I’ve always been a big advocate of rentvesting, however, a lot of people still seem to misunderstand what the strategy is all about and how it actually helps you build wealth.
First, let’s address one huge misconception. rentvesting doesn’t mean renting forever. It’s a strategic approach to property investment that can accelerate your wealth creation.
Here’s the core idea: Instead of buying a home to live in, you rent where you want to live and invest in property elsewhere. It sounds counterintuitive, but the numbers often make a compelling case.
Let’s break it down:
1. Renting is often cheaper than owning
In many areas, especially with current interest rates, renting a property is cheaper than owning the same property. This frees up cash flow that you can redirect into investments.
2. Tax benefits of investing
When you own an investment property, many expenses are tax-deductible. This isn’t the case with your primary residence. The tax savings can be substantial, especially if you’re in a high tax bracket.
3. The power of leverage
By investing in property rather than buying a home to live in, you’re using the bank’s money to build your wealth. This leverage can significantly boost your returns over time.
Let’s look at a practical example:
Imagine two properties, both worth $1 million. One you could buy to live in, the other you could rent.
Scenario A: You buy the home to live in. It costs you $60,000 a year in mortgage payments, taxes, and maintenance.
Scenario B: You rent a similar property for $40,000 a year and invest in an identical $1 million property. The investment property costs you $60,000 a year to own, but you receive $40,000 in rent.
At first glance, both scenarios seem to cost you $20,000 out of pocket. But here’s where it gets interesting:
In Scenario B, that $20,000 loss on your investment property is tax-deductible. If you’re in the highest tax bracket (47% in Australia), you’d get $9,400 back at tax time. This reduces your actual out-of-pocket cost to just $10,600.
Compared to owning your home, you’re now $9,400 better off each year. Over 10, 20, or 30 years, this adds up to a significant sum that you can reinvest to grow your wealth even faster.
But what about capital gains tax, you ask? Yes, you’ll pay CGT when you sell an investment property, unlike your primary residence. However, the ongoing cash flow benefits often outweigh this long-term cost. Remember, you can use those annual savings to invest further, compounding your wealth over time.
There are other benefits too:
1. Flexibility: Renting allows you to move more easily for work or lifestyle reasons.
2. Diversification: You can invest in different property markets, spreading your risk.
3. Better borrowing capacity: Banks often view you more favourably without owner-occupier debt.
Rentvesting isn’t for everyone, and it’s crucial to crunch the numbers for your specific situation. But for many, especially high-income earners, it can be a powerful strategy to build wealth faster.
Remember, the goal isn’t just to own a home – it’s to build long-term wealth. By thinking like an investor rather than a homeowner, you might find that rentvesting is your best option to build substantial wealth.
Engaging a trusted buyers advocate through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
