Rentvesting vs PPR first - SPREADSHEET CALCULATOR?

Hi all,

There’s lots of great debate on PC on the financial pros and cons of rentvesting (renting whilst investing in IPs) whilst either delaying PPR purchase, or never buying Vs purchasing your PPR first then buying investment properties later. As far as I’m concerned though it pretty much comes down to a spreadsheet calculation factoring in all the variables over the long term.

So, has anyone prepared such a calculator? I haven’t found anything on the thread but I might just be searching for the wrong thing.

 

just the rent and low yields on expensive areas would seem to support rentvesting. But…. How do you include in a spreadsheet:

Emotional value of ppor
borrowing limits / dti
Ppor being cgt free when you sell, when upgrading, downsizing or retiring, maybe after the ppor goes through rezoning?

 

For the record - I used to be sold on the rentvesting strategy (tax deductible debt and lifestyle flexibility) and now own 4 IPs and rent where I live. The strategy was always ’to keep rentvesting until we don’t want to rent anymore’. Lately the thought of purchasing a PPR has been more appealing and I’m weighing up my options. Whilst I generally understand the pros and cons, opinion still seems to be split on which actually makes better financial sense in the long term. So I figure there’s only one way to find out: model it with a spreadsheet!

 

So this is what I did.

I rentvested and borrowed as much as I could.

Once I hit my serviceability limit I started saving cash (with equity releases) to pay for a PPOR. It was the final leg in my journey.

Would I do it again? Maybe not. I should have gone for the PPOR first. But whatever, I'm in a good spot regardless.

 

I know where I stand on the emotional/lifestyle side of things; I just want clarity on the financial side.

CGT can be modelled. Rezoning is an unknown for both PPR or IP but would need to be captured in the capital gain rate applied to each scenario (for arguments sake I would probably apply a slightly lower CG rate to the PPR given your aren’t just basing your purchase on what is the best investment asset.

 

This is actually pretty much where I am at: no more serviceability so I will need to either sell all/some IPs to purchase PPR or just save (which is unrealistic for me given the price point I want for my PPR).

I’ve heard many suggest the strategy of:
> Sell down IPs (assuming there is reasonable equity available).
> Purchase PPR with as low an LVR as possible (reduce non tax effective debt).
> In time (or immediately) refinance PPR and use equity as deposit(s) to purchase new IPs.

Pros: tax effective debt. Can repeat process as PPR is payed off.

Cons: selling/purchase costs erodes ~5% of your asset value to switch from one IP to another, which to me seems kind of crazy (especially when you might only have 20% equity in the asset - that’s losing a quarter of your equity in fees/duties!)

Obviously there are other financial considerations but these appear to me to be the main two.

 

Why do you say you should have gone for PPR first?

And that being the case (and given that neither of us can ‘start again’) I’m guessing then that the advice would be to switch to/purchase PPR sooner rather than later?

 

Because I live in Sydney and my IP's were in Brisbane.

Brisbane didn't boom immediately after Sydney, as has been the case for many decades now. It only started booming now in 2021.

My timing was very wrong.

But I could never have predicted that, so it's only a regret I have in hindsight. It's not something I could really have planned for. So my advice isn't to buy the PPOR first necessarily - it's just what I would have done if I could wind back the clock. But given the future is unlikely to unfold exactly the way things have gone over the last 10 years, I wouldn't say to follow in my footsteps.

 

Does it need more complex or precise modelling? Isn't it obvious that renting is financially better when the financial costs of renting are pretty much always less than the costs of owning the same home?

Isn't that pretty much the end of it because nearly all other things are equal if one instead spends the saved capital investing in property. The only difference I can think of off the top of my head is the CGT free PPOR, and then land tax possibly.

 

Is it obvious? I'm not convinced (under all circumstances), and nor it seems are the other PC members who argue against reinvesting on long-term financial/strategic grounds. The key consideration is, as you mention, CGT. If the primary mechanism for generating long-term wealth through property is capital gains (not all agree on this however if you goal is yield property is a poor vehicle IMO), then surely at the end of your investment journey paying half as much CGT on the asset is a substantial consideration? Is it enough to swing the equation? I don't know, but I want to see the numbers.

 

As a mathematical exercise, I think it mostly is. Nearly everything is equal between renting and owning an identical house. Just the expenses and costs are different, and the tax treatment of the growth.

What other variables are there?

 

Agreed that the main variables would be the tax treatment (both of expenses and growth) I just haven’t seen the numbers showing that the tax benefits on expenses/holding cost for an IP outweigh the tax benefits of growth for a PPR.

Variables over time are of course interest rates and yields. As a general rule it would appear that when interest rates are low growth is high these would both favour a PPR strategy; with the opposite benefitting a rentvesting strategy.

 

how about living in it for minimum amount of time to establish main residence then move out and treat it as IP?

 

That’s a whole other discussion…

 

There is another variable in this discussion - future laws and taxes. We can never assume in our calculations that the taxation rules will stay the same as they are now. What we can do is develop a spreadsheet that calculates several potential outcomes based on various scenarios of land tax imposed on PPOR and likely reductions in the CGT discount.

 

Any idea, How does "Stamp duty" / "Land Tax" impact if PPOR changed to IP after, say 1 year. With rising price, Stamp Duty almost costs 5%

 

This would depend on which state the property is in. They can charge different rates of stamp duty and land tax depending on whether it is a primary residence or IP, and whether the property is above or below a value $ threshold.