To Buy A Home Or Invest First?

Hello everybody. And today I wanted to tackle something that is been increasingly popular in recent times and that is the topic of Rent-vesting. So again what exactly is this.

Well this concept basically means to rent a property where we want to live and invest where we can afford to invest. And as that key topic of affordability that has really seen the rise in the popularity of rent-vesting today. Basically in expensive markets such as Sydney people are struggling to be able to afford to enter the property market. But on the other side they need to be within reasonable proximity of their place of work and therefore they don’t have the choice to relocate to the areas where the house prices are more affordable.

However from my own personal experience as a rent-vestor there are a couple of other reasons that I chose to adopt this strategy and I wanted to share a couple of these reasons with you today as well as a few stories from my clients that we recently spoke to. Now firstly there are many reasons I choose to live where I do and all of these reasons are completely personal to me and only one of these reasons is somebody of yours. But none of the reasons that I chose to live where I do have anything to do with investment and nothing to do with the considerations of what areas in the current market would lead me to purchasing in those areas because I believe that they were a good investment. Now let me give you an example from one of my clients situations to try to show you exactly what I’m talking about.

He is originally from France and wants to move to a specific suburb in Sydney and the reason that he wants to move to this suburb is that it’s within the school catchment zone for a bilingual school speaking both English and French. And that’s where he wants his kids to go. Now the question I asked him is does this school catchment zone that is extremely relevant to you of course make this suburb a good investment. And the answer of course was not necessarily so sure you can imagine there’s a whole multitude of factors that go in to determining if purchasing within a particular suburb at a particular time is a good investment.

But the point that he understood that after chatting with me was that it’s very very easy to trick ourselves into thinking that just because we personally want to live somewhere it doesn’t necessarily make it a good investment choice. Another way to think about it is that where we want to leave comes from our heart and where we choose to invest comes from our head and we really need to make the effort not to let the two of the to get confused. Now the second reason I discussed with this client was that even though he could afford purchase in the area he was looking at which was a rather prestigious and expensive suburb. It still might not be the wisest thing to do financially and what I meant was as you start to move up in the value properties that you want to live in if you were to think about it from an investment perspective they start to become cheaper and cheaper to rent.

Now I know this is a difficult topic to grasp so let’s try and break it down. Let’s say you wanted to live in a place that was valued at two million dollars and you had the capacity to service a loan on this property if you were to purchase these property as an investment you would likely be to be able to get something like up 2 to 3 percent yield or rental return. Basically what I’m trying to say is on average the more expensive the property the lower yield you’ll be able to get. But on the other hand if you took your 2 million dollars you could effectively purchase three smaller rental properties giving you around about a 5 percent yield and also you can spread these investments across different markets allowing you to have some diversification and still have some cash flow left over to be added to pay the rent that you need to pay to live in the property that you want to live in. So basically what I’m saying here is from my perspective I would rather pay someone two to three per cent yield and earn 4-5 percent. Doesn’t this make sense. Now the final reason that I’ve covered with my client was the taxation implications investing vs purchasing a principal place of residence. Now time for a disclaimer I’m not an accountant and this information and I’m trying to give you is for educational purposes only and you should seek professional advice prior to making any decisions.

Now my client’s concern was that if he purchased the house that he wanted to leave in within the school catchment zone, he was not going to have to pay any capital gains tax whereas if he purchased any investment properties he would have to pay capital gains tax when and if he sold Whilst he was 100% right, What he didn’t consider was that he would have to service his mortgage on his house he wanted to buy in post tax dollars. This basically means he pays taxon the income that he earns from his job and then uses what’s left over to pay for his mortgage. And this differed from investing in properties as he would effectively service to his loans before tax and then only pay taxes on what was left over. Essentially he understood that his choices were to pay tax.

Now i.e. no negative gearing and get some tax concessions later i.e. no capital gains tax on principal place of residence. Or he can get is tax concessions now and defer the tax bill to later up with his investment properties making them easier to service and hold. Now am I saying that there’s no place to buy a house for you to live in. Of course not but I’m simply trying to impress upon you that you need to be clear in why you’re doing what you’re doing and what the implications are. Essentially when taking a look at the debate between rent-investing and purchasing a principal place of residence.