Rentvesting vs Buying Outright

Hey guys,

I'm really struggling to stack the numbers so maybe you can assist.

What's a financially better decision, to buy your home outright and live in it or to invest your money instead in IP's and rent (rentvesting)? Let's use 500k as an arbitrary figure, and let's say it's possible to buy a PPOR outright in a desired location for that money. For the case of rentvesting, let's assume it's possible to rent for $350pw in a desired location.

Any input would be much appreciated!

 

What numbers have you done so far? I'm pretty sure its a fairly easy calculation to show that rentvesting is better financially in most capital cities looking at typical properties and their typical yields.

I'm not sure what buying a house outright has to do with the rent vs buying thing either.

 

Why not buy outright, then borrow against your ppor to invest. That way all your debt is deductable, and you can borrow 105% of IP costs.

I don't practice what I preach though. I rentvest, and only borrow 80% for IPs.

 

main pro is you can buy / borrow more and have a larger portfolio (i'm aware you're saying you're paying 500k cash for the ppor but for comparing i've listed some more numbers)
500k at 3.8% IO would be $365 a week
rates roughly 380 a quarter?
water roughly 250 a quarter?
insurance 1k p.a

rates+water+insurance = 68 p/w
total $433 p/w
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rentvesting $350 p/w

if you had 500k i'd go with 20% deposits and allow 5% for closing costs, which would be around a 2M property portfolio. at 80% LVR now from this point it'd just depend on where you bought if they were high yielding lower end properties or better quality properties that could be negatively geared which would then determine your weekly cashflow/shortfall. but you've gone from having an asset of 500k to having one 4x bigger. also keep in mind it would depend on your borrowing capacity.

Cheers, Elives

 

Scenario 1: buy a 500k home outright. In X number of years the value doubles (say in 15 yrs) to 1M. Profit: 500k (no CG tax).

Scenario 2: buy 5xIP's, each 500, total of 2.5M. Total value in 15 yrs is 5M. Profit: 4.5M, or 2.25M after CGT. However, I imagine a lot of money would be spent along the way on the holding costs of the portfolio (I guess that's the money a person in the first scenario would be able to invest in other opportunities, such as IP, shares etc.). On the top of that, rent over 15 yrs would be 270k, assuming the rent of $350pw.

So the real advantage of the second scenario is:
2.25M - 0.5M - 0.27M - opportunity costs on money spent on holding costs of the portfolio = ???

 

Scenario 3
Buy $500k ppor with cash.
Borrow against it to buy 4IPs each $500k

 

Did you repay the debt to the bank or keep that as profit???

 

The profit made on the portfolio? I understood you would always have some costs holding it, negative gearing etc.

 

In your example it looked like your Profit didn't consider paying back the debt.

 

This is what I would do
1. Buy a $500,000 main residence.
Live in it.
It will be CGT free
it will be land tax free

2. Borrow up to 80% or $400,000 against it as a LOC.

3. use $100,000 x 4 for deposits on 4 properties. or 8 maybe if you pay LMI.

This way you have no rent to pay, no non-deductible debt and will still have the same number of properties (or more) as well as be saving on CGT on the eventual sale and land tax.

This should help servicing too because rent paid is bumped up on servicing calcs. If you don't have to pay rent it will help.

Also consider to pay $350 pw rent you may have to earn $600 before tax.

 

So what would the calculation look like?

 

What I said, but with more words

 

starting cash $500k
5x 500= $2.5m doubles in 15 years = $5m
Profit is not $4.5m
It is $4.5-2m (debt) = $2.5m before tax...

 

Hi Terry,

Thanks a lot for the reply.

In both cases I'd be paying interest on 2M. In the case I buy outright, I receive 4 x rents on the 4 IP's and don't pay rent. In the case I buy 5 x IP's, I'd be receiving 5 x rents but I'll be renting. Could you please clarify the real benefits (most definitely I misunderstood something)?

I was also thinking.. In case I buy 5xip, I can also convert any of them to a ppor in my understanding. And hence I still get CGT exemption.
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In other words:
1. Buy ppor and live in it
Buy 4x500k ip and rent them out
Pay interest on 2M
Receive 4 x rents
Equity: 100%, 0%, 0%, 0%, 0%

2. Buy 5x500 ip and rent them out
Pay rent wherever
Pay interest on 2M
Receive 5 x rents
Equity: 20%, 20%, 20%, 20%, 20%

 

You would not get a full CGT exemption if you convert an IP to a PPoR.

However, you could get a full CGT exemption if you turn a genuine PPoR into an IP subject to the 6 year rule. Hypothetically, you could buy a PPoR with a 20% deposit, an IO loan and an offset account. You could then fill the offset account thus paying no interest. Then say you moved interstate or rented in another suburb to be closer to work (the rent you pay could be lower than the rent you receive from renting out your PPoR). You could then move to fund from the offset account to some other investment and the interest on the loan would be tax deductible. Noting that staying one night in a house does not establish it as your PPoR.

@Terry_w has a bunch of useful tax tips on this:

Tax Tip 87: Moving out of the Main Residence and Interest

Tax Tip 23: The 6 year Absent from Main Residence Rule

My understanding is that you can reset the 6 years by moving back in for some time then moving back out again. The key here is to genuinely treat the house as your Main Residence (PPoR). You will see claims you only have to spend one night there to claim it as your PPoR. This is not correct.

 

Brilliant post.

 

You would have no non-deductible debt. Slightly less rent initially, but you are not paying any rent either so it will work better for servicing.

 

This is another option, but you would need to live in one of the properties from the date of settlement to establish it as your main residence. You would then have 5 properties, one potentially CGT free, but you would be paying non deductible rent.

 

Thanks Terry, your expertise in this is invaluable.

Am I able to move into any of them at some point after the settlement (say 2 years after the settlement), live in it for a bit, claim it as PPOR and get CGT exemption?

Many thanks!

 

no