How To Use Rentvesting For Wealth Creation - PODCAST EPISODE 3
Listen to the Rentvesting Podcast
Rentvesting Transcript
Introduction
Speaker 1: [00:00:00] Welcome to the Location Property Podcast. The podcast for property owners looking to grow their property portfolio. In this podcast, you’ll learn how to put your wealth creation on automatic so your assets are working for you 24/7 while you’re cruising the Mediterranean in your superyacht. To access previous episodes packed with property investment strategies that actually work, head over to www.locationpg.com.au [00:00:30] /podcast.
Why is Rentvesting Important?
Ajay: This is Ajay Valanju from Location Property Group. Our website is www.locationpg.com.au. Thanks for tuning in to the Location property Group Podcast. Today, we’re going to talk about a hot topic: Rentvesting. Why is rentvesting important to us as property investors? Why do you really need to pay attention to this? [00:01:00] Well, the benefits are: It can significantly increase your serviceable income to your bank or financial institution. Does that sound interesting? Two: It’s going to improve the quality of your home and you’ll spend proportionately less on it. Three: It’s going to allow you to purchase a much larger investment property portfolio.
What do we mean by rentvesting? [00:01:30] Rentvesting means you rent the property that you are living in and you use those resources that you would have otherwise used to make that purchase to purchase multiple investment properties. How can you implement rentvesting into your life? There’s basically a three-step process that you can use to implement rentvesting and those three steps change depending on whether you’re [00:02:00] currently an owner occupier of a property or whether you’re currently renting a property.
If you’re an owner occupier, step one is to rent out your own place. The rent that you earn becomes additional serviceable income. The second step is to rent a place where you’re going to live yourself. The third step is to go back to your bank or mortgage broker and see how much additional funds you can borrow [00:02:30] as a result of this additional serviceable income. The three-step process for rentvesting, if you’re already a tenant in a property and don’t own additional properties is: Step one: Continue renting where you live and potentially try and secure as long a term as possible on your lease to give you stability. Step two is to go out and purchase additional investment properties. Step [00:03:00] three: When you see your banker, every additional property that you purchase will have an associated rental income with it allowing you to have the maximum serviceable income and, therefore, maximize your property portfolio.
Challenges
Rentvesting isn’t all positive though. There are common challenges people face with implementing it. The four most common challenges in rentvesting are, [00:03:30] firstly, the emotional attachment that some people have to their home. A common way of overcoming this emotional attachment is to consider that you’ll be able to live in a much better or superior property if you rent rather than own.
The second challenge is the term of the lease. When we own the property, we do have complete assurance that we can continue living where we are [00:04:00] as long as we want. However, when we take out a lease, there is always a fixed term that at the end, we don’t know what we can do at the end of that fixed term. The best way to overcome this is to take out as long a lease as possible that meets your requirements and to also consider that over time, things do change so your income will change, where you work will change There are so many things [00:04:30] that change so taking out a lease for three years. Normally, we only have certainty in our lives for a period of only about three years so this matches the longest lease that you can take out. There is still security in renting. It is though slightly different to having ownership.
The third challenge that people face when rentvesting is if they want to customize the place that they are [00:05:00] actually living in themselves. This, in a similar sense to the emotional attachment, can be overcome by taking into consideration that you will be able to live in a much a far superior home than you would if you were owning that property. It’s interesting in the rental market that as a property becomes more and more expensive, the associated rental yield that that property will achieve in the market [00:05:30] becomes lower and lower.
As we become more successful throughout our careers, we can allocate more to our rental income budget and unlike when we purchase a property, we’re going to get proportionately more and more value as we increase our rental budget. The best way to demonstrate this would be to look at, say, a $500,000 property, a $1 million property, a $5 million property, and a $10 million [00:06:00] property.
If we were looking to rent out a $500,000 property, we’re most likely going to be looking to pay rent of around $450 to $500 per week which comes out to be close to around that 5% mark. If we look at renting out a million-dollar property, we’ll probably going to be looking at around $700 to $750 per week. If we look at a $2 million property, the rental amount would be more like 1,400 to [00:06:30] 1,500 per week.
What I’m trying to demonstrate is that as the property becomes more and more expensive to own, the proportion that we pay as rent becomes lower and lower. An extreme case of where excellent value can be achieved by renting, I recently experienced with a client whereby they were considering renting a $13.5 million ground floor apartment in Point Piper and the [00:07:00] asking rent on the property was $5,500 per week. Yes, $5,500 per week is a lot of money to pay as rent, but when you consider the alternative of paying a mortgage on a $13.5 million property, it actually works out. Fabulous value.
The fourth challenge that rentvestors experience is that they’re not able to claim the capital gains tax exemption [00:07:30] on their own home as they’re not physically living in a property that they own. There are two considerations in overcoming this challenge. The first consideration is that the Australian Taxation Law allows an investor to claim a property as their primary residence if they have lived in that property and the intention when they first moved in to the property was for that property to be their primary residence so they can [00:08:00] live, move out of that property and, for a period of up to six years, can claim it as their primary residence and sell that capital gains tax free as long as they don’t live in another property that is their primary residence.
The second consideration in this is if you do end up living in your own home for a very long period of time, then that capital gains tax exemption is only able to be claimed [00:08:30] once or upon selling the home. If you do, in fact, end up living in the home you purchased for an extended period of time, you don’t actually gain any benefit from that capital gains tax exemption. The only time you actually gain that benefit if you actually sell that property.
Summary
Today’s episode has been about rentvesting. Rentvesting allows us to significantly increase our serviceability to the bank, [00:09:00] it allows us to improve the quality of the home that we actually live in and our lifestyles, and increases our ability to increase the size of our property portfolio. The best action steps to take to see if rentvesting is something that can assist in your situation: Step one: Call your local agent and get a rental appraisal on the property that you own and live in. [00:09:30] At Location Property Group, we provide full property management services in the Sydney area. If you give us a call, we’ll be able to organize that rental appraisal on your behalf.
Step two is to call your broker or banker and compare your lending limit in the scenario where you own or occupy your home and consider buying an investment property or [00:10:00] you rentvest and both your current homes rental appraisal value plus the rental income of the additional property you’re purchasing is factored into your ability to repay. You’ll be pleasantly surprised by how much more affordable your property portfolio will become.
We’ve covered an interesting topic today, rentvesting. I’m available on email at [00:10:30] ajay@locationpg.com.au.
or you can give me a call on the mobile on 0413338853 and we can discuss rentvesting further. This is Ajay Valanju from Location Property Group signing off. Thanks for listening. I’ll talk to you again in the next episode.
Speaker 1: Thank you [00:11:00] for listening to the Location Property Podcast, the podcast which consistently delivers actionable strategies to property owners who want to automate their wealth. You can access all the information below this episode by the show notes at www.locationpg.com.au/podcast. You can also ask questions in the comments section which Ajay will answer in upcoming episodes. How can Ajay help you today? [00:11:30]
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