In this podcast, Jayden Vecchio and Louis Strange will be introducing you to rentvesting!
What is rentvesting?
Rentvesting is the concept of living where you want to live, getting the lifestyle you want while renting, but investing the remainder. In Sydney specifically, it’s very relevant because the average property is over $1 million, so to get an affordable mortgage with a 20% deposit on that, along with making repayments, is very difficult for the average Australian. To buy a property worth $1 million, the 20% deposit would be $200,000, meaning the loan amount is $800,000. That equates to around $4000 a month in repayments.
If you could rent a great place for less than $4,000 a month, you could invest the shortfall. For example, if you rent a property for $1,000-$2,000 a month, you could then invest the remaining $2000-$3000.
It’s about being a bit smarter with your money and not having all of your eggs in one basket, driving up your income.
Why would you not want to buy a home?
The major thing is that a lot of clients come in and their major goal is travel and lifestyle. If you go ahead and get yourself into a lot of debt, then you have a massive cloud hanging over your head and the bank asks you for that money every month.
- Brisbane property costs roughly 6 times the average household income.
- Sydney property is around 12.2 times the average household income.
Instead, you could rent somewhere and not pay as much and live the life you want to live.
If you buy a place in Sydney you’ll use 50-60% of your income to pay it off. Elsewhere, it’s probably around 30% of your income. It’s a big chunk of your everyday income that you could be spending on generating wealth.
Tax benefits / Extra cash flow
There are tax benefits and gearing benefits that come with investment.
For every dollar you invest, you assume it’s in quality assets. If you’re investing personal cash into a portfolio of shares, or you’ve got a decent deposit and can buy a home elsewhere and rent that, then you can negatively gear that (we will cover that in another episode as it’s not always good).
As far as assets go, fully franked Australian shares are a great investment. Franking credits – a share is ownership in a company and you’re entitled to a profit. The government at tax time gives you a rebate of these franking credits. If your only income is shares, you can earn ~ $88,000 in shares before you start paying any tax!
Advantage of rentvesting is that you might be renting but you still have an investment portfolio.
Is rent money dead money?
It comes down to a break even. You could say that interest is dead money, and rent kind of is too. But what’s cheaper in the long term? If you are renting and it’s costing you $6,000 but you could buy an equivalent place that will only cosy you $4,000 a month it’s better to buy.
But people always forget about the interest costs – body corporate and management fees. Maintenance fees and management rights might be another $700 a month plus rates and water and insurance. So instead of $4,000 it could be $7,000.
The cost of your time and running a car might not be worth buying in a cheaper area if your work and lifestyle resides around another area.
Pro – Live close to work, city and can’t afford that. Rentvesting is great.
Con – You can’t renovate a rented property.
Rentvesting is renting where you want to live and buying another investment or investing surplus cash to build your wealth at the same time. It gives you more flexibility and lifestyle, saves you some time and helps you live the life you want. It also free’s up your cash flow to invest in other things instead of just paying down a mortgage.
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.