She's On The Money - Is rentvesting the solution to having our avocado and eating it too?

Episode Date: March 24, 2020

What the heck is it and is it a good alternative to the more 'traditional' Aussie ideal of buying a home and living in it? Join us as we chat the pros and cons of this relatively new phenomenon and discuss why rent-vesting could be the ideal investment for you. Do you love the podcast SICK and want more SOTM? Of course you do! Join our Facebook page to share your money wins and money confessions, follow us on Insta for daily inspo to keep you on track and DEFINITELY subscribe to our newsletter, the written recap of the pod's key takeaways, including some bonus bits you won't want to miss... In a money mess and need help untangling the muddle? We've got you sorted - simply record your qualm and send it through to us at [e-mail] and you may end up on the podcast! Your podcast hosts are Georgia King and Victoria Devine. The advice shared on She's on The Money is general in nature and does not consider your individual circumstances. She's on The Money exists purely for educational purposes only and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Consultum Financial Advisers Proprietary Limited ABN 65 006 373 995 I AFSL 230323.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the Money, the podcast for millennials who want financial freedom. Today's episode of the show is brought to you by UpBank, the digital bank designed to help you organize your money and simplify your life. As regular listeners to the show would know, my name is Georgia King, a 20-something with stacks to learn when it comes to navigating cash. to help me find some answers for the very last episode of season two.

We'll be back soon though, guys, don't worry. I am joined as always by millennial money expert, Miss Victoria Devine. Hello, Victoria. Hello, friends. Now, today on the show, we are going to be talking about rent vesting, which to put simply is the choice to invest in a property somewhere while renting somewhere else. Instead of the more traditional trend of buying property

as your big investment and then living in it. Before we do dive deep into today's topic though, Victoria, let's chat our own money wins, money confessions, How did you go this week? I have a money win that I am silly levels of excited about that no one else is going to care about. Share it with us. On season one, I talked to you guys about how much I love my pantry

and I have these beautiful containers. You've probably seen the picture on our Facebook group. Beautiful containers, really well-labeled. Little OCD, some may argue. Yeah, look, calm down. I am the queen of the spice rack and recently I have been looking to make sure that all my oil bottles match because that is not a sign of having OCD at all so I found some oil bottles that I really like they are beautiful they are well designed but they are $80 each on the internet

and I am not having it it is not an option but I still really like the design of them yeah so I went on to AliExpress this week and I have ordered them all for $15 each instead of $80 per bottle. That's a pretty good deal. Still seems expensive to me for an oil bottle but I'm happy for you. It is. It's a ridiculous amount. I've bought six of them. I will probably post photos once I've labeled them and for me I feel like that's a money win but it also could be a money loss because I've never ordered something off AliExpress so who knows if it's even AliExpress. What is that? It looked good it's just a website they ship directly from china no judgment but what if it doesn't arrive i might have a money loss for you next season watch out anyway oil bottles i know no

one's as excited about that as me but i don't particularly mind i think that means you're an adult now like that does it legit like when you're starting to be interested in homewares and towels and oil bottles and vacuums i'm looking for a vacuum right now all recommendations welcome How exciting, guys. Oh, my God, wild. If you are still listening to the show after all of that, Georgia King, do you have a money win or confession that you'd like to share that isn't as dry as mine?

Mine is a win and it's not a dry one. I recently went to the Great Ocean Road with my boyfriend for a little weekend away. Oh, a date. A boy. A boy. And instead of staying in a ritzy hotel, we decided to camp. Beautiful.

A free campsite in, like, the hinterland. so gorgeous didn't spend a cent except for on food and petrol and stuff like that but not on not on accommodation so we saved there and shout out to my friend lily pope who recommended that to me so what a delightful human being lily is the best i love it okay so now let's take a quick look at the facebook community which was impressive as it literally always is week on week v which post stood out to you okay so i have one from rebecca who i love it is hilarious she says money win but I would really have thought it was funny if she put like honey win because it totally is about honey and that's funny. Anyway she said my mum and I have been beekeeping for about a year

and today quite dramatically she found out she was allergic to bees. On the plus side she said we sold our first two kilos of honey to the nurses in emergency therefore making our first money win with our bee slash honey business and she posted a really cute photo of her with two jars of honey but also a swollen shut eye and i feel like that's maybe a loss but she also made the first sale in her small business so here's to rebecca and her honey business i love it what have you got for me jk okay so mine is from asanki who has written in money win was paying near five dollars for a packet of bliss balls and going through about two to three packets a week uh me yes we've all been there uh decided to make these at home and it took me 15 minutes to make they taste even more

delicious than the store-bought ones they're plastic free saving money saving the environment they're also vegan friendly and healthy she then posted the recipe as well as a photo of some delicious looking protein bowls there as well awesome georgia did she use any emojis she did sorry she used several emojis let me just um talk you through them there were four with the big teeth like big grin yeah beautiful beautiful important to visualize this exactly there's also two more of those and then a wink face i think it's quite small so it might not be a wink face but i'm pretty sure it is. Let's go with a wink face. Should we move on, V? We should absolutely move on. Today's wild. And now into the main part of today's show, rent vesting. Now, it's no secret

that the property market in Australia is a tough cookie to crack with the average home price in Sydney just shy of $1 million at $955,000 right now. In Melbourne, the median price is $737,000, which is a little bit more reasonable down here in Melbourne. A little bit, just a little bit. that still seems astronomical to me. So even the millennials refusing Avalon toast and opting instead for bland brekkies are battling to break in. And the old Australian dream of owning our own home seems like it's only getting further and further out of reach. So what are our alternatives? Some say that rent vesting is the way to go. That is renting in the suburb you want to live in while buying a home in a more affordable location, perhaps a little further out and using that

property as your investment. Victoria, firstly, is rent vesting something we should actually be considering and why do you think so many millennials are using this strategy to break into the property market? I love this strategy because I feel like everyone that I talk to after we've had a really good discussion about investment and they have decided that property is the asset class they want to be investing in. Rent vesting allows you to buy a property in a location that has good capital growth, good rental yield and the ability to create wealth while still living in an area that gives you the lifestyle you want. So, for example, we live here in Melbourne

and I have a couple of clients who live in apartments in Paran. They couldn't afford to buy in Paran, so they've bought a little bit further out. They rent those properties out and they still get the lifestyle that they want at this point in time. And a lot of the time, rent vesting is a great idea because it turns a property that you purchase from an owner-occupier asset to an investment asset which means you can now claim tax on that

asset and it becomes a little bit more of a sexy option when it comes to returns right so whilst there are a whole heap of different rules and regulations such as living in the asset for the first year so that you can get some concessions on capital gains and then moving out there are a lot of moving parts to this but at the end of the day rent vesting is essentially where you purchase a property that you do not live in that has a rental yield you take that rental yield for example if someone was paying you $350 in rent each week at the property you own you then go and spend that $350 on renting the apartment or property that you want to live in the area that you want to live in and you then go and pay the mortgage but you're getting a tax deduction on that mortgage therefore

you're able to pay it off faster as well. So there's a number of benefits to rent vesting that aren't just I'm not living in the property. So there are tax benefits associated with it, there are lifestyle benefits associated with it and also the ability to pay off a mortgage faster which to me is really important because it does two things. One, getting out of debt is priority to me and making sure that we don't have assets that cost us money but two, the faster we're paying off a mortgage, the faster we have access to what is called equity. And equity allows us to build other assets. So it allows us to leverage to purchase another asset if that is what we wish to do. So would that be like buying another house? It could be buying another house. It could be you

purchasing a property because it is a really good asset in a well-diversified investment portfolio so that you can then go and buy some shares and you've got your rent covered so that you're in a position where you are making the most of the income that's coming in. So rent vesting isn't for everyone, but it's a really good conversation to have because now that we are in a position where the average house price here in Melbourne is $737,000 and in Sydney it's $955,000. Those numbers are incredibly hard and very, very unrealistic for most first home buyers. So we need to look at other assets that we can invest in in the interim before we are actually able to buy our family home the australian dream over the last 50 years 50 plus years let's call it forever

has always been to buy your family home live in it pay it completely off and that is what we've all worked towards but now it is not financially viable for most of us to actually own the property that we live in. So rent vesting gives us the ability to purchase a property that is going to help us create future wealth while also giving us the ability to live the lifestyle that we want to live right now. Because historically, let's call it our parents were able to buy a property that they could move into and afford and pay off, whereas we don't have that grace. I know if I look at myself, I live in the inner eastern suburbs of Melbourne. The prices of properties there are insane and there is absolutely no way that myself included as a first home buyer will

be able to buy a property in that location and have it be my dream property. So I think that it is a really important thing that we actually reiterate here is that first home buyers are now not able to purchase their dream property as their first property. So we've spoken about using this strategy to get our foot into the property market door. Would you say people are mainly using rent vesting as a stepping stone to eventually getting their dream home? A lot of people talk about rent vesting because you can get into property now. I think we really need to be thinking about the long-term strategy. And an important thing when it comes to property for me is that we take the emotion out of the investment. Too often do I see people coming in to talk about property with us

and they're like, I really just want to buy my perfect home. And it's like, okay, cool. So this is an emotionally driven purchase. And to me, we can't have that because you are going to make a decision that is not going to be in the best interests of long-term you like yes you might get your white picket fence and you might get the perfect front door but does that actually help you generate wealth over the long term so yes some people are using rent vesting as a way to get their foot in the property market or they are purchasing a lower value property the property is increasing in value and then they are either selling that property so that they are able to them buy what we deem their dream home or there are a lot of people who are purchasing properties

to rent vest they're paying interest only on their loans and they are purchasing more properties with the goal of having the rental yield as an income source so a lot of people and i'm not saying that this is right or wrong it is just a strategy that we are having a chat about a lot of people are purchasing property with the intention of gaining the rental yield and creating a property portfolio that sustains their living expenses and that could happen for their entire life. So they might create a property portfolio that returns enough to pay off all of the mortgages or pay the minimum on their interest-only loans as well as meet their daily and monthly money needs. So I think it's important to see that there are a number of different reasons we would rent vest

but the reason we are rent vesting is going to be personal to us so a good example of this is let's use me as an example I would love to purchase in the area that I live I can't afford it so I might go and purchase a property in an area that I can afford that I believe is going to have really good capital growth really good rental yield I'm not purchasing a property that I'm in love with I'm purchasing a property that is a good financial decision and I am waiting for that capital growth to kick in and me to have an asset that enables me to purchase the home that I would like it is not the only wealth creation strategy that exists there are a lot of them but it is one that you can use to leverage it but it's not going to take 12 months we know that property takes about 10 years

to double in value so this as much as it seems like a really quick fix because a lot of the articles and the communications that are out there about rent vesting make it seem as though you can get into your dream property faster using rent vesting it's actually a little bit of a myth because you still have to wait for that capital growth to happen you still have to be paying off a mortgage you still have a really large financial commitment that you need to consider whether is actually going to help you create wealth in the way that you want in the time frame that you have so i'm rent vesting victoria can i just move into that property whenever i want to technically yes because legally you can kick your tenants out and you can move in as the owner to become owner

occupier. There are a number of things that you need to take into consideration when making that decision though because if you switch from being an investment to an owner occupier you are now not able to claim it on tax. Things are going to increase and there is a very large probability that you cannot afford to live in that property. So I have clients where we have said look you can buy the property that you really want to buy but you cannot move into it until you've paid a specific amount off your mortgage so that we have debt repayments that are really manageable once you move in so more often than not your debt repayments will increase because you no longer get those tax deductions on that property if you move in now we all know that rent money is dead

money no we do not gee king well is that a thing in this case is it a thing generally you need to Stop saying things that are wildly inaccurate on this podcast. You're the expert. Well, I try to be. You don't help me. No. So I think that rent money is dead money is such an outdated concept that never existed to begin with.

Like paying rent to me is paying for a lifestyle. And if that is of value to you, then pay more on rent. I know people and have clients who say, no, I don't really want to spend a lot on rent, so I'm just going to rent this place. It does the job. It's a place that I have, that I live and I'm going to spend all my money on entertainment. Whereas the opposite is true for a lot of my other clients where they say, no, I really

want to have a beautiful home that I love living in. I entertain at home a lot and that's their values. So it all comes back to values. But rent money is not dead money if you're getting something out of it. So if you're getting the lifestyle that you want or you're investing your money elsewhere. So mortgages are really expensive and I won't be breaking any news here to you. Everybody knows that. But more often than not, a mortgage is really expensive.

So to live in the property that you own can often be just out of the question, especially in the area that you want to live. So paying rent enables you to invest the surplus cash that you have in another place so you can create wealth while you're paying money to have a roof over your head. at the end of the day, I think rent money is dead money is a really terrible saying because we all need somewhere to live. Literally. Yeah. And paying rent is a part of that. Yeah. It is an essential. Yeah. So it's like saying, well, spending money on food, what a waste. Like that's not a thing that we can say because we all know we need food. We all know that we need to be paying

money to have a roof over our heads. However, we have the opportunity to choose how much that costs us and that comes down to our values so as a millennial if one of my values is to have a property break into the market would you say this is the best way to do it it's not necessarily the best way to do it but if you are a millennial who says well you're just a person who wants to get into the property market and you know the property is a hundred percent what you want to purchase out of all the asset classes if you've done your research and you say no still want to invest in property and Victoria it's not emotional I just want to choose this I'm here for it I think that it is a really great way for people to purchase a property so that they can build wealth but again

I need to really reiterate buying property needs to not be such an emotional decision I can fall in love with so many different properties and it is so easy to go through the domain website and be like oh my gosh look at that one it's got a pool I do that sometimes it makes me so excited I know and we really need to stop doing that because it's not that it's not going to happen it's just that it is unreasonable for us to be choosing an asset that's meant to be generating us wealth if we're choosing it based on face value we need to be making sure that the properties we buy are in areas that have good capital growth in areas that have good rental yield that have good infrastructure around them so that we are actually getting the growth that we need to create financial

freedom. It's really important here as well, G, to mention that like every single other investment asset that we talk about, property is not something that you purchase with the intention of getting rid of in one or two years when you find your dream home. If we are purchasing a property, we are choosing that asset for a minimum of 10 years. And if you don't want to commit to something for 10 years, you are not meant to be purchasing at that point in time because there are so many things that you need to take into consideration there. We need to be talking about capital growth. We need to be talking about rental yield. We need to be talking about how much money you are spending on stamp duty and transfer costs and all of the fees and additional

costs associated with buying and selling property. For example, how much are you going to pay your real estate agent? So all of those need to be built into the actual property price. And because property is such a tangible asset, so many people forget this. So, so many people will turn around and say, well, I've made money on this property because I purchased it for $500,000 and I sold it for $700,000 a couple of years later. And you go, fantastic, that sounds like a great return. But what they didn't tell you was how much they paid in stamp duty, how much that kitchen and bathroom renovation cost them, how much all of the additional things that they've added to the house actually cost. So when it came down to it, and I've done the numbers before with clients

where they've bought for $500,000, sold for $700,000, but they've actually only made $10,000 $15,000 profit because they've put so much money into the property to actually get it to that stage. So we need to be really cautious of where our money goes. It's not like a share. A share doesn't cost us additional money. They don't call up and say, hey, Victoria, it's Rio Tinto. I'm just wondering, we've ruined our hot water system. Could you throw us $1,500 to fix that? You don't have that when you are investing in shares. So, we need to make sure that when we are buying property, we are taking into consideration all the additional fees and charges that are going to be associated with that. All right, Evie. So, it sounds like there are benefits aplenty to

rent vesting, which I hadn't really heard of. Apparently so, given the conversation we've had. Yes, exactly. But are there any quants? There are a few things that you need to take into consideration here. So, first things first, are you buying property just because you feel like property is the asset you should have without having taken into consideration any other asset class that exists a property whilst rent vesting sounds really sexy is a mortgage that you have to pay regardless of what is going on in the economy you have a mortgage payment that you are obligated to pay unlike shares where you can choose to just not contribute that month a mortgage needs to be paid and if you don't pay it the bank is coming for you so we need to remember that whilst this

sounds like an attractive opportunity it is a financial responsibility that you are taking on another one is buying an investment first so so many people are hung up on buying their dream home and purchasing a property that they own and that they get to live in and if you are purchasing an asset to rent vest you don't actually get to do that and whilst I don't think that's a negative thing because I'm very pro-renting I think a lot of people might say but I'm sacrificing the goal of living in the property that I own. Another thing to add to that is that you can't make a home that you rent your own. It's something that a lot of my clients talk about. They're like, oh, but I can't paint the walls, but I can't do this or I can't have a dog. And a lot of that

is changing. We're now seeing the rental industry actually trying to keep up with us because they know that unlike 30 years ago, renting these days is far more long term. So people are offering longer leases there have been rules passed here in Victoria that you are allowed pets and that they can't be declined and I think that landlords are now being far more flexible if you are a good tenant for example if you call up and just say hey could I paint a wall could I get permission to hang out I think it is really fair to ask those questions however if you don't like the tiles in the kitchen you don't get the opportunity to change them so I think it's important to be if you're renting and you're going to choose to rent for a long period of time not picking a property

that you want to tinker around with but picking one that does meet your expectations is important but being aware it isn't your home so you don't get the opportunity to change it for me that's not enough of a deterrent to change my decision however it is worthy of note it's worthy of having that conversation and last but not least Georgia it's really important to remember that just like every single other asset there are ebbs and flows. So the property market can increase in value as much as it can decrease in value and if we are going to be committing to a long-term financial responsibility we have to be in a financial position to be able to ride that out and that means if your property is valued at less being in a position where you are not forced to sell

is essential. So making sure that you're talking to a good mortgage broker about your service ability and about how to purchase a property that aligns with your goals but also your financial abilities is really really important and a broker is going to be literally your best friend here when making sure that you are making decisions that are in line with not only your values but your financial situation do we need to be chatting to brokers if we want to make this happen I am a very big believer in putting your money in the hands of experts I am not on the page of just making decisions for yourself too often do I see people going and getting loans that don't actually benefit them that are structured incorrectly that don't have the flexibility that my clients need

and more often than not when I do see a client that has finally realized that they are actually locked into a fixed term that I can't do a lot about for maybe one or two years so I think it's important to get a professional on your side a mortgage broker does this day in day out and make sure you are in the best possible financial position they will be able to weigh up all of the pros and cons they will be able to make sure that you're not missing any of the fees charges stamp duty anything included that you might miss because you're not a professional investor you are not a professional property buyer talk to someone who is and they will be able to hold your hand through that process and more importantly here that service is free it does not cost you anything

to see a broker because a broker gets paid by the bank that they end up taking the loan out with yeah it doesn't actually change that broker's decision to go with a particular bank unless you see a broker who works for a bank which I would discourage because they don't have the ability to weigh up every opportunity in the market for you which I think is very very valuable but seeing a broker they are going to be able to get the best possible deal for you and put you in the safest possible position that you can be The world is a pretty strange place to be at the moment and social media and our Facebook group are absolutely flooded with information about COVID-19. Our number one priority, as it always

has been, is to protect the health of our team and our community. So we made the decision this week to not record with our money diarist. In light of this ever-evolving situation though, we have recorded a COVID-19 podcast that will be released later in the week. Whilst health is incredibly important and we need to protect that fiercely. Finance and money are so closely tied to what's going on. And whilst there is so much going on in this world, feeling financially prepared will hopefully help you feel a little bit less stressed and a little bit more in control at a time when not much is in our control at all. So keep an eye out for that because it'll be uploaded later in the week. But keeping in tradition of our She's On The Money podcast,

we still have a listener question. So let's jump into that. Hi, Victoria. I've always wanted to purchase a property. And over the last 18 months, I've started to collect a really great deposit. Just wondering if I rent Vest instead of living in the home I purchased, do I need less of a deposit? And what other costs do I need to take into consideration? Thanks. Where does she begin, Victoria? So there are a lot that people just don't seem to take into consideration when deciding to purchase a property. And this is why I am a massive advocate, once again, of having a good broker on your team because they're going to be able to outline all of those fees and charges for you. They actually have access to really,

really wizard-like calculators that can spit out exactly what you're going to be up for if you purchase specific properties. And I think that's incredibly valuable. But something that applies to everybody, regardless of whether you are rent vesting or buying the property of your dreams to move into is that you need a strong deposit. So we always, always, always at Zella recommend that you have about a 20% deposit because anything less than that puts you at more risk. We're not saying that you can't get a loan with less of a deposit. We all know that that is not true. We can actually access loans for 5%. It happens. We don't necessarily get behind that though because if you only have a 5% deposit, you're putting yourself at a lot of risk. If the market declines and

property prices decrease, you could quite easily put yourself in a position where the debt you owe on a property is higher than the actual value of the property. So I would never want a client to be in that position and I think that having a really strong deposit is essential. Having a strong deposit also means you've really worked hard to get this property and you've taught yourself how to save and how to allocate funds so when you finally do get that mortgage it's not as painful to service that. So for everybody that is getting a mortgage I spoke before about additional fees and charges it's not just the total property purchase price for example if you're spending $500,000 on a property that is not all you are up for it's actually a percentage that you need so

the deposit needs to be a percentage of the total cost of the transaction not just the property and that includes a whole heap of additional fees and charges above and beyond that purchase price for example stamp duty lenders mortgage insurance if you take it out valuations conveyances pest inspections the list goes on and that's why again i'm going to reiterate having a broker on your team is going to make sure that you are covered for this yeah because i have had clients that have been approved for mortgages been really excited about it gone and put an offering on a property and then had to pull out because they actually didn't have the funds to meet the transaction they had the funds to literally meet the value of the property but they didn't have

the funds to make sure that they could actually afford the property if you are a first-time purchaser which it sounds like our listener is because she says she's been thinking about getting into property it's important to know that there are a number of different concessions available to first home buyers if they move into their property these often and whilst I can't talk about every single state these yeah and everything does change these grants aren't available for first-time investments but as it stands at the moment if you're buying a property here in Victoria you can purchase an investment property and still get the stamp duty concessions and concessions on your first home that you move into later down the track it's not to say that they won't change the

rules but right now you could buy an investment property and then also go and buy your first home and get a whole heap of concessions on the home that you eventually move into. If you're not a first home buyer though, everything else in terms of additional fees and charges still relates to you. You are just in a position where you might be able to use some of the equity in your property to leverage getting into a property. It just means you're pulling a deposit from somewhere else rather than just saving up for it again.

So I think it's important to note that yes, if you've got property, it could be helpful, but it doesn't necessarily mean that it's going to get you into your next home ASAP. So would you say that the deposit would be the main thing stopping people from getting into property? No sadly not there are so many different hurdles that I'm sorry there are so many different hurdles that need to be jumped over when getting into property but I believe that there are two main ones. Yes you are correct the deposit is the number one thing that we actually need to make saving for it is really hard but once we have our deposit and we've got enough money for

all of the additional fees associated with that transaction. The second really big issue is actually being able to service that loan. And it is so heartbreaking when I have clients come to me that are on lower salaries that say, Hey, Victoria, I have worked my life away to save for property. It has been my goal. And I go, I am so here for this. Congratulations. They'll have a $250,000 deposit. They will have saved epically. Like it is so impressive, but then they earn 60 or seventy thousand dollars and the property that they want to purchase because they've calculated that two hundred and fifty thousand dollars is like 1.2 million dollar property you actually can't have that property because you cannot on your income service that debt so being aware

that you need to one save for the deposit but then two you also need to meet the criteria of servicing that debt is really really important and it can be the one thing that once you've gotten over that you've been saving for that home deposit it can be the thing that gets you out of the game again that is all we have time for today but before we head off we need to wrap the boring but important stuff but before we do that there is also some exciting news that some of you may already be across victoria is writing the shiz on the money book which is going to be our ultimate finance bible and honestly i cannot wait me either so that means that we'll be pressing pause on the podcast for a little while apologies so that victoria can meet her deadline and make her

publisher and us stupidly happy rest assured though we will be back for a very exciting season three very soon if you do have any episode topics you'd like us to cover please get in touch on the facebook page so we want to make sure the content we're bringing you is relevant and it's what you want to hear now back to the boring bit the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or financial decision and stress less we promise victoria divine is an authorized representative of consultant financial advisors propriety limited abn 65006 373 995 afsl 230 323 and thank you of course to ryan john for whipping

our wild chat into the podcast you guys love we would absolutely love it if in the time that we are away you still keep in contact via our facebook group where our community you'll be there I'll be there. George will be there with the bells on. Where our community shares money tips and tricks every single day free of judgment. Search She's On The Money on Facebook and join us. If Facebook's not your thing, find us on Instagram.

We're at She's On The Money AUS. See you next season, guys. See you, friends.