Rentvesting - Is It a Good Idea in My Circumstances?

jm7 on 04/02/2024 - 23:05
Last edited 04/02/2024 - 23:25 by 1 other user

Seeking some advice because I can't figure out if this is a good idea or not;

Circumstances:
Adult 1: $100k salary
Adult 2: $130k salary
1 dependent: $27k/annum childcare cost before rebate
Mortgage: interest payable is $1.8k/month (with $125k in offset), $600k initial loan amount and approx $3.9k/month repayment (P+I) if nothing in the offset. Approximate house value is $1 million. House is approx 20 years old so limited ability to claim depreciation.

Does it make sense to;
Rent out PPOR for $700-750/week
Invest the 125k sitting in the offset in ETFs
Rent another property for $580/week

I'm struggling to get my head around the complexities of negative gearing and negative cashflow, and the articles about rentvesting refer to single first home buyers. Does it make financial sense to rent out my PPOR and rent elsewhere?

Happy to provide more info if required.

Thanks 😊

• 

  jug123 on 04/02/2024 - 23:26

  +3

  Dont forget the capital gains that will be payable if you turn your PPOR into an investment this obviously depends on how long you plan on having your PPOR as an investment
  If youre seriously considerig, go and see an accountant that specialises in investment property tax
  What sort of property are you getting for $580 p/wk. If Syd are you going from a house to a unit, will that suit your lifestyle?
  Will you be in the location you want for $580
  Do you want to take the risk of your $580 rent being $650 next yr or the landlord selling the rental youre in, etc, etc
  Dont forget to factor in moving costs and those costs could be every 12mths
  Theres a lot more to your qu's than the economics in the current climate

  • 

    jm7 on 04/02/2024 - 23:39

    +1

    Thanks for highlighting some things to think about. I'm really just trying to figure out if it makes financial sense in the first instance, then I will consider other factors. The house we can rent for $580/week is sufficient for us and we plan to move back into the property we own in year 6 to avoid CGT.
    The other points you make are definitely food for thought.

• 

  zangbangapda on 05/02/2024 - 00:12

  +1

  Rentvesting makes sense where you want to rent at a decent suburb you could otherwise not buy, but buy a house in a different location for investment you would not really live in.

  Looks like your situation is more about minimising costs and not maximising returns.

  From the capital gains view, which will be the significant majority of the returns here, you will get anyway either as a PPOR or IP. 6% increase for $1mil would be around $60,000.

  The difference in your scenario is cashflow and whether you get like $120 to $170 extra a week by renting out your place and living in a cheaper place with rental difference and negative gearing. It could add up to maybe $12,000 or so a year of benefits, but less once you factor in moving costs, agency fees, paying maintenance costs, etc its less, and even less once you factor in CGT for IP which will be substantiall and eat away about $10k of that $60k capital growth if you sell. And who knows how the ETFs will perform the next 10 years compared to your guaranteed offset mortgage rate.

  I see the comparison here more as a cost savings idea rather than comparing an investment strategy in your case. You could save more money, and ETFs could return slightly more than offset, but then at $125k if ETF returned 1% more than offset a year, you could have $1,250 more per annum, then minus CGT and more like $1k benefit. Its minimal and shouldnt sway your decision.

  So all in all, while no one has a crystal ball, you living in the PPOR shouldnt be a bad decision. You could save more money by rentvesting maybe, especislly if you want to save up more in the short term for the next IP and cough up taxes later, but otherwise it wont be a noticeably better investment decision.

  • 

    EightImmortals on 05/02/2024 - 08:16

    +1

    Don't forget land tax on investment properties too.

• 

  AustriaBargain on 05/02/2024 - 06:43

  $27k/annum childcare cost before rebate

  Bargain, how did you land that?

  • 

    jm7 on 05/02/2024 - 07:19

    It's only 4 days per week

    • 

      AustriaBargain on 05/02/2024 - 07:31

      So what, $135 a day? That's very cheap if it covers you and your partner's entire workday.

      • 

        jm7 on 05/02/2024 - 07:53

        +1

        It's at a university. We are very lucky. The hours could be longer but we make it work.

        • 

          AustriaBargain on 05/02/2024 - 08:16

          @jm7: My university I studied at had daycare, but I was told the waiting list was like three years to get in.

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  jm7 on 05/02/2024 - 08:56

  I'm really just trying to determine if we will come out in front from a financial perspective due to negative gearing (and potentially increasing our childcare rebates) and renting a cheaper property. If it's not going to have a significant impact we won't consider it due to the reasons listed above by jug123, but would seriously consider rentvesting in the short term (i.e. 6 years) to minimise expenses and grow equity. The rental we are looking at is in the same suburb just a little smaller.

  • 

    avoidfullprice on 05/02/2024 - 09:12

    if we will come out in front from a financial perspective

    As zangbangapda said above, your net cashflow/cost may be improved, but your gain/return may be worse. They are the financial tradeoffs you have to make

    • 

      jm7 on 05/02/2024 - 09:20

      Thanks for sharing your opinion. Would it make more sense to invest the money in the offset into an IP?

      • 

        RockyRaccoon on 05/02/2024 - 10:46

        Are you taking into account that the offset interest is effectively tax free income. Where as your IP won’t be.

        Your offset, means you reduce your outgoings, which is paid with after tax money, where as interest on the IP is income and subject to tax, probably around 40%

  • 

    soan papdi on 05/02/2024 - 09:21

    if we will come out in front from a financial perspective due to negative gearing

    Not sure if you entirely understand this but negative gearing means you're literally losing money every month and asking the ATO to reduce your taxes. It's never going to get you out in front. The only hope is to gain it back (and some more on top) when you sell the property.

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  arkie0 on 05/02/2024 - 09:03

  What's your interest rate on your home loan?

  Based on my initial calculations you won't be massively negative gearing because you can't deduct decline in value / capital works depreciation with your setup. You'll be very close to neutrally geared.

  • 

    jm7 on 05/02/2024 - 09:16

    6.14% comparable rate

    • 

      arkie0 on 05/02/2024 - 09:34

      Rent vest:
      Income - 36,400@700, 39000@750
      Deductions: $51,775 - Property Management $3k, Insurance $1.5k, Land Tax $2k, Water $1k, Rates $2k, Repairs 3k, Home loan Payments 46,800 PA, Interest: $21,600+$7675 PA, Capital works deduction 7k-10k.
      Taxable rental income after costs - -$15,375k@700, -$12.7@750
      150k eft - Dist $4.5k
      Yearly change to taxable income combined: -11k to -$8k

      Conclusion - Does not make financial sense to rent vest.

      • 

        jm7 on 05/02/2024 - 09:48

        +1

        Thanks Arkie. Appreciate the time spent to calculate

  • 

    Duckie2hh on 05/02/2024 - 09:29

    But OP's other costs would now be deductible (i.e., land tax, council rates, repairs to home, etc)

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  Duckie2hh on 05/02/2024 - 09:28

  +1

  House is approx 20 years old so limited ability to claim depreciation

  That means you still have another 20 years worth of depreciation. Approx $3000/annum

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  barge-in hunter on 05/02/2024 - 09:37

  +1

  I would hazard to guess that the rent difference just isn't enough to justify the move - but I'm not smart enough to work out the impacts of the tax write offs. For what it's worth, here is a non-exhaustive list of costs you'll need to pay to become a landlord:

  • moving house expenses (utility disconnections/house movers/cleaners etc)
  • land tax (now that it's an IP)
  • rates
  • landlord insurance
  • utility service fees (not usage, that's on the tenants - but "maintaining a connection to the network" is a landlord expense in Vic at least)
  • realestate agency fees (both ongoing @ 4-7% of rent, and 'leasing'/advertising fees, tribunal fees etc etc. Expect $130-200 monthly depending on your agent )
  • 'between tenants' loss of rent (yes, consider this a cost - in this market it's not usually long, but even just a week's rent will take a long time to recoup)
  • maintenance (cleaning the gutters, annual/bi-annual electrical, gas & smoke detector safety checks, and depending on the tenant, little things you would have been fine living with or DIYing)
  • repairs when you do want to move back in (guaranteed the property won't be in the same condition even with good tenants, so don't discount basic wear and tear repainting or re-carpeting if you take pride in your house and garden). Edit: not saying anything negative about renters - but over 5 years, most owner occupiers will spend a few weekends doing minor touch ups or garden work for example, that most tenants likely won't

  As a renter, you'll still need to pay for:

  • utility usage
  • basic garden maintenance
  • moving costs (house movers, 'end of lease' and carpet cleaning etc)

  I say all this as someone who moved into a property we used to rent out. Definitely worth talking to an accountant about the tax implications - but go in with eyes open to these (mostly deductible) costs too.

  • 

    jm7 on 05/02/2024 - 09:44

    Appreciate your insight. There are definitely lots of things to consider. Luckily the person we purchased the house from already paid land tax for this year, and the house is pretty low maintenance (i.e. no carpet). We would be looking to move for more than a year to make the moving cost worthwhile (but obviously no guarantees the rental will continue beyond a year). I'm thinking it might be best to use the 125k as a deposit for another (cheaper) property, and still rent our PPOR out. That way we won't have to worry about being evicted from the rental.

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  sumyungguy on 05/02/2024 - 11:19

  The comparison I'd suggest is residential property vs superannuation and ETFs. Factoring in your aspirations for family size, school fees, leisure travel, PPOR reno/extension, etc.