Episode 46 - Rentvesting
Updated: Mar 4, 2020
Want to get into the property market but can’t afford to buy where you want to live? Rentvesting might be your ticket to having it all. On this episode of the #mastersoffinance podcast we talk about how a rentvesting strategy works and how you can benefit from it. Stay tuned to the end for our masterful tips on what we have learned from personal and professional experience. Have a listen!
Follow us on Facebook https://www.facebook.com/moranfp/
For more podcasts, blog posts and videos, head over to www.moranfp.com.au
Alex Hont 0:16
Welcome to this episode of the masters of finance podcast. Today Chris and I are gonna be talking about rentvesting. What is rentvesting. We're going to delve into it and talk about some of the advantages in that and some of the things you might not have thought of, as well as what are some of the drawbacks? And also how will the strategy work for you? Have a listen.
Chris Haggart 0:33
Chris Haggart and Alex Hont are authorized representatives of Moran Partners Financial Planning. Any opinions expressed in this podcast are solely our own and do not reflect the opinions or views of Moran Partners Financial Planning, or any entity we are associated with. This podcast is for informational purposes only and should not be used for or does not constitute investment advice.
Alex Hont 0:53
Alrighty, Chris, welcome back to another episode.
Chris Haggart 0:58
Here. We are. Yes on a Lovely Wednesday.
Alex Hont 1:02
That's right. So Chris. Let's talk reality TV, are you getting into survivor?
Chris Haggart 1:06
Yeah. Well, I didn't get to watch it last night because love Island. Trumps all.
Alex Hont 1:13
Fair enough. I love it. I reckon it's game theory in a little bit of a different format but the psychological aspect of it and the decisions that people make. And the fact that every game is completely different because the players are always different
Chris Haggart 1:26
it is and it's nice to see the familiar faces back I must say.
Alex Hont 1:28
Anyway, this is not a reality TV podcast. It's not it's not so let's get into the serious business of finances. Why are you laughing?
Chris Haggart 1:38
I shouldn't be laughing.
Alex Hont 1:40
We're very serious on this. we called ourselves masters of Finance. Chris, this is you know, serious business.
Chris Haggart 1:45
The point was we were taking a light hearted approach. We typically do, I don't think we do anything too serious in here sometimes maybe. But yeah, so today we're talking about rentvesting.
Rentvesting that sounds like a it's like two words mashed together. Is it a real word?
It's a weird term, but this is a good way to describe it.
Alex Hont 2:05
Yeah, well, let's What is it? Right?
Chris Haggart 2:08
Yeah. So basically, I guess property investment. Where it's not you're buying buying an investment property and renting where you want to live.
Alex Hont 2:18
Yeah. So I guess you're buying a property in an affordable suburb. But you get to live basically, wherever you want. You live in a suburb where you're paying rent that you want to live.
Chris Haggart 2:27
Correct. I guess there's a dynamic in here. That is assumed.
Alex Hont 2:32
Yeah, go on.
Chris Haggart 2:34
Because you, you could have bought a property say I'm just gonna pick a suburb, Glenroy.
Alex Hont 2:42
Glenroy, northern suburbs of Melbourne.
Chris Haggart 2:45
And let's say you're renting in Toorak.
Alex Hont 2:48
Chris Haggart 2:49
And so the rent that you're paying in Toorak is going to be significantly more than the mortgage you would be likely to pay depending on the property that you buy obviously in Glenroy.
Alex Hont 3:00
In this case, yes, yep. Unless you're buying a car park in Toorak or renting the car park in Toorak.
Chris Haggart 3:07
Yeah, well let's just say on on, I guess, typical assumptions.
Alex Hont 3:11
Chris Haggart 3:12
That that scenario is probably not the best outcome.
Alex Hont 3:18
Well, no, I mean, you still Well, I guess you get to live where you want to live and you're still
Chris Haggart 3:23
investing property wise. Yeah, I guess I was just more thinking about the fact that
Alex Hont 3:28
all right, but in general, generally you're buying a property. Yeah. But it's the same sort of thing. You're buying a property in a suburb where it's more affordable. Glenroy is significantly more affordable than Toorak.
Chris Haggart 3:39
Alex Hont 3:40
And you still get to live where you want to live in, you know, in in amongst it.
Chris Haggart 3:43
Yeah. Well, I guess that's I guess that's fair. Typically the way this is used is that you'll find the rent that you're paying is less than the mortgage you would otherwise fund.
Alex Hont 3:54
Yeah. And I guess that's because mortgages are quite big.
Chris Haggart 3:57
Alex Hont 3:58
And Therefore they take a lot of money to service, whereas the rent, the rent is not always as much as you might be paying in the mortgage.
Chris Haggart 4:06
So and typically that's the dynamic that's we have found ourselves in, in, in Australia, I think we're going to go into housing affordability.
Alex Hont 4:17
Well, I think it's come about because I mean, one if we go back a long way, when they changed the laws to introduce the 50% capital gains tax discount. Right. And and the deductibility of interest. It it, it made speculating on real estate as an investment and much more appealing idea. Now, this is not that old a strategy I think from from memory, it was sort of started coming about in the 90s. You know, before that no one, people owned investment properties, but it wasn't as speculative as it is now
Chris Haggart 4:48
as widely, as widely practiced.
Alex Hont 4:51
Chris Haggart 4:52
And I suppose at that time, we probably hadn't seen the increases in property prices.
Alex Hont 4:56
Well, I think the increases in property prices could very well be a function of the speculation or at least added to it
Chris Haggart 5:03
Self funding well I guess that's that but then that creates the cycle doesn't it?
Alex Hont 5:07
Chris Haggart 5:07
Increasing property makes more people invest, which increases the price of property and so on so forth. So we've seen the the value of properties rise and it's just become almost generic knowledge now it's just like well.
Alex Hont 5:21
Property always goes up. It doesn't, but that's what we think.
Chris Haggart 5:24
That's that's the mantra.
Alex Hont 5:26
Yeah. So I guess we're we've ended up and why rent vesting has become such a much more popular strategy is because housing in cities has become a lot less affordable. What was it that Chris, we said before insert, okay, Boomer reference.
Chris Haggart 5:40
Yeah, exactly, right. Some of the, the comebacks where it's like, well,
Alex Hont 5:48
Interest rates were 17% when I bought my property, yeah. Sorry, sorry, boomers! I'm not having a go.
Chris Haggart 5:53
Alienating a whole whole part of our listenership here.
Alex Hont 5:57
Yeah, and I'm not disputing that because interest rates Now, are you know sub 3%. So the, I guess the the servicing.
Chris Haggart 6:06
The difference is, although interest rates might have been 17% the debt on the actual property purchase wasn't seven times your income at that point, it might have been two.
Alex Hont 6:17
Well, that's right. I mean, that's what the data says when we look back at at say, the year Chris was born 1982 and have a look at the multiples of income. And this is data we've pulled from the RBA house prices in Sydney in 1982. Were about four and a half times
Chris Haggart 6:33
the average average income
Alex Hont 6:35
Chris Haggart 6:36
and now we're sitting at well, about nine.
Alex Hont 6:39
Chris Haggart 6:40
Yep. So it's like twice as unaffordable as it was.
Alex Hont 6:45
Chris Haggart 6:46
Thirty eight years ago
Alex Hont 6:47
And Melbourne 1982 was about three times income, and now it's more like eight. Right. So this is a significant jump, not just it hasn't just kept pace with wage inflation. It's gone well and truly above that.
Chris Haggart 7:00
Significantly, right. And then what that means is for the purchases, the deposits might have been similar, but you know, you don't have the equity. So you're taking on the debt. And then as a result, because you have larger debt, you have a larger mortgage obligation which eats up more of your salary, which means that we don't have money going into the general economy, for consumer spending. I think this is this is part of the issue that we're seeing, like we're not seeing wage price growth here in Australia, but that money doesn't go back into the economy to, to, I guess, feed other other areas.
Alex Hont 7:37
Yeah, that's true. I think also, we also forget about, you know, this idea of kicking the can down the road, where, where inflation slowly erodes the value of your debt, because if you just interest like, if you've taken out a loan of a hundred hundred thousand dollars in 1982, right, and you would have paid a huge amount of interest on it that I'm not disputing that. Let's just say you went interest only for the whole term of that loan for 38 years, and you still had it, you know. The price of your property has gone up significantly. And your $100,000 is not worth what it was back then you had the debt is not worth what it was back then.
Chris Haggart 8:11
Yeah, correct. Yeah. So even if we had property price growth, that inflation, you'd still be in a better position because your your asset is increasing in line with inflation while your debt is decreasing in line with inflation so that the it still makes sense. It's just Yeah, that's a good point.
Alex Hont 8:30
So I guess what we're trying to say is the reason that this has become a lot more popular is because getting into the housing market has become a lot harder. And it's been particularly, I think, utilized by younger people, but not not, not exclusively.
Chris Haggart 8:44
No, no, no, not at all.
Alex Hont 8:45
So why on earth would we do this? Why wouldn't we just buy the house to live in? Why would we rentvest?
Chris Haggart 8:51
Well, as I think I've already kind of touched on is like, if you can't afford to purchase the house that you in the area would like to live, I guess We, US Gen X Gen Y
Alex Hont 9:04
I think the term's millennials,
Chris Haggart 9:05
Millennials. Well, that and that generation, we want it all. Don't we, we can't
Alex Hont 9:09
And I want it now too Chris
Chris Haggart 9:10
We're not willing to sacrifice. So we choose to want to live in the areas we want to live, we're not willing to move out into the outer suburbs. On the most part, I must say that's probably a gross generalization. But so why do it? Well, I want to live in the inner city. I want to have that lifestyle.
Alex Hont 9:32
Well, I think you're right, you know, you want to get a foothold in the property market and so you gain exposure to a growth asset. And, you know, in an ideal world, it's potentially the property you buy is potentially somewhere you could live if you had to, but not always the case. Well, it's part of the planning process, isn't it? I guess, and and yeah, you get to live where you want to live. You know, you get to enjoy the lifestyle that you might have become accustomed to. As the advantages of buying somewhere and still renting somewhere else.
Chris Haggart 9:58
So aside from those two things which are good because you're meeting two goals in the sense. The key thing is here that financially the numbers stack up,
Alex Hont 10:08
Chris Haggart 10:09
Yep, yep. So So in this scenario, let's say the, the rent that you're getting from your investment property pays the mortgage off. So you're ideally in this scenario, that you're you're meeting your costs of your property ownership. And then you're seeing well typically, if property always goes up, you're saying the price appreciation in your property asset. So that's not necessarily costing you anything. So you've got your you got your investment the numbers are numbers are working for you on that side. And then you've you're paying your rent where you want to
Alex Hont 10:47
Yep, that's right. I mean, if you use the the rental income to pay down your mortgage, that's a big upside of that seller strategy. And just one other thing is that a couple of other things but an interesting one that actually I'm experiencing at the moment as as the tenant but you might want to rent somewhere to get your kids into the school that you want.
Chris Haggart 11:10
Yes I see this too.
Alex Hont 11:11
Right? So and I say like, Oh, you might have heard the last podcast Um, I've got renovations going on at the moment. So we've had to move in and rent the place next door now the place we're renting it from it, I know this from because they my neighbor. But they moved out and had to move overseas for work. They had a child at at school, who is about I think, very soon to start high school. And they just outside the zone, I think of their desired high school. So the plan is that when they move back, it is not to move back into their home, which I'm living in. So I'm glad that they're not kicking us out for the moment. But to move back into a place pretty close by but it's, you know, I'm going to be right in the zone for that school, and they're not going to be far away anyway when they move back, but so they get the kids in. Once they are attending, it's a lot harder to kick them out. I know there are some schools it's still a bit. We'll look at your addresses and everything. But nonetheless, that's the strategy, get the kids into the school while living there and then disappear.
Chris Haggart 12:03
Exactly right. And well, Naomi and I are planning something similar but more in catchments for hospitals for, for children. So we we want to make sure we're in a certain catchment for a certain hospital. So, we will be moving when we decided to do that into an area that would fall in that category.
Alex Hont 12:25
It's interesting as well, Chris, because looking at the services that are provided in particular areas, so that's good. Another one that you mentioned before was flexibility, you know, that, that one of the big advantages is having some flexibility around managing or controlling your housing costs.
Chris Haggart 12:41
Yeah. Well, I guess the the pretext of a lot of this conversation is about buying an investment property and that's why it's used but this is also a strategy and we've I've used it for a few clients is that you know, you they reach certain points in their life they've previously bought the home that they've lived in, they've lived in that home happily. But they've come to a point in their life where let's say one partner wants to do a career change and start a new business. And it means they're going to have to take a pay cut in order to do that. That this rent vesting I guess, structure or approach basically allows them that they don't have to sell their home. Because if we take a pay cut and we can't afford the mortgage, well we get a renter into to contribute to the mortgage and we move somewhere where we can afford to rent for a short period of time whilst the career change happens, that sort of thing. So it's not necessarily just about the property ladder, in that sense, like going out and buying investment property and building wealth that way it can be used as a as a way to, I guess, deal with with life's other goals.
Alex Hont 13:58
Well, it's interesting because it's kind of reverse of the kind of strategy we talked about off the top where instead of, you know, buying somewhere less or more affordable and living somewhere less affordable, you're going the other way. You're saying, Well, you know, we've already bought the place in the place that we've lived in, and it's great, but it's a expensive area and we can't afford to live there. So we need to rent that out. Someone else who can afford to live there can pay the rent and help pay the mortgage and we'll go save some money by moving to a more affordable area or space where the rent's going to be lower than the mortgage repayments we're going to get.
Chris Haggart 14:29
Alex Hont 14:30
So that creates a positive kind of cash outcome.
Chris Haggart 14:32
Yeah, exactly. Just makes the the numbers affordable. And we like to use this too for older clients. I'm about to use this for an older client now, she is 50 odd I think and is looking for retirement and wants to buy her long term home. So we're going to rentvest her long term home.
Alex Hont 14:53
So buy the long term home
Chris Haggart 14:54
Yep rent it out so it's affordable. And then use that to repay the mortgage.
Alex Hont 14:59
And I guess once the mortgage is repaid?
Chris Haggart 15:01
Oh, then she moves in. Yeah. Yeah. So just it's a way for her to be able to live a lifestyle that she wants to in an area that she wants to, but we're also taking care of the longer term goals.
Alex Hont 15:12
Yeah, that's good. I mean, there's certainly some plenty of options around how you utilize this strategy.
Chris Haggart 15:17
Exactly. It's not just about buying an investment property. Yeah. For younger people.
Alex Hont 15:21
Yeah. Yeah. And I know, there's always a lot of pressure to get into the property market and has been for generations.
Chris Haggart 15:27
Alex Hont 15:28
And this is one way you can do it. So let's talk Chris now about tax. Right, because any investment strategy we have to think we have to factor tax in and it's not the determining factor. But nonetheless, it does play a role in the kind of return that you get it.
Chris Haggart 15:44
Yeah, it does definitely. And never I would we would never advocate for making investment decisions solely based on tax, but I hear it often enough.
Alex Hont 15:54
Chris Haggart 15:56
I want to do this because I can negatively gear it well, is that a necessarily good idea. Yeah.
Alex Hont 16:02
Let's well while we're on a negative gearing I mean, I think we've talked about this in the past our podcast episode. Debt, the good the bad, the ugly
Chris Haggart 16:10
Alex Hont 16:11
the spaghetti western.
Chris Haggart 16:12
Yeah, I think everybody's a bit sick and tired of me banging on about how much I don't like negative gearing, because, not because of any policy aspects, but just because its wealth destructive over time.
Alex Hont 16:22
Yeah, I think it certainly can be, there's always I think as a time and a place. There's situations where, you know, where you've got a lot of disposable income. And you paying a lot of tax and part of your tax management strategy might be a negatively geared property. But again, you know, you're completely relying on the growth in the property to balance out the loss, the negative the, you know, the loss that you're making in the short term.
Chris Haggart 16:50
Yeah, definitely within Yeah, unless you're on the highest marginal tax bracket. You're still giving more money to the bank than the taxman. So but you know, as you said, it's not it's not all about the tax. That's just a side aspect.
Alex Hont 17:09
Yeah. So we probably should just given a quick description of negative gearing, which is basically where the the outgoings. So the mortgage and the insurance and the rates and all of this stuff, the costs that you incur in owning a property,
Chris Haggart 17:22
Which are tax deductible,
Alex Hont 17:24
Which are tax deductible are more than the income that you get from the rent
Chris Haggart 17:28
and is taxable
Alex Hont 17:29
which is taxable, so that you get to basically deduct the rent off the of the expenses and whatever is left, so you, I probably said that really badly. But the difference between the rent you get and the amount you have to pay is a tax deduction that you can use against your other income,
Chris Haggart 17:45
assuming it's negative,
Alex Hont 17:47
Well, yeah. Instead of you paying you've got more expenses than the income you getting. The difference is you get to use that the rest the difference to deduct off your other taxable income,
Chris Haggart 17:56
Alex Hont 17:57
Okay. I guess the other side of that is when you've got a positively geared property where the income the rent is more than the interest payments or the and all the other stuff. So you've got a positive cash flow.
Chris Haggart 18:07
Yep. And this is a great scenario was probably my preferred property scenario where you're getting the increase in the property value and also earning a positive income.
Alex Hont 18:17
But Chris, I won't get a tax deduction! Yeah. What's the point?
Chris Haggart 18:22
Again, coming back to that scenario, where I would rather give 40 cents to the taxman and keep 60 then give 60% to the bank and get 40 back from the taxman.
Alex Hont 18:36
Yep, I agree.
Chris Haggart 18:39
But it's a hard one because it's a bit like property in itself from a like ingrained culture, I need to invest in property and I need to get my tax benefits. Yeah. And I think people don't think past those two just mantras.
Alex Hont 18:55
That's right. And I'm with you. I love positive gearing and it's more income, More income means you've got more ability to do
Chris Haggart 19:01
Oh you can do all sorts of things,
Alex Hont 19:03
Tax management strategies that, super you know. We could have harp on about this stuff all day
Chris Haggart 19:08
I know we could, we could but then that's why we're here. So yeah,
Alex Hont 19:11
so there's the tax implications are that you're gonna have to pay tax on the income if it's positive. And if it's, if you've got an negatively geared property or the outgoings are more than the incoming, you get to claim a tax deduction for that part. So the other part of this is that it's an investment, really. And so generally, any investments that you own, you will have to pay capital gains tax on.
Chris Haggart 19:34
When you sell
Alex Hont 19:35
When you sell, right. Capital gains tax, if you've held the asset for longer than 12 months, you get a 50% discount on the gain. So as a quick example, if you've made $100,000 gain on your property, and you sell it and you've owned it for more than a year, you apply the 50% discounts are only $50,000 is included in your taxable income. And you're taxed at your marginal tax right.
Chris Haggart 19:56
Yep. So since there's no I guess there's a common misconception that capital gains tax is a tax in its own right. It's not it's just added to your your other taxable income and taxed as it would be normal income.
Alex Hont 20:09
Now, the only caveat to that is if it is you can use our capital losses.
Chris Haggart 20:15
Alex Hont 20:16
But you can't use capital losses to offset income anyway, that's going down the rabbit hole.
Chris Haggart 20:21
But let's just keep it simple from that that aspect. I guess the only the only Asterix I'll put on that is what's called the principal place of residence exemption.
Alex Hont 20:34
Aha! This is the aha part, this is this is now this takes a bit of forward planning. This is not something you can do retrospectively.
Chris Haggart 20:40
Alex Hont 20:42
so the PPR the principal place of residence exemption, how does that work, Chris?
Chris Haggart 20:47
So essentially, the way that it works is that you can move out of your primary residence.
Alex Hont 20:53
So let's say we buy the property
Chris Haggart 20:55
Alex Hont 20:55
We've got our investment property, our rent vesting property all ready to go
Chris Haggart 20:59
Alex Hont 20:59
What's the first we need to do?
Chris Haggart 21:00
Alex Hont 21:01
Move in. Have a housewarming party, get some mail sent there. You don't actually have to technically have to sorry, if you're listening ATO . Yes, you do have to or
Chris Haggart 21:10
You do move in for, let's say 12 months. I think they've changed the
Alex Hont 21:16
There is actually no defined period of time.
Chris Haggart 21:19
There's a 12 month. Oh, no, they released like mid last year,
Alex Hont 21:24
maybe there was. I remember they used to be a period that you had to live in it for the first home owners grant
Chris Haggart 21:30
Six months, so yep, yep.
Alex Hont 21:32
But I from but previous to last year, and we might have to check that. I don't think there was a defined term that you actually had to live there to claim the principal place of residence. I think all it said was you must move in at the earliest possible time for after take after settlement.
Chris Haggart 21:45
After. Yeah, correct. Yeah. So essentially, I think to be safe, for most people move into that house for a period of time, if you can, obviously, if we're looking to avoid capital gains tax in the future, once you have lived in that period for a reasonable amount of time. Just put that inverted commas reasonable. You can move out and rent the property. And then you've got six years.
Alex Hont 22:04
You've got a six year exemption where you can still claim it as your principal place of residence and a principal place of residence. There's no capital gains tax payable on the sale of that asset.
Chris Haggart 22:19
If you moved out a year later, and then six years down the track, or five years and 300 days down the track, you sold that property, you wouldn't pay any capital gains tax.
Alex Hont 22:30
That's right. As we said, you have to have lived in it at the beginning. Correct. Right. And then at the end, the other side of that is Chris, if rather than sell it, if I just move back in for another six months, maybe it's 12 months,
Chris Haggart 22:42
I think it's 12. Again, yeah.
Alex Hont 22:43
So if you if you you know, if you move you live in it for a year, you move out for five years, you move back for a year, your six year window it resets so you can then move that for another five years and still not have to pay capital gains tax when you sell it.
Chris Haggart 22:56
So this is a nice CGT strategy if you are able to fit that into your I guess life plans. Yep. Yep. And the other option is to if you don't move into that property straightaway, which is fine, just by circumstances you can't. And then down the track you moved in and then sold it. Well for the for the pro rata period that it's your primary residence that is CGT exempt.
Alex Hont 23:25
Yeah. So if you in this example, let's just say you rented out for five years and moved in for one.
Chris Haggart 23:31
Yep. Well, you have lost one sixth of your because your holding period will be six years. one sixth would be the CGT amount so you take your
Alex Hont 23:39
One-sixth of the gain.
Chris Haggart 23:41
One sixth of the gain is exempt. Yeah. Yeah.
Alex Hont 23:44
That's right. Okay. That's the fun part called tax. So, now just thinking about this, there's some other responsibilities we have as landlords which are not always, you know, which can be sort of onerous, because because really, that if the property's yours, you're responsible for all the maintenance, making sure you pay the rates, making sure that you've got insurance on the property, probably landlord insurance is not a bad thing either.
Chris Haggart 24:09
Yep, I'll definitely advocate for that.
Alex Hont 24:12
Yeah, and and, you know, things can go wrong. Often people forget about this property, that there are a lot of costs in maintaining a property.
Chris Haggart 24:19
Alex Hont 24:20
And as an example, you know, we've got a big cladding issue going on. I'm not sure it's not just Victoria but where there's flammable cladding on a lot of building a lot of apartment buildings, and some of them that are deemed high risk are getting helped out by the government. But if you're not one of those properties, you've got a big bill you're gonna have to pay and this could be anywhere between say $30,000 and $50,000 per apartment to fix this problem.
Chris Haggart 24:44
And and you don't have an option, you can't say no to that. If the body corporate decides that that's what's required, which most do because if something happens, you won't be covered by insurance
Alex Hont 24:54
You lose everything.
Chris Haggart 24:56
Then how do you fund that?
Alex Hont 25:00
Yeah, well, it's got to be funded from somewhere. But if you're thinking about, you know, this as a wealth creation strategy, that's a big hole, it puts it is put in straightaway. It's a sunk cost.
Chris Haggart 25:08
Alex Hont 25:09
Because it's unlikely just by doing that, that the property is going to be worth more, you know?
Chris Haggart 25:14
Yep. And it might mean that you, who knows what happens in that scenario, you then become a forced seller on a property that's losing value because nobody wants to put in the 30 to $70,000 to fix the cladding issue. So it's, so there are risks out there with any investment that's yeah, that's kind of what it is.
Alex Hont 25:33
Same with a home right even like a house if you need a new roof. If you need new plumbing, you know, if you things things go wrong, they need maintainence and so I looked as a landlord as well, you know, you've got to keep the property in a reasonable shape for your tenants. And obviously, the better shape you keep it in probably the more you can charge for rent. So there are you know, there are some outgoings that you're going to have to incur.
Chris Haggart 25:56
and now guess this the the coming on the the negative side of that is you've obviously got tenant risk. Yep. So, you know, are you going to get tenants that are going to look after your property the way you want them to, are they going to pay their rent, or they're not going to touch wood burn the house down or trash the place. Exactly. Yep. So,
Alex Hont 26:18
so but you know, it's not all rosy as a tenant either, because if you're rentvesting you by the by definition, you've got tenants in your place, but you're attending someone else's place, correct? Yep. And so look, you know, that you've got you're always subject to the lease, and hopefully the lease is being renewed. So there's not always that security of longevity in the place you're in
Chris Haggart 26:40
Alex Hont 26:41
Because leases tend to be 12 months to begin with, and then either renewed for another period or on an ongoing basis. But you don't necessarily have the five year certainty that you might get in places like in Europe.
Chris Haggart 26:53
Yeah. Well, you can attempt to negotiate that if you if you want, if your landlords open to it. There's nothing stopping you. But yet Typically, yeah, not, not, it's not the normal operation here in Australia I would say,
Alex Hont 27:08
yeah, you also got to come up with a bond to hand over a bunch of cash just in case you wreck the place. Or, you know, it's typically in my situation is it's my friends come over and wreck the place. Yeah, I reckon the first night I moved into my apartment 12- 13 years ago, I had a couple of friends that were great. They helped me move some stuff. But then sure enough, they fell asleep on the couch and spilled beer on the carpet. One night in the place, one night in the place
Chris Haggart 27:32
Didn't even get to enjoy it? Yeah.
Alex Hont 27:34
Oh. You know, I didn't mind too much. I just thought it was funny. But still, you know what I mean, you know, you do all this work to take care of the place and then someone else
Chris Haggart 27:41
Alex Hont 27:42
swan in and you know,
Chris Haggart 27:44
time to get new friends.
Alex Hont 27:45
That's right, I hope they're listening to this and they hear that bit anyway, yes, you have to pay a bond in case you wreck the place or your friends. Or your bloody kids wreck the place.
Chris Haggart 27:57
Yes. Well, we won't go into that.
Alex Hont 27:59
Yeah. I reckon you know, every property I will live in for now will have hand marks at around knee level from the little ankle biters walking around with their hand. So my son is terrible, he has to touch everything everywhere we go. Right? So it's and it is about knee height. So you don't really notice it. And then you see it. You're like, oh, there's just kind of this line around the whole building.
Chris Haggart 28:21
Joys of children hey
Alex Hont 28:22
Chris Haggart 28:24
Aside from that, you can't make changes to a property unless it's allowed by the landlord. But that's changed a little bit in the recent tenancy act update.
Alex Hont 28:32
Yeah, I mean, that's interesting, because before you couldn't even paint the walls, you couldn't put shelves up.
Chris Haggart 28:37
Hang a picture
Alex Hont 28:38
Yeah, you know, you just had to deal with what was there and not put anything permanent up, but that's it. That's an interesting change in that in the act that they've made a little bit friendly for tenants to make it feel a little bit more like home.
Chris Haggart 28:50
Yeah, well, I think it's more about I think the rules are probably a little bit inequitable in favor of landlords up until the more recent recent past so they're just trying to equalize that a little.
Alex Hont 29:03
Yeah. So that's one thing, you know, making modifications. And I think if you're a disabled person as well, you you're allowed to make more significant modifications to make it easier for you to live there. But some of the other changes in that that tenanncy act that have made it a little bit more favorable towards renting is they put a cap on the amount that a landlord can increase rent. Yep. And it's, it's 10% of the CPI number on top of the CPI CPI, is it 3% you can increase the rent by 3.3%.
Chris Haggart 29:32
Correct. Right. So this is, I guess, a little tip out there. For those of us already landlords. Don't hold your rent for four or five years expecting to be able to increase it in one big jump down the track because you're not legally going to be able to so each time there's a lease renewal, you should be increasing the rent in line with inflation.
Alex Hont 29:53
That's right. Another another change was contentious was around pets. So it you know where I think the starting position was that it was up to the landlord whether or not they wanted to allow pets, the starting position now is that you must allow them to have pets unless you have reasonable cause to deny it. So that makes it easier for those people that like a little furry friend and can come with them.
Chris Haggart 30:20
But for landlords I guess the thing is, if the pets then damage the house, then that comes out of the bond and your landlord insurance if it's worse, so it's more headache, but I wouldn't necessarily say it's more risk for the property.
Alex Hont 30:33
Yeah, yep. There's there was a change to the no cause terminations. So if your landlord is not renewing your lease, and they don't really have a good reason.
Chris Haggart 30:43
So they're not selling or moving back in themselves.
Alex Hont 30:45
Yeah, you don't have to wait till two weeks before the end of the lease term. You can leave you can give three weeks notice and leave anytime.
Chris Haggart 30:53
Yep. So you're you're allowed to give the landlord four days notice after that three week period and you can go. Whereas a landlord, ending the lease, you've got to give 60 days. Yep, yep.
Alex Hont 31:06
And one of the other ones was just the change to the breaking of lease fees and I think it's capped at the amount of loss that you actually suffer. So, if someone if a if a tenant breaks a lease and you get someone in a week later, you can only really expect
Chris Haggart 31:21
a week's rent
Alex Hont 31:22
a week's rent
You can't profit from that scenario, and I think that's fair enough. Yeah.
So that's kind of covers off on the downsides of being a tenant or a rentvestor. So really, I mean, where do you see this sort of strategy being really useful Chris, what are you in terms of where have you seen the most value that people have got out of doing a rentvesting strategy?
Chris Haggart 31:44
Alex Hont 31:44
being somewhat of a rentvestor yourself?
Chris Haggart 31:46
Yeah, well, I started off definitely doing this this is kind of how I my I guess because my my family's backgrounds pretty property heavy so
Alex Hont 31:57
that's why you did the property rich, retirement Podcast isn't it Chris.
Chris Haggart 32:00
Yeah, yeah, definitely that actually was the the key driver, because I'm trying to convince my parents that property is not going to give them the income they need. But aside from that, yeah, wealth creation, obviously, assuming the property prices go up, and that doesn't always happen. So my first investment property that I bought, didn't increase in value, and actually went down in value for the first seven years of ownership. And it's only been in the last probably two years that I've actually seen myself in a positive asset position. So it doesn't always work. It could have worked a lot better.
Alex Hont 32:09
It could have worked a lot better. But I also think something worth thinking about here is that, you know, your timeframe has to be a bit longer than a couple of years because as you said, it didn't work for you in the first couple of years. But now you're starting to see it pay dividends a little bit later on.
Chris Haggart 32:50
At a greater level, yeah. Whereas for the last while, I've been sitting here saying, Well, what am I throwing throwing all this money at yet something that's not necessarily going up in value so wealth creation Look it works and I think in the long term flexibility for those who need a lifestyle change is a is another good place where I see this working. And also, I guess,
Alex Hont 33:13
I think even looking at yourself you've, you've lived in some great places over the last few years and some really interesting places and haven't necessarily been tied to one spot.
Chris Haggart 33:22
I haven't no but in the same vein as part of the disadvantages. I'm probably at a point now obviously, with a wife and a child. We probably like to make some changes to the place we're living in so you know, that's that's a consideration, but I really think it depends on you. We keep talking about this all the time every podcast and it comes back to what your your goals are. Yeah, it's another strategy to have up your sleeve depending on what you're trying to get out of one, your money and two, your life.
Alex Hont 33:58
Yeah. Soany tips of things that you've learned through over the journey.
Chris Haggart 34:04
Alex Hont 34:06
Sorry to put you on the spot, we didn't have this on the runsheet.
Chris Haggart 34:08
Be careful buying off the plan.
Alex Hont 34:11
Yes. I've seen this a couple of times as well. Yes. Why? Because you don't know what you're going to get you don't know when you're going to get it. And at the time that you signed the contract is not the time the bank does the valuation.
Chris Haggart 34:22
Correct. Yep. And I've had some structural issues with one of my properties and that's hasn't been cheap to fix. Two is, if possible, always buy freestanding house. I guess in hindsight, property values have increased significantly more had I spent an extra little portion on my first purchase. I'd be in a lot better position than I am now.
Alex Hont 34:46
Yeah, you'd be saying okay, millennial instead of Okay, Boomer? Yeah, correct. Yeah.
Chris Haggart 34:52
And don't borrow more. Like I guess factor in the interest rate rises.
Alex Hont 34:57
Yeah. So building a margin of safety into your calculations for cash flow.
Chris Haggart 35:01
Is that that one brought me home from London probably a year and a half early that I wanted to
Alex Hont 35:06
Really good advice for anyone who's listening. And yeah, I mean interest rates are at historical lows. Yeah, in Australia, and they might go down a little bit further, but they can't go down much further. Yep. Panic. So I think anytime you fact you're doing some calculations on serviceability you need to be thinking not just what the bank will lend me. But what happens if interest rates are one one and a half 2% above where they currently are. Yeah,
Chris Haggart 35:33
yep. I plan for that. Yeah. And base base your strategy around the fact that interest rates are going to be higher. And essentially, if whilst they're lower, it's for savings. Yeah, it's not it's not a bad outcome for you. Now.
Alex Hont 35:47
Can I add just one more in that I'm actually going to quote you something that you say not every podcast but every time we talk about homeloans, yep. principal and interest repayment, yes.
Chris Haggart 35:58
Yep, definitely. Don't
Alex Hont 36:00
just make it interest only payments if you can.
Chris Haggart 36:03
Because you're not only as Alex said before we get the the deflationary power of inflation. You'll also have a lower actual nominal debt.
Alex Hont 36:14
Yep. And you'll pay a lot less interest over the journey correct.
Chris Haggart 36:18
And have more equity, which will mean you'll have more money, which will mean you can invest in more properties or just
Alex Hont 36:24
life is easier right?
Chris Haggart 36:26
less stress. Definitely less stress.
Alex Hont 36:29
Chris Haggart 36:30
Yep, exactly right.
Alex Hont 36:31
Well, I think that's a pretty good summary. That's pretty good rap of that one Chris. Stay tuned for the next masters of finance podcast coming out shortly hitting the airwaves. Thank you.
Thanks for listening to this episode of the masters of finance podcast. If you want to hear it again or hear any of our other episodes. You can find us on iTunes, Stitcher or Spotify, or you can also head over to our website at www.moranfp.com.au to find all the episodes and some other material that we have for you if you want to get in touch with either Chris or you can find us on social media or get in contact with us through the website. We hope you enjoyed this episode and look out for the next one coming soon.
Transcribed by https://otter.ai