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage.

We are now literally building our assets and wealth.
Rentvesting allows us to start building your investment property portfolio, which can be used to generate riches for you and your family in the future.

At the same time we are also saving for our dream home !
Owning an investment property is a means which now helps us to save to buy our dream home in Sydney in the future.
And we also have a plethora of choices whilst renting, as you can easily upgrade or downgrade to a different home if your circumstances change, for example if you lose your job or get a high-paying promotion(hell of a problem right ) with are no stamp duty expenses to sap the kitty or legal costs to worry about our nest egg.

 

If you’re not yet ready to put down permanent roots in a particular area, rentvesting gives you the freedom to move around and even travel the world if you so wished.

And something every business loves to manipulate(lower), their taxes, is a great possibility in a legal sense of course.

You can claim interest payments and all your expenses and your investment property loan as a tax deduction.

Choose where to invest given your initial budget.

In essence rentvesting allows you to be more efficient when it comes to choosing an investment property location.

The possible negatives to rentvesting would be the following.
For one, the mindset of finances or wherewithal is not too normally go through an acquisition of property first.
Many people new to wealth creation and even people with a background in financing find it difficult to grasp.

Then there is the whole notion of using a part of your kitty/resources/fortune etc for purchasing an investment first.

Purchasing their investment property before purchasing their own home can and does it seems, appear counter-intuitive to many people.

 

Another constant refrain is ‘But it is dead money’ which can put people off as well.

And even if by chance you love your rental property you never really own it.
Just make sure you limit your emotional ‘attachment’ on it and you should be fine.
As an added thought, we should keep the same lack of emotional attachment mindset when we purchase the investment property.

You can also have problems with landlords as well as being told your lease agreement is now over.

The house your renting is not yours to fiddle around with though friends have manage to get a lowering of their rental by upgrading paints jobs over the years.

Group1 March 2014 quarter house price analysis found the median house price in Sydney was $950K
This implies we would need a deposit but because we have invested in a cheaper capital city we have saved a 20% deposit of $199,000 — meaning you’ll need to take out a home loan of $796,000.
If you borrow that amount at an interest rate of 4.50% p.a. on a 25-year loan, your monthly repayment amount would be $4,424.43. The total cost over the life of the loan would be $1,327,327.96.
Whilst the same quarter, the median unit price was around $645K and with a 20% deposit saved you would need to borrow $524,000.
We are playing with an interest rate of 4.50% p.a. on a 25-year loan, your monthly repayment amount would be $2,912.56 and the total cost over the life of the loan would be $870K

 

A strong 2017 March quarter shows us a median weekly rent for houses in Sydney is $540, while units cost $510 a week to rent.

We now assume a house in Sydney costs $2,130 per month to rent, that’s more than $2,300 less than the monthly mortgage repayment on the average house in Sydney we were suing in a model analysis.

If you rent the unit for $2K a month, we are still $800 less than the median monthly mortgage repayments.

House
Unit
Median monthly mortgage repayment
$4,424.43
$2,912.56
Median monthly rent
$2,120
$2,080
Money left over to invest (per month)
$2,304.43
$832.56

The juicy and obvious rentvesting point is, we can now Invest the difference we are saving !
Rentvesting wins big time !
But first we have to compare those potential investment returns with the capital gains you might enjoy on your property in the future.

In the 10 years to December 2015, Sydney property prices increased by an average of 6% each year.
Now we have to assume for this exercise that the same increases are to occur across the next say decade, in 10 years’ time your $990K house could be worth $1,781,893 (a capital gain of $786,893) and your $655,000 unit could have risen in value to $1,173,005 (a capital gain of $529K

 

Now following along with our previous mental exercises we now have more than $2,300 available to spend on our mortgage each month, and can possibly invest in a $530K investment property and assume we have the deposit saved of course.

And , we are now able to choose an investment property in the best location (Brisbane area is a hot tip)prime location and enjoy larger than average capital gains.
Now our $520K investment is valued at over one million.

So should the advise be buy now and rent ?
Like many things in life itself, it all depends on many variables.
We personally know several people building their property portfolios whilst they still rent and they are all relatively young.

Everything will depend on your personal circumstances.

Always seek out expert advise from companies like ourselves.

rentvesting tax benefits
rentvesting tax benefits