What’s going on guys It's Jordan de Jong here and today I want to talk about rent vesting, it’s a topic everyone’s been talking about lately and its mostly driven by unaffordable housing in the places we want to live. If you’re unsure what rent vesting means, essentially it’s renting a property to live in while investing in another property that you rent out, and you may be thinking, well that seems counter-intuitive but there is plenty of reasonable explanations why someone may choose to do so. Predominately, housing affordability in our major cities is starting to get out of hand, to the point where double high-income families are even capped out at their maximum borrowing capacity in the most desired locations, which provide the lifestyle they need to accommodate those long working hours, so instead they rent in those locations and invest in more affordable areas. Secondly, due to the cost of trading property, which is about 5% of the property price to purchase and 3% to sell, sometimes it doesn’t make sense on paper to “Upgrade” or “Downgrade” into a new property, especially if they are moving to a new location, with “rentvesting” they can try the new location before they buy. Moving to a new location has become more and more common as we are seeing larger numbers of interstate migration, mainly out of Sydney and into Melbourne or Brisbane, at the forefront, this seems to be driven by the sky-high property prices in Sydney. But a new location doesn’t have to be between states, it could be to lower the commute time into work, or a getting a new job altogether that would take an hour to commute to every day unless you moved closer. For families with kids, it could literally be a move down the street, as school catchment zones often change and if a parent wants to put their kids through a specific school, they might rent somewhere else to be in that catchment zone, also if your loving this content don’t forget to smash that like button. I’ve heard people talk about getting more capital growth in other areas then in the areas they want to live, and for some this is true, if you live close to family in the middle or outer rings of a CBD and want to stay near them, then buying in a location that has proven consistent capital growth could be a better financial decision in the long run. This is a catch 22 though if someone was renting in an area for the lifestyle and couldn’t buy in that area because it’s unaffordable, that generally means there’s demand for property in the area, and if you didn’t know it already, demand is one of the factors that drives the price of property and will continue to do so over time. So instead they chose to invest in a more “affordable location” because they had heard property investing is the way to go, and they need to get onto the ladder as quickly as possible! this is what generally catches people out when they chase these so-called more affordable areas. Areas with cheaper property generally means there is either less demand for people to live in that area or an oversupply of stock available, and you might not see as much capital growth as you would in areas with more demand and less supply. Of course, it’s not one or the other, you know, really expensive or dirt cheap property, there’s plenty of properties in between that can suit your individual needs, I just want to draw your attention that you can actually lose in property and the opportunity cost of making a bad investment could set you back financially for the rest of your life. Taking capital growth out of the equation, running the numbers, it does actually make sense to rent a higher-end home than to buy one, rental costs are generally determined by the building, and capital growth is generally pushed up by the land, or more accurately, the location of that land. Higher-end properties usually have a higher land value, therefore the rental costs, as a percentage of the overall value of the property is often lower, so if a higher-end property is somewhere you want to live, then for cashflow reasons it might make sense. Which feeds into the passive income argument, but that's another whole can of worms that I won’t be discussing in this blog. So up until this point, it might feel like I’ve been sitting in both camps, there's reasons for and against rentvesting, and because everyone is in their own individual circumstance, I wanted you to be aware of the back story of how rentvesting has become a viable solution for many, but let’s break down these camps now and go over some scenarios that might help you decide if its right for you. Scenario 1 would be if property prices in the area you want to live are growing faster than you can save, If you’re constantly trying to save up for a 20% deposit in an area that keeps growing, you may never get there. The best time to buy a property is when you can afford to do so, and rentvesting allows you to get onto the property ladder earlier than waiting the 10 years it now takes to save a 20% deposit. Implementing this strategy allows you to save for your dream home, by utilizing the capital growth on the leveraged money growing at a faster rate than you could have saved from your income, my only concern with this approach is the cost of getting in and out of a property as discussed before. So if I was in this scenario I would only “Rentvest” if I knew I wanted to hold onto the investment property even after I purchased my dream home, and we can do this buying pulling out the equity in the property through a re-finance, rather than selling it to get access to that capital growth. Scenario 2 would be to have the flexibility to move around, either for work requirements or to live the lifestyle you want to live, with remote work and new technology allowing us to be more flexible with working arrangements, we may want to go and trial living close to beaches or on a farm without having the headache of buying and selling a property and all the associated costs that come with it. When renting, its often fairly easy to upgrade or downgrade, life circumstances do change, like when we have children and need more bedrooms or need to be closer to family, we often don’t think about these life-changing events until they happen and the can be costly if we have to buy and sell property to account for them. So if I was in this scenario where I wasn’t 100% sure where I wanted to live for the next 20 years, maybe in between jobs, following a different career path or not settled down with a family, I would consider renting and investing in an area with a long term sit and hold strategy. Scenario 3 would be if you seriously wanted to build your wealth through property, by investing in the best of the best areas that you’re not interested in living in, obviously, no one has a crystal ball and can predict the future, but there are areas that have consistently performed well over multiple decades. This scenario gives you the choice of where you want to invest and you can be aggressive in your asset selection, there’s also additional tax benefits with owning an investment property, but only if you have the intentions to hold the asset over the long term. Although, If I did want to live in one of these locations, I personally wouldn’t “rentvest”, majority of wealth sits in peoples principal place of residence and the capital gains tax exemption rule is, without doubt, the best tax saver of them all. I think you can see the common theme here, I would only consider “rentvesting” if the circumstances aligned and I was buying a property with the intention to never sell it, as the old saying goes rent money is dead money, so I would ensure that by renting it was a financially beneficial strategy. And of course, there’s nothing like living in your own home, you can make it yours, you can change what you want without any issues and have as many pets as you want, so if you’re the type of person who enjoys having an emotional connection with where you live, then rentvesting just may not be for you. Additionally, if this is your first property purchase and it’s an investment, you may be missing out on the First Home Loan Deposit Scheme, which gives you a significant step up into the property ladder, it may be a financially better alternative to buy and live in a more affordable area that has good potential capital growth. As with any investment, make sure you crunch the numbers, there’s plenty to consider, interest rates, rental yields, tax deductions, capital growth, capital gains tax the first home loan deposit scheme and that’s just to name a few, if it stacks up on paper, it may be a viable alternative. As always, seek your own professional financial, legal, taxation & property investing advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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