In this episode, we’re going through the cons of rentvesting with Louis Strange and Jayden Vecchio.
We’re going to get a bit negative and go through the cons of rentvesting.
In this episode we cover:
- Financial grants, concessions and tax reasons you’re going to miss out on
- Psychological factors
- Practical issues – maintenance and the annoying stuff
- The negatives of getting an investment property first
The lack of concessions
Firstly, you won’t get the first home owners grant (funding for your first home as a brand new purchase) if your first property purchase is an investment property.
In Queensland, you get a concession for an owner-occupied home if it’s an existing property. Plus, if it’s a brand new property under $500k, you don’t have to pay any stamp duty. If it is an investment property, you have to pay full freight. The stamp duty is higher on an investment, meaning you pay more tax and don’t get any of the concessions you would get on an owner-occupied home.
What is the Capital Gains Tax (CGT) exemption?
If you buy a house for $100k as an investment and it doubles in value (to $200k), the difference ($100k) is a capital gain. The Government will give you a 50% discount (which you pay tax on) if you’ve owned it for longer than one year.
From the above example, when you earn $100k in capital gain, you’re likely to pay about $15k – $16k in tax as a marginal tax rate. So you’ll walk away with only $85k.
Lesson: If it was your personal place of residence you wouldn’t have to pay that tax.
Own your home
- If you are renting and you want to renovate it, you can’t! If you’re making capital improvements you can get permission from the landlord but you’ve got to pay the price yourself and there’s no obligation from the landlord to chip in money.
- Air-conditioning is the same, what you see is what you get.
- Pets are the same.
Lesson: The benefit of your own place is that you can have dogs, cats – whatever you want. Owning your own home allows you freedom to do what you want, within reason.
Issues of owning an investment property – Dealing with tenants and the maintenance
- If something goes wrong, it’s up to you to fix. You, as the landlord, have to pay for it.
- If the lightbulb goes out, your tenants can get you to come around and fix it.
- If the problem is a big appliances or an issue such as plumbing, you have to pay for a repair man to fix it.
Lesson: Any unexpected maintenance issues could cost you a lot more than anticipated, or just be a pain in the neck to do.
When you spend more on a property in maintenance and rates than you actually receive in income, you can claim a tax deduction on it.
For example, if you receive $1,000 in rent but property is costing $1,500, it’s negative geared as it’s costing you an extra $500. Tax is only deductible because you’re losing money, but the downside is it’s only ever deductible at your marginal tax rates, which might not cover the overhang.
- Buying a place of residence first is good financially for the incentives.
- Not owning your own home means you can’t renovate it.
- You don’t form an emotional connection with the property.
- Dealing with tenants if you have an investment property can be a pain and the maintenance costs can set you back a lot.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.