Rentvesting: The new great Australian dream?

Some years back I wrote an article that picked up a lot of attention around why some people were opting to rent and invest elsewhere rather than buy their own home. With Sydney prices skyrocketing, the issue seems as important today as it did back then, so I thought I would revamp the original article and add some new points to help show things from a different angle.

While many people think rent money is dead money, the concept of handing over your pay packet to the landlord each week may be a better financial move than you may think.

By itself, paying rent can be a futile exercise if you’re looking to get ahead; however, disregarding renting as an effective investment strategy can be like throwing the baby out with the bathwater.

Consider these two scenarios:

On the one hand you have chosen to invest in your own home, paying down the mortgage from your own pocket.

On the other hand, you could choose to stay renting, purchase an investment property elsewhere and use the rent collected from your tenants to pay the mortgage on the investment property.

In each scenario you have invested in a property, and in each scenario you are paying down a mortgage. The difference lies in where the money is coming from to pay the mortgage.

While it’s true that in the second scenario you would be paying money to a landlord, you now have additional income to consider that the first scenario didn’t – rent from your tenant.

There are a number of factors to consider if you’re looking to pursue this scenario, however. Let’s take a look at some of them here:

Pros

Live where you want: If you’re renting then you have the major benefit of being able to choose where you want to live and for how long.

My wife and I did exactly this. We had been living in Balmain in Sydney for a number of years and wanted to experience a lifestyle closer to the ocean for a while, so we picked up and moved to Tamarama. Best thing we ever did. But it won’t be forever, and as we grow our family we’ll probably have to get a bigger place anyway.

Whenever I meet new investors who are considering starting a family, I recommend that they rent and invest elsewhere as well. It’s not as permanent a situation as buying, but see how long it takes before you want to trade up for a larger space or want to relocate for the schools and you soon realise that “settling down” may be semi-permanent at best – at least until the growing pains slow.

Live in a better home: Many people live in the home that they have chosen because that’s the limit of the mortgage they could afford to pay. Even with rates as low as they are today, once the value of the property you’re looking to live in rises above $1 million, the declining rental yields start to swing in favour of renting and investing in smaller, higher-yielding properties.

You’re also not required to pay land tax, strata fees or general upkeep of the building in order to rent a more expensive place, and you can be sure the costs would be higher if you did decide to.

Ability to adjust your budget: Mortgage repayments can be one of the biggest financial strains on a household. While you can slowly pay the balance down over many years, the first 10 years are often a struggle.

If you’re renting though, you can adjust your budget accordingly; or if your financial circumstances change, you then have the ability to move down (or up) to a property that’s more suitable for you financially.

Job promotion? Great. Upgrade to a better neighbourhood. Saving for a trip to Europe? No problem, simply downgrade for a year to a smaller space.

Flexibility is the key here, and if you’re open to change (and maybe a bit of an adventure) then renting is a no-brainer.

Tax deductions galore: Very simply, repayments on a principal place of residence (PPOR) cannot be deducted. On the other hand, interest repayments from an investment property are fully tax deductible, so you can end up making some great savings when tax time comes.

With prices as they are, many people are taking interest-only payments on their homes to reduce mortgage stress, so the benefit of paying off the principal is lost anyway. You might as well opt for a fully deductible situation if this is the case.

Greater profit potential: You love the suburb, but would you invest there? Most people wouldn't know the growth prospects of an area they’re hoping to live in and most wouldn't care.

Whether you know it or not though, your money is in the market, so you might as well make the most of it. While your choice suburb may be a great place to live, your money may be better spent on a property in a growing area that is more likely to build your wealth faster than the area you've identified as ideal for your own lifestyle.

Say goodbye to entry and exit costs: Selling your own home and then purchasing another to live in will cost you about eight per cent of the asset's value (stamp duty and legals plus agent selling costs). This is how much your property portfolio loses every time you decide to pick up and move. Not so with renting, where the major cost is in furniture removal and delivery.

Renting isn't always rosy, of course, and there can be disadvantages that balance up the positives:

Cons

It’s always temporary: Like it or not, the home you live in does not belong to you. While this may not bother those who are more pragmatic about things, it may be much harder to bear for others who have more of an emotional connection to their living space.

Limited changes: While I have found some great wall-hanging systems to put our personal art collection up on the walls without too much damage, I know friends who shudder at the thought of not being able to put a nail in the wall (or paint the wall) where they live. Personally I’m not that interested in changing things around, but if that’s your thing, or you have a teenager who wants to paint their room black, then renting could prove a difficult concept to come to terms with.

Potentially less choice: This is particularly the case for more premium-style properties where owners are much more prevalent than renters. In this situation your dream home may simply not be available to rent. Mind you, unless you’re in a buyer's market, finding a dream home can be difficult at the best of times!

Packing: Urgh! – Nothing ruins a perfectly good weekend more than breaking out those packing boxes and dismantling everything you've spent years arranging only to have to unpack it again in a foreign place. While this can be a burden, it does provide a good opportunity to do a bit of house cleaning though. You can also opt for a two-year rental term if the owners agree to it, with yearly price adjustments as necessary.

If you want to do some quick calculations for yourself, one of the better calculators I’ve come across for the Australian market is from Westpac, which you can get here: http://bit.ly/1OncZqo

This calculator will tell you how long it takes until you’re 'better off' buying. This is a great tool but it doesn’t take a genius to realise that if you can afford to buy into the market, then it’s only a matter of time before you’re at an advantage. Rent money really is dead money.

The real advantages listed above come from renting AND investing. The key being to have your money in the market at all times, then you can really maximise the benefits of this strategy that not only creates a more affordable and flexible lifestyle but can also supercharge your wealth.

Read more: 

The overlooked market driver 

How to buy more properties 

What causes big investors to lose it all? 

The top 5 unrealistic expectations that bite investors

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