Nice work Michael Zhu (Zoolander)

Good stuff by another millennial Michael Zhu (@Zoolander), who quietly built up a solid property portfolio in Sydney (4 Sydney apartments and a Central Coast house) with a combination of rentvesting and living at home.


https://www.domain.com.au/news/rent...-creating-a-city-of-landlords-20170209-gu7skx

Well done by @Jennifer Duke for the story, it highlights that it is still possible for young people to thrive on the property ladder in one of the world's more pricey markets.

"Rentvesting" not the traditional thing to do, but it's absolutely effective.

 

Thanks Gockie for sharing.

There wasn't a catchy name for rentvesting back in the day - it was about taking a lifestyle hit from living at home and living within my means on an abysmal salary (trying to) sell newspaper ad space to investment banks and financial planners in 2008/09. Frugal habits from that time are forged in stone.

Having gone to a couple of meet ups and browsing posts here, it's felt like going from Year 6 to newbie Year 7 - there's so much more to learn and progress from people who've been at this game for much longer and more comprehensive ways of building a portfolio. Such a great community!

 

Great stuff @Zoolander those frugal habits are hard to shake trust me

 

From my calculations it looks like current yield on that portfolio ( based on original purchase prices ) is 5.3%. That's quite reasonable.

Anyone buying that portfolio now would have a yield of 4.1% ( based on current value ). Also quite reasonable for mostly Sydney-based properties.

What's your total yearly strata bill for all the apartments? That would impact the yield somewhat.

 

Hi wombat,

Close. Current yields are in the 4-4.5% range.

Strata is $15k a year across the four apartments. Higher this year given some major public area repair work that'll hit all lot owners and an oddly high number of essential-living applicances to replace.

 

Awesome work @Zoolander! Although I know your portfolio already but still good to see it on paper! Very impressive on what you have achieved while leveraging off living at home and RentVesting. Look forward to seeing you shine in the future!

 

Wait until you retire .

If you work hard and build up a decent size investment portfolio (property and/or shares), then the frugal habits drop by the wayside in retirement, especially if you live "the good life" and your net worth continues to increase in spite of that.

Trust me. That is the whole purpose of delaying your gratification.

 

Renting somewhere to live and renting out the investment property you own - the only difference I can see is the tax incentive, which either I don't understand or others don't understand.

If you have an investment property, the tax incentive is only when you make a loss (am I wrong?), and in which case you have made a loss and even though the loss is reduced by your tax rate (lets say 30% for a young person who is unlikely to make 6 figures), you is still making a loss of 70% out of pocket, which needs to be made up in capital gains.
This used to be a viable option when property prices rose during the 80's at crazy rates, but it just isn't the same any more as I understand it.

If you are not negative gearing but are actually paying the place off (positive gearing), then you are not making a loss and where exactly is there any tax incentive and difference over living in your own place vs renting a separate place and renting out your own one?

Tell me where I am wrong.

Having said that - the person in the example is living at home for the sake of using all of his rent money to pay off his properties faster, which of course is excellent if you can do that, and you will generate wealth massively faster, but the "rentvesting" part does not make sense to me outside of a 1980's property market where the capital gains are much more than they are now.

 

@Terry_w wrote a comparison before. It is cheaper to rent in an identical property vs owning.

Strategy: Rent where you live and Buy Investment Properties

 

Thanks for the link

Yeah it basically assumes negative gearing as I mentioned, and also assumes a new building to claim a large cost of depreciation.

If you are actually paying it off (positive gearing) or if you have an older building with low depreciation, that nullifies the benefit mentioned entirely.

These might seem like just details, but the entire crux of whether it is financially worthwhile to "rentvest" and if those conditions are not both met (and if capital gains is not through the roof like it was decades ago but is not any more), it does not seem to be beneficial.

Actually, in the link you posted, it looks like he used the tax deduction of 1/3 of the 20k cost of depreciation as a positive but then left out that he is out of pocket the other 13.3k which wipes out almost the exact amount of benefit that he quoted from "rentvesting". Am I wrong?

 

Thanks David
The shininess is on hold in the current lending environment, so it's a good chance to brush up on learning and see what others are doing to add value, or other asset types to dabble in.

 

Hi Anthony, the tax deductions play a major role. Im no pro with the details but at a high level, costs associated with operating the investment (loan interest, replacing broken appliances, insurance, depreciation, agent fees, council and strata rates) work towards pushing ones taxable income into a lower bracket, so negatively geared. Depreciation on recently built apartments is a big one.

Also for a single guy, he might want to flatshare which is a lot less than moving into a 3 bedroom apartment he owns. paying ~$300pw rent in a flatshare arrangement (or $500 for a studio) is better than losing $700pw rental income an investment plus the aforementioned tax factors.

I'd love for the IP portfolio to be neutral or slightly positively geared and stop bullying my salary credits.

Hope this helps answer your queries Andrew.

 

Hi Michael,

I'm curious to hear the background behind the Mascot Apartment? It's valued at $900,000 but only seems to be renting at $590/week. It looks to have done really well for you though, doubling in ~7-8 years. Has the rent just fallen behind market?

 

Thanks for the response.

Yes for sure if you can flat-share somewhere else and put the additional funds towards an IP (or live with you parents and put the whole lot towards it), that is far and away the best way and really nothing can compare to that.


But if that is not the case, I am not convinced it is worthwhile.

In that article, your first property made about a 9% gain compounded yearly. If this is normal, then negative gearing definitely is profitable.
But your next 2 properties made a 4.5% gain compounded yearly. If this is normal, then negative gearing is actually not worthwhile (or else I can't do maths)

With negative gearing, you make a loss on the income but then make up for it in the property appreciation.

I assume (feel free to point out if I am wrong) for a 500k property:
- 3.5% rental income (17.5k) and about 3k in strata/repairs/management (so +14.5k)
- 4% loan (-20k)
- 2% loss to depreciation (-10k)

Which leaves you with a 15.5k loss (about 3%)

The negative gearing part of it means if you pay round 33% tax, your loss will be raound 10k instead of 15 or about 2% of property value.

- estimating 4.5% value increase means overall gain = 2.5%, which is equivalent to inflation which averages about 2.5% so in actual "value" terms, your overall financial position has gone nowhere at all.
- estimating 9% value increase means overall gain = 7%, which gives you enough of a gain to go head and do this with as many properties as you can and is very profitable.


Negative gearing depends on a number of factors, including
- inflation rate (luckily these days in aus it is a steady 2-3%)
- loan rate (these days about 4%)
- the tax deductions (often will be about 1/3), which means you made a real loss of 2/3 of whatever your loss was (people on forums seem to always forget to add this to the final profit/loss of negatively geared property when in fact this wipes out most of the benefits of negative gearing)
- and most importantly, it depends on what the expected value increase will be for your property area to cover the losses you incur after the tax deductions. To break even (not lose or gain money) you most likely will need an expected return of at least 4.5%, but if you want some actual benefit if increasing your wealth, you probably will want at least another 3% on top of that to make it worthwhile. If you really think 7.5% and up is a reasonable "average" growth rate, then negative gearing is worthwhile. If not, then it is a not worthwhile. I personally don't think that is the case any more which is why I think negative gearing is just a cool sounding word with people not understanding the idea that the loss must be offset by value increase or you else you are effectively getting no actual increase in wealth.

I would really like to hear if I left something out or if there was an error in there.


But as I said, if you rent out your place so that you live somewhere cheaper (or free) and use the money to positively gear, then that is an entirely different story and worthwhile, but it did not appear that was the meaning of "rentvesting".

 

Hi @Anthony Brew , you've touched on good points. For the purpose of the article, the PPOR-inspiring first home buyer vs live-at-home numbers-only investor works well in bookending the spectrum of attitudes towards property. Kudos to @Jennifer Duke for producing that piece.

I'm envious of your assessment skills - if I had that at the start of journey, the current situation would definitely be more cashflow-smart. When you're negative you eventually hit a serviceability wall. I surely don't have the solutions to overcoming that, probably something aimed at pushing the gear towards neutral. So far the portfolio numbers and rate of bleed is comfortable for my personal circumstance.

I reckon you'll do well with your investments.

 

Which is why some cashflow plays are needed. Airbnb/short term lets in the right areas gives extra cashflow. But it's work, and extra funds from short term lets may not be acceptable to many lenders. So there's other cashflow strategies that get employed too.

 

I was looking at Airbnb for the Mascot place... daily rates for a room is slightly higher than normal lease rates but my concern is around the portion of time it'll get booked vs being vacant. Seems to already be plenty of competition with very few listings having no reviews (no bookings?).

Good to see my tenants aren't listing here already. Would've given then a kick up the bum if they were.

 

Or the ultimate cashflow cow - owning your own successful business.

For a lot of people this is too high a risk and/or too much work.

But remember, you can only reap what you sow .

 

You're right about tax. But you've missed servicability. A servicing wall comes much quicker if you are living in your own place.

 

Appreciate your response.

Here is what I think you said (could easily be wrong).

Serviceability means ability to borrow more (assuming for leverage purposes).
Normally you have a higher serviceability if you are renting it out because you can then pay it off with the rental income plus your own money added on top.
With paying rent in a seperate place, unless you rent for less than the incoming rent of your IP, you don't actually have any more money to pay the property/ies off with, meaning you do not have higher serviceability.

There is a good chance that I am misunderstanding the meaning of this though. Please explain if I am wrong.

Cheers.