June 21, 2017@3.23
Renvesting
Many people would love to be able to afford to buy in a specific location but at this stage in their lives, they just cannot afford it.
So they just go along with the standard method which is to try and buy into a location for the family home.
Then pay off as much as their mortgage as quickly as they can and try and use some of the equity to buy their first investment property.
Thats the way our parents taught us to get ahead in life and create wealth.
But is their a way that might be possibly better ?
We believe there is !
Its called rentvesting.
No, there is no hip acronym.
For example, about 16 years ago Mark Smithton was about to purchase a house that he wanted, which was located in St Ives just out of Sydney.
It was a great location, close to the beaches and the city etc but the slight problem was, he could not afford it at the moment.
So, as a form of compromise, he purchased an apartment in Bondi and rented in st Ives with a friend to lower costs.
This investing strategy is called reinvesting.
And it allows first home buyers a way to get into the surging property market by buying a place within their budget and leasing it to tenants whilst renting in their desired suburb.
It has its good and bad sides of course.
A range of considerations includes the tax treatment of the properties and the costs involved constrained within a buyer’s individual situation.
Many people love the flexibility of rentvesting and when consumers are careful it sure does work as a long term paradigm
That way a buyer stays in the suburb they prefer to live in – perhaps closer to where they grew up, or near their friends and place of work.
By renting with a flatmate Mark said he lowered his costs which helped him budget for his long term goals.
He also said that “Renting gives you options over your lifestyle changes.”
Another facet is that it’s cheaper to move as a renter than an owner, given all the transaction costs involved in selling one property and buying somewhere else.
If the consumer has been duly diligent it can be possible to get a tax benefit on the investment property if it is of course negatively geared.
Or, put another way if the rental income you receive is less than the interest and other expenses you have to pay, you are now making an investment loss, which can be used to reduce your taxable income if done wisely.
But like many things it is very important to make a wise choice when selecting an investment property, Mark said.
Mark also said from his perspective he was always on the lookout for a house(not a home) that’s clean and has good light, off-street parking, a balcony or courtyard, and air conditioning or heating.
Don’t choose somewhere noisy, such as right next to a train line, and avoid apartment blocks with a swimming pool and gym as these can push up the body corporate fees.
Rentvesting can surely look very attractive for someone whose lifestyle is important to them, but the old capital gains tax can raise its ugly head.
This can have a large effect on the profit margins you are working with says buyer’s agent Peter Wilson , managing director and new licensee in charge of Wilson Associates.
When a buyer decided to sell their investment property for more than they paid for it, they will pay tax at their marginal rate on the gain.
But, if a buyer holds the asset for more than 12 months, they are now taxed on only half the gain which is fantastic.
Luckily for us, the old family home is exempt at this stage from capital gains tax when it is sold, he points out.
for Investors looking to build wealth over the long term, Mr Wilson has some very frank advice on the new rentvesting methodology.
“It’s often a slang term for spending money on a flashy lifestyle.In the meantime; it’s not a pathway to wealth creation in every case.”
He continued also with “try and live in a nice owner-occupied home that may not be as flashy but at the very least offers decent capital growth potential and now you can pay off your mortgage quickly as you like.”
And watch where your money is going.
“Paying rent is also paying someone else’s mortgage and that’s what we call dead money,”
Mr Wilson says. “Interest on your home is not necessarily dead because when you sell that home you’re going to make more than the interest.”
As Sydney property prices keep on rising, there have been many requests for federal changes to both negative gearing and capital gains tax to reduce investor demand.
This has come from the greens and Labour.
Historically the Liberal Coalition government has been reluctant to alienate its support base with anything like an extensive reform to these taxes.
Mr Wilson now encourages clients to think abut their “Plan B” type scenario which is that Labor might win the next election and then tries to implement its new policy of limiting negative gearing to only new housing and reducing the capital gains tax threshold.
“Run that scenario and just make sure you can cover all your borrowings,” he suggests. “If you think the Libs are never going to get lose in the near future then don’t give it a moment’s thought.”