With housing affordability an ongoing barrier to home ownership in many Australian postcodes, 2016 could be the perfect year to recommend rentvesting as an option for your customers.
‘Rentvesting’ is the practice of renting in a desirable area while buying in a more affordable one, and is a great long-term wealth creation strategy with several merits for both seasoned property investors and market newcomers alike.
As an investment plan, and if implemented correctly, rentvesting offers strong financial returns and works well in the vast majority of market conditions. In many cases, renting out a number of low value properties extends better protection during recessions and market downturns than investing all wealth in a single, high value property.
Furthermore, with recent data suggesting that rental rates may fall over the coming months, rentvesting is becoming extremely appealing to consumers.
Rent money doesn’t have to be dead money
For first home buyers and new market entrants especially, property prices will likely increase faster than the ability to save, and it makes sense to enter the market somewhere affordable while renting elsewhere. It’s formed an integral part of my personal property investment strategy for many years because the financial and lifestyle benefits to be gained through rentvesting are too great to be overlooked.
Another reason why rentvesting is so appealing is that it can often provide buyers with better financial returns than living in the property they own.
For example, instead of paying to live in a $2 million home, it would make more sense to purchase two $1 million properties and rent them out. This would roughly return $800 or $900 dollars a week – a total of $1,800 in monthly income. That $1,800 a week rental income could then be used to rent a $3-4 million property for the buyer to live in themselves.
There is also a common belief among consumers that rent money is dead money and this is true only to some extent. If the equivalent amount is invested into property, shares, or business, this could actually provide a greater profit than investing in a single property.
As an investment strategy, rentvesting is not limited to property – it can also be used as a strategy for other investments, which is something that should be relayed to your clients. The same mentality can be used to buy assets like cars and boats. Through implementing a rentvesting strategy, I own a Lamborghini that has appreciated by $100k rather than depreciated $100k. Likewise, I have a share in a $1.5 million motor yacht that costs me $22k instead of $345k per year. There is a strong misperception among consumers that rent money is dead money, but this is only true if the equivalent funds are not reinvested elsewhere.
Focus on the figures
It’s important that the correct advice is given to those considering rentvesting to build a property portfolio. For rentvesting to be effective, it is essential to examine the rental returns and capital growth predictions for a median priced typical investment property, and then compare it with the relative rent returns and capital growth of more expensive property. It will work if there is a favorable difference.
As with any investment, it’s also important to reiterate that rentvesters need to concentrate on the numbers and remove fixed mindsets or emotions associated with renting from purchase decisions.
While investments aren’t free of capital gains tax, if a property is never sold, the tax never has to be paid. Forget about the debate, renting and having investments instead of a home affords the negative gearing benefit of everyday ownership, and that’s what helps the everyday Australian.
A change in attitude
In Australia, there is a misperception that renting is for those that can’t afford to buy a property. This is unlike other countries, such as Germany and many other European countries where only 50% of the population own their homes.
Few high income earners want to go into their office and admit they rent, which is understandable, however the stigma associated with renting is a small price to pay to rent at a quarter of the price others are paying to live in the same area.
For rentvesting to work, tolerance for change is a necessity. A fear of being unable to rent a property for a long period of time is a factor that holds many consumers back from renting. In most cases though, landlords are unlikely to evict good tenants and even if this does happen, it doesn’t necessarily have to be a negative – it can be an opportunity to upgrade to a better property.
At the end of the day, the beauty about rentvesting is that it doesn’t have to be forever. It offers a better lifestyle, while setting up a profitable future.