5 Ways To Get Over Your Rentvesting Hurdles
Many people understand the benefits of rentvesting – renting where you want to live and investing where you can afford – but they can’t get over the emotional hurdles and make the move. While some may call these issues hurdles, I call them excuses.
The idea behind rentvesting is that most people can’t afford to live in the house they want, in the suburb they want. As properties get more expensive they typically rent for proportionately cheaper (lower yield) as fewer people can afford that price bracket. So, like in the game Monopoly, you’re better off renting the hotel on Mayfair or Park Lane and having 4-5 more affordable green houses elsewhere. As you’re not going to live in those green houses you have more choice as to which area to buy in, so you can target the best growth areas, rather than being restricted to where you want to live.
While this makes complete financial sense when you look at the numbers, most people have an issue with it from an emotional perspective, and stumble upon the following concerns:
- It’s the great Australian dream to live in your own home.
- You need to provide a nest for your family.
- It’s not capital gains free.
- What if the landlord kicks you out and you can’t renovate to your own taste?
Personally, however, with a property portfolio worth over $15m, I’ve been Rentvesting for more than 20 years and I love it. Sure there are a few things to overcome but where there’s a will, there’s a way. In the last ten years, I’ve saved anywhere from $75k to $225k per year. Seeing these savings add-up can really help you overcome some of these excuses or hurdles as you may want to call them.
1. Your home is capital gains free whereas you pay tax when you sell an investment property.
Very true, but if you don’t sell those investment properties then you don’t pay any capital gains tax. People then argue that you can’t get the benefit of your capital growth without selling - but that’s not true as you can access those funds by refinancing. Refinancing is like selling your property to the bank and then repurchasing it the same day without the stamp duty and other taxes. It may be harder to refinance now than it was 12 months ago but that is just part of the investment cycle and it won’t always be the case.
2. Rent money is dead money.
Yes, rent money can be dead money but it’s not if you invest the equivalent elsewhere. Renting is very efficient if you are only paying out 1-2% on the big house you rent, and you collect 3.5% - 4.5% rent on the cheaper houses or units you rent out to others. Plus, most of your expenses and debt is tax deductible. Most renters, however, don’t invest elsewhere, they just spend the remaining money on luxuries they can’t afford and have no appreciating assets creating wealth besides.
3. You can't renovate to your own taste.
Yes, you can most of the time, especially if you promise the landlord you’ll get professional decorators in afterwards if they don't like what you’ve done. I’ve even offered to build a new kitchen or bathroom. People argue ‘why would you pay $25k for your landlords’ kitchen when they might throw you out a year later and you get no benefit?’. Who cares when I’m saving that much money. I would rather save $100k a year by rentvesting and have a happy wife than save $125k and not have her happy – I’m still saving $100k. If the landlord does try and move me on the next year, I’ll offer them a new bathroom.
4. You might get kicked out.
Yes, you might and that’s what we always dreaded after we got married and had kids, but then we changed our attitude. Rather than dread moving all year, we assumed we would and so had nothing to fear. 3 months before the end of the lease we would then look around for a better property in a better suburb and so then it was a positive thought. If the landlord let us stay, then that was a bonus. If you’re always moving to a better property, where’s the downside? When we started renting we did have to move every year, which was a pain, but ever since we changed our attitude, we haven't had to (and have remained in the same place for over 7 years).
5. It’s stressful moving.
It is supposed to be one of the most stressful times in your life along with a job move but it doesn’t have to be that way. What if every time you had to move you simply walked out, went on holiday and forgot about it. How stressful would that be? Well, that’s what we do. We hand the keys to the removalist on the way out, they pack up the home, move everything and unpack. Then the cleaner comes in (who knows where everything went in the last place). They make the beds, put the clothes in the closet and set the kitchen up, the way my wife likes it. When you come back from holiday, you just go to the new place. Sure, there’s probably 10-20% you still need to do to fine tune, but at least the stressful part is done.
Although rentvesting does make financial sense, it’s not for everyone, especially if you or your partner hate change. While there are savings to be had, a divorce will cost you more and so rentvesting is not the best idea if it’s going to cause that much heartache. Instead, buy your own home and then just make more of an effort to invest even wiser with your remaining funds.