There's nothing more frustrating than to build a dream of owning your own home, get excited when you find a property you fell in love with, only to have your finance specialist utter those heartbreaking words - 'You can't afford it!'
Many are left feeling deflated and resigned to renting for the rest of their lives.
However, many others determined to get into the property market are not accepting no for an answer and have discovered a so-called secret back-door to getting into the property market.
It's called Rentvesting.
Rentvesting is a scenario wherby you remain renting your place of residence and purchase an investment property instead.
Whilst this is not necessarily a solution for everyone, depending on your circumstances, this could be just the ticket you need to get into the property market sooner.
I'm not going to go through all the pro's and con's of rentvesting in this article. You can find plenty of articles on this topic if you deem it one worthy of further research. My intention is to introduce this concept to those who desperately want to own their home and have been turned away due to lack of finance affordability. In some cases, by literally a bees whisker! If you're at a loss as to how you could ever own your own home, this could be the answer.
Let's look at a few reasons this could be for you...
- It could get you into the market sooner.
Maybe you have a descent deposit saved up yet, your finance specialist has said you still can't afford your dream home. By re-jigging the numbers you could remain renting and purchase a lower priced property receiving healthy rent. This could make all the difference to go from a decline to a bright green approval. - Live where you want to, in the nicest suburbs.
Ok, so maybe the dream home is a bit out of your reach for now. Especially if you live in Sydney, you could be living in a beautiful home without having to pay the plus-sized mortgage that goes with it! Maybe you need to live close to the City for work and travel reasons. This enables you to be figuratively 'living beyond your means' without the price-tag. Whilst rent yields are much lower in Sydney due to prices skyrocketing year on year, by renting, you can live in a property in which to purchase would be way beyond your means. Still try to keep the costs down, you don't want to over-commit yourself. - Live and purchase in two different States.
Depending on your life-style choices, you might need to live in one State for work purposes but want to buy in another State, maybe because that's where your family are and where you want to end up in the future or visa versa. Purchase prices and rents are vastly different in each State and in different regions. This can enable you to map out the perfect plan for your current and future situations. - Chase the higher rental yields.
When buying an investment property many will tell you to buy with out emotion and look at the numbers - you may never ever live there. If you're happy living in the right suburb whilst renting, now you're not limited to where you might buy as an investor. You're property expert will be more than excited to show you where the best rental returns are happening on their stock lists. By achieving top rental income, this could push your affordability over the line and start you on your journey as a property owner. - Property investors receive tax benefits.
Now that you're an investor, you are eligible for tax benefits such as depreciation, deductible interest, investment property expense deductions on your tax return. Make sure you engage an excellent accountant (if you haven't already) so they can set you up to maximise your benefits - the difference can be thousands of dollars each year. - You may be able to still claim some expenses on your rented residence.
Your accountant can guide you through this. If you are a business owner or professional who requires a home office, you may very likely be able to claim 'home office expenses' provided you meet the criteria of a separate office or dedicated work space. This may include a portion of your rent and utilities, office expense items, purchases, depreciation and even your car space may be included. Your accountant will be able to explain the best ways to claim this governed by your situation. - Work with the situation you are in now - circumstances may change later.
Whilst there is often a debate between buying for maximum rent return versus capital growth, your current circumstances might very well favour higher rent return as a rentvestor rather than capital gains. Speak to your accountant about the capital gains which is payable on increased property value upon the sale. They can assist you to create a plan and advise where and how you can minimize this. Remember, you only pay capital gains tax when you sell the property and realise the profit. Your circumstances may change in the future and you may wish to live in this property for a period. You could be eligible for a CGT discount of up to 50% but speak to your accountant. - Avoid multiple real estate agent entry and exit costs.
By rentvesting you can conveniently eliminate the heavy costs of purchasing and selling, such as stamp duties, agent fees, legal fees etc. This is especially handy if your work requires you to be moving home a lot or if you plan to make a sea-change or two. - Start on your pathway to multiple properties.
If you buy well and either save a deposit or build equity in your purchases property, this could enable you to continue on in the near future and purchase another investment property. If you are achieving exceptional rental income whilst curbing your personal rent costs, you could afford to buy another investment property sooner than you think. - Your Rentvested properties could buy you your own home.
Wind the clock forward several years... life has been good to you, you and your partner have received pay-rises, you've saved money and gained equity in your property/s. Remember the time when you doubted you could ever afford to buy a property? Now that your circumstances have changed, you might be ready to buy your own home, maybe even your dream home depending how good life has treated you! - Rentvesting could enable you to purchase inside a SMSF.
Purchasing an investment property within a SMSF has many rules to follow and can also provide you great benefits such as avoiding CGT, assiting you with retirement planning whilst still capitalising on profiting from the property market. Make sure you not only have a great accountant but also a great financial planner to help you navigate your way through this and advise if and when it's the right time and the right circumstances for you to evolve your strategy in this direction.
BONUS: Suppose you're reading this and you are going to buy a property and you know you're going to live in it at least for a while. You're not sure how long for because at any stroke of the clock, your employer has warned that they may need you to relocate interstate or even overseas. Ask your accountant about the ''Temporary Absence Rule'.
What is the rule? If you move out of your home and rent it out, under this law, the property may still be treated as your principal place of residence. This could extend for a period of up to six years which could be very handy especially if you have to move overseas. so, if you decide to sell the property within this time frame you may be exempt from paying CGT if you profit from the sale. You are also exempt from paying capital gains on the income generated from the leasing of the property.
NOTE: If you're moving out of your home and renting it out, you're going to need somewhere else to live. You will need to elect one of the two dwellings as your principle place of residence and a tax will be applied to the sale of your non-primary property. Speak to your accountant about how this might relate to your personal circumstances.
I hope this article has been of value or got your thinking in a new direction. If you know someone who could benefit from my article, please share it with them.
Article Source: John J Maxwell
When you do buy an investment property, No one is going to care as much as you do, about your investment property. That is just a fact of life.
So why let them, with today’s technology and online property management platforms like RealRenta, which have automated everything. There is no reason why you can’t look after your own rental property and save a lot of money in the process.
