What is Rentvesting?
Updated: Apr 14, 2020
Rent-vesting (for lack of a better term) -
Is a concept where you rent in your chosen suburb and invest in other suburbs or states where the numbers stack up.
“Buying the house down the road from mum and dad without doing any research could mean that you have just tied up your money in a market that is mid-cycle, which means growth will be stagnant for years.”
What is the logic behind this concept?
The disparity in household cash flow between renting and owning can equate to thousands of dollars per year and that money can work harder when put into investments that are bought strategically, as opposed to a home bought purely on emotion.
For example, $595 rent per week equals $30,940 per year and this will get you a 1 bedroom unit in Bondi, which is a beautiful beach-side suburb in Sydney. Purchasing a similar property will cost around $840,000. Based on a 20% deposit, 5% interest rate, and once you consider rates, Strata, any repairs and maintenance, it could cost you upwards of $45,000 per year to hold. The extra $14,060 per year (plus initial deposit) could be used to control investment properties elsewhere that are acquired at the right time in that particular markets growth cycle.
Buying the house down the road from mum and dad without doing any research could mean that you have just tied up your money in a market that is mid-cycle, which means growth will be stagnant for years.
In most cases, the property that is convenient for you to live in won't actually be the best property to invest your money in. People are far less likely to spend the time researching suburb data when they think they know everything about that area already, but what are the chances that the suburb you have chosen, is the best investment suburb aligned to your personal circumstances, out of the 15,000+ suburbs around Australia?
As a result, you could be missing out on 2% or more of compounding annual growth and the dollar amount associated with that percentage will be in the hundreds of thousands over 10 - 20 years
The great Australian dream is to own your own home outright. Right?
When it comes time to retire and finally reap the rewards of decades in the workforce, you are going to need some kind of income stream to sustain you, and unfortunately we cannot trade our front door for a week or two worth of groceries.
Many baby boomers are now faced with the issue where a fully paid off home has become somewhat of a burden in the later stages of life.
If you own your home worth $1,000,000 and you want to downsize into a $600,000 property, you are only left with $400,000 before taking into account selling costs of the existing house and acquisition costs of the new house and your pension eligibility is most likely going to be impacted (let's face it, who even knows what will happen to the pension in the years to come).
Rent-vesting flips the Australian dream on its head, but in my view produces a greater result. A property portfolio worth $2,500,000 returning 4% will create $100,000 per year in passive income for the rest of your life and can be passed on to the next generation.
Accumulating $2.5 million worth of property over 10-20 years is far more likely to occur if each property is bought strategically as part of a plan for retirement.
So when do you end up buying your own home?
A meticulously planned investment strategy can most certainly make provisions for the purchase of a principal place of residence at some stage throughout the journey.
Before buying any property, it is important that you have mapped out the role this property will play in order to avoid the costly exercise of reversing out of that decision later.
With this in mind, ask yourself the following questions.
Have I built my portfolio up to a place that will sustain me through retirement? If not, will this purchase put a handbrake on my portfolio?
How is this property going to impact my monthly cash flow?
Am I certain that I will be happy to live in this suburb and this property for the long term?
When we are looking for a home to live in, two major considerations include, proximity to work and amenities, so that our daily commute is easy and we have fast access to everything we need. Once you are financially free, the importance of being close to work is no longer relevant and the need to access amenities quickly diminishes because you have more time on your hands. This will seriously impact your opinion of what a perfect home looks like and begs the question - Does it make sense to buy a home now, or should I wait until I’m financially free?
What about first home buyer incentives?
“Firsty’s” are going to be faced with a serious mental barrier when considering rent-vesting due to the government incentives, that most states provide, if you satisfy the eligibility requirements.
I remember buying my first ever property in Brisbane and was SO caught up in the Stamp Duty “savings” I could make if I buy an owner occupier home. Little did I know that there was a substantial opportunity cost associated with that decision.
If I had spent the same money on a similar property in Sydney at that point in time, I would have doubled my money by now.
This is where timing becomes so important, and it is very hard to time the market when looking for a principal place of residence.
Sometimes first home buyers go for the hybrid property where they purchase to live in with a view to convert into an investment property in the future.
Trying to kill two birds with one stone can also be a trap because your decision to buy a certain property is influenced by the emotional overlay you subconsciously place on it.
• Flip the great Australian dream on its head.
• Rent-Vesting prioritises the accumulation of income producing assets and achieving financial freedom.
• The disparity in cashflow between buying your own home versus renting and investing
elsewhere can be significant.
• Make your money work harder for you by putting it into sensible investments that aren’t based on emotion.
• The perfect home today will look different to the perfect home in 15 years when you are
financially independent and time rich.