Like anything you do in the investing space knowing which strategy to apply and when to apply it are powerful wealth creation tools. Rentvesting is becoming ever more popular strategy as more and more people have been priced out of their preferred markets over recent years.
In essence, the strategy of Rentvesting is investing into an investment property first (in either area you can afford or where the investment fundamentals are better) while continuing to rent in the area you want (or can afford) to live in for lifestyle purposes.
Moreover, a 2017 poll by non-bank lender State Custodians Home Loans, which surveyed over 1000 people across the country – found that almost 3 in 4 people (74%) think Rentvesting is a good strategy for those struggling to enter the property market. Rentvestors make up about 8% of property buyers according to research prepared by Ipsos. Rentvesting is one that is particularly being adopted by Millennial’s (those born between 1981-1996 making them between 22-37 years old in 2018). A Westpac study found that Rentvestors are typically young males, most likely single, with a bachelor degree level of education. They are earning relatively high incomes, and they don’t feel the same way the previous generation did about owning their own home. Besides often being priced out of their preferred markets they also often see property as an investment and a way to accumulate wealth, rather than a place to settle down and raise a family.
5 Questions You Should Ask To Help Decide If Rentvesting Is Right For You
- Do You Have A Property Plan?
- What Size Deposit Do You Have?
- What Is Your Maximum Borrowing Capacity (M.B.C)?
- Do You Know Where You Will Be in 1 Year, 5 Years, and even 20 Years from now?
- How Much Tax Do You Want To Pay (and when do you want to pay it)?
They say in life there is nothing as certain as death and taxes. However, the taxation treatment of a PPR and an investment property (IP) are very different. On the one hand, your PPR is considered a non-tax deductible form of debt. That means that you will not be able to take advantage of any of the depreciation or tax-benefits that may be able to be applied to an IP. For example, if you are on a good income and your IP (after all of your cash, and non-cash deductions are factored in) might be negatively geared meaning you may be able to legally reduce the amount of tax you need to pay each year under current tax laws.
On the other hand, if you are likely to be trading properties regularly, you might find it more cost effective to buy a PPR as a PPR does not attract any Capital Gains Tax (CGT). Alternatively, at least not until the financial year of sale if we are talking about the CGT calculated on the sale of an IP if held for greater than 12 months.
Ultimately there are usually two different decisions that need to make when assessing whether Rentvesting will be right for you. The first are financial decisions based around your property plan and involving often complex mathematical calculations taking into account things like the size of your savings, income levels, maximum borrowing capacity, and taxation benefits.
The other decisions are more emotional decisions and lifestyle driven such as where you want to live. This may include the type of access to schools, hospitals, work and transport that are important to you and whether you can handle the uncertainty of living in rental accommodation vs the convenience of living in your own home and being able to paint the walls or add on an extension onto the back of the house for example as your family grows.
Do you need help navigating all of these decisions then why not call us at The Property Mentors for a no-obligation consultation to discuss all of your options?