RentVesting is a popular financial growth strategy, especially among younger property buyers. House prices in Australia are rising, pushing first-time buyers out of the market. However, there is an age-old scheme that may be the solution to their financial problems.
House prices have risen at a soaring rate in recent years, with average property price increases in major cities like Sydney exceeding 400% since the 1990s.
Many would-be homeowners today believe their dream home is out of reach, and an increasing number of Australians are considering other ways to help them climb the property ladder.
Rentvesting Strategy— Renting property, or buying an investment property within your budget and renting your ideal home, is a technique that has been around for a long time, but in the post-COV environment, it has become more popular.
For Australian Millennials, the traditional approach to house ownership was instilled in us from an early age— owning a home was simply ‘what you did’ in our parents’ generation.
While having your own property and being able to paint a feature wall in your favourite shade of tangerine is tempting, many people are questioning if the half-century-old approach of purchasing a home and coping with a huge debt is actually a sensible move.
There are a few things you should know before answering that question.
Rent Isn’t a Waste of Money
One popular money myth is that when you pay rent, you’re simply paying someone else’s mortgage or wasting money. This is only partially correct; especially when you take potential rentvesting tax benefits into account.
Yes, your rent payments will certainly be utilised to cover your landlord’s mortgage payments. However, because the average rent is far less than the average mortgage and other expenditures on the same property, the alternative to owning is not simply renting the same home, but rather renting and having more savings.
Also, you nearly always ‘tie up’ financial savings for your property deposit when you buy a house. This implies that if you decide not to buy your current house, you will have more money to invest in it.
The implication of the above is that while deciding whether to rent or purchase, you’re actually deciding between: option 1 – renting and having greater regular savings and more cash savings to invest in increasing your wealth, vs. option 2 – buying a property with your savings and a larger portion of your monthly income.
Renting has Financial Advantages
Renting the house you want to live in, for example, may allow you to put your money towards a different investment property, maybe one with a greater value that will increase quicker since it is more costly. You still have a roof over your head in this situation, but your investments are rising at a faster rate.
There are a lot of moving elements here, so you’ll need to do some math. (use a rentvesting calculator.) However, because real estate is such a huge investment, having the right plan in place will almost certainly have a significant impact on how rapidly you accumulate wealth over time.
The Distinction Between Renting and Buying
Mortgage interest and property fees such as strata are not tax-deductible in Australia under existing tax regulations, although they are on investment properties. This implies that the after-tax cost of buying the identical property as a primary residence, as opposed to an investment property, will be different.
Your taxable income, marginal tax rate, current interest rates, your mortgage, and other continuing property expenditures all influence whether the after-tax cost of your property acquisition is positive or negative. However, you should be aware that there is always a distinction to be made.
Your House isn’t a Sound Investment
Another widely held assumption is that having a high-value property is advantageous since it indicates that you have a significant asset behind you. While your house is legally a financial asset, if you plan to live in it forever, it isn’t actually an asset that will provide you with any meaningful financial advantage.
This means that the higher your home’s worth, the more of your money is essentially “trapped” in an item that doesn’t contribute to your actual wealth.
One of the most important elements that create genuine wealth, in my opinion, is achieving the appropriate balance between your overall wealth and the amount of capital locked up in your home. If you get the balance incorrect, you’ll wind up like the nobility of the United Kingdom, who live in castles they can’t afford to keep and don’t have enough money to live comfortably.
Obviously, this is an extreme scenario, but it’s worth remembering in light of housing prices in Australia’s CBD regions.
Rent Vesting— Stepping Stones to Your Dream Home
Keep in mind that if you decide to rent today, it does not have to be a permanent decision. If the math adds up and you’re okay with renting for a while, you can use your extra cash to build assets and make it easier to buy your dream home later.
If your ultimate objective of purchasing a $1.5 million house is now out of reach, buying an investment property for $750k will put you halfway towards your dream home’s overall worth. Then, in a few years, you should be close to being able to sell both homes and purchasing the home you genuinely want by purchasing another $750k investment property.
Although there are other things to consider, such as taxes and the costs of purchasing and selling a home, I’ve seen this method work successfully for a lot of people in the past.
The alternate tactic of staying out of the real estate market while prices increase has historically been shown to be ineffective.
Figuring Out What Is Best For You
There are many things to consider when determining if renting is better than purchasing a home. I don’t believe in the widespread assumption that there is a single solution that works for everyone. The correct response is entirely up to you. Rent vesting may just be a great option.
It depends on your current financial condition, the type of property you’re considering purchasing, and how your situation will evolve over time. A home purchase is a long-term investment, so don’t make the mistake of thinking short-term.
Purchasing a home is an emotional decision, and your emotions are crucial. However, they are not the most significant factor. Too many times, I’ve seen individuals make property decisions based only on how it “feels” to them, rather than digging deep enough into the data, only to come to regret it later.
The key to making the greatest property purchasing decisions for you is to think about your emotions as well as the figures. You should sketch out your present financial situation, including your assets and debt, as well as your income and spending, and then consider how these will develop over time.
Consider any major life changes, such as raising a family, starting a company, daycare and education expenditures, prolonged travel, and so on. This is what I refer to as your “lifestyle baseline.” Once you’ve laid the groundwork, you can start thinking about your home purchase, weighing the pros and cons of renting versus buying, and buying as an owner-occupier.
Examine your figures and consider the impact on your day-to-day operations over the next several years, as well as your asset position in 10 to 20 years. There will be a monetary difference between the two situations, but there will also be an emotional difference, as previously stated.
You must consider what is most essential to you and find a balance that works for you.
If you strike the appropriate mix, you’ll end up with a home that provides you with both the financial and personal rewards you desire. This method also helps you to detect and manage risk, as well as ensures that your home acquisition is compatible with the lifestyle you choose now and in the future.
This can be tough to accomplish on your own, so don’t be hesitant to get professional assistance – it will more than pay for itself.
Purchasing real estate is a big choice that will affect your finances for years, if not decades. The emotions and peace of mind that come with renting vs. purchasing a home are also important considerations. The trick is to maintain a sense of balance.
There are a lot of myths, misunderstandings, and stigmas around purchasing property out there – don’t fall for them. Take the time to plan out the best approach for you, and you’ll reap the rewards today and in the future.
Are you planning to stay out of the real estate market? If you’d like to know more about rent-vesting, check out these blog posts outlining a strategic approach to obtain the benefits of rentvesting.