Rentvesting: when you rent somewhere to live, while investing in a property elsewhere.
The idea is that you’re getting a foot in the property market 👞, but at the same time can have the lifestyle you want. Bathing in smashed avo.
We reviewed the rentvesting advice out there, but most ‘experts’ seem to have fallen for that old chestnut … that buying property is always good 🌰. Not true.
Our biggest lols? When ‘advice’ is written by people selling property, selling loans, or who are sneakily in on some property-related product 😂. We’re firm believers in independence. Queen Bey type independence 🐝, but also clean, don’t-tell-me-what-to-do-if-it-benefits-you independence ☝️.
There’s a huge amount of your money and freedom at stake here, so you deserve to have the right information.
Here’s a brutally honest, evidence-based list of what you need to know.
The reason to buy an investment property is … to make an investment
Sounds obvious, but remember from Wk 1? An investment is money stored away to be used in the future with the intention of growing your wealth. That means you need to rationally assess if your investment property is the right way to grow your wealth— given time, costs and constraints.
Rental earnings are low
In Australia rents aren’t growing much. In Sydney and Melbourne, rental ‘yield’ is at a record low. When you factor in the cost of running a rental property plus interest costs, you’re unlikely to cover them. Which means you’ll be losing money. That loss is tax deductible, but you’re still losing money.
You need to make money when you sell
If you’re not making money from the rental income, then you’re relying on the sale price for your profit. And property prices can fall. In last week’s Carrot, our guest expert dished on why prices aren’t likely to keep pace. Prices fell last year in Canberra, Adelaide, Perth, Darwin + Hobart for units or houses. The Reserve Bank of Australia found there was no financial benefit from buying vs. renting over the last 55 years, while the US housing market has returned close to 0% over 100 years.
It’s really expensive.
- Purchasing costs: the price you pay, stamp duty, lawyers, building inspections etc.
- Maintenance costs: the never-ending repairs, insurance, strata, council taxes etc.
- Tenancy costs: finding and managing tenants means paying an agent, or with your time.
- Interest costs: on a $400K, 25-year mortgage at 4% interest, the monthly repayment is ~$500 per week. You’ll be paying ~$350K in dead interest costs, and that’s at record low interest rates. Expect them to go up.
- Disposal costs: agents will get a chunk of the sale price. If your sale price is higher than what you paid, you’ll pay capital gains tax. Any gain will be added to your assessable income at tax time. At the highest bracket you’d be taxed at 45%+.
You still have all the pain of owning and it’s a huge, loooong-term investment 🕰. Your money will be tied up for all that time, limiting your expenditure elsewhere—holidays, buying a house to live in, or having a family. It’s also illiquid. If your circumstances change, you won’t be able to offload it quickly.
The place could go empty. Or get damaged. Interest rates could go up. Prices could go down. Leverage is great when prices go up and you sell at a profit. Leverage is terrible when prices go down and you have to sell. If you can’t meet your payments in Australia, you’ll not only be handing the keys back 🗝, but maybe the shirt off your back too 👕. The banks can come after you for all you’ve got.
You’re exposed—in one area
When putting most of your money into property, your eggs are all in one basket 🐣. Diversifying, a.k.a spreading out your risk over different types of investments, is proven to be better for your wealth in the long run. Think about it like planting all your carrot seeds in one spot 🌱. If you spread them out around the place, you’re more likely to get more carrots🌱🌱🌱.
You should be an expert
Buying property is an active investment decision. You’re making a bet. But 99% of active expert investors have been wrong since 2006. You’re betting on the housing market going up, betting on a particular house, a region, a point in time, on a real estate agent, on the tenant. So how much do you know about maintaining homes? Housing market fundamentals? Managing tenants? Tax-effectiveness?
Opportunity cost opportunity cost opportunity cost
Remember to consider what you could be doing instead. Like putting your dosh into a different type of investment with fewer costs, like shares and bonds. Like investing in your education, increasing your earning power.
Property can be great. It can make sense as part of your garden of carrots🌱. It can make sense as a consumption good if you want to live there 🏡. But before we jump into a 25-year commitment, we should fact-check and be smart. Is property the best investment for you? Why? What are the alternatives?
We’ll be back with our final housing ep covering that next week!