If you’re a property owner, investor or looking to get into the market The Rentvesting Podcast will help cut through the hype, look at the facts and draw on decades of experience to help you make smarter property decisions.
May 13, 2017
With all the recent buzz in the media, and crazy stats from OECD; which has reported that Australia jumped from 29th to the 9th most unaffordable country for housing in just five years. Then Sydney listed as the world's second most unaffordable city, after Hong Kong, it's not hard to think that buying your home is nearly impossible.
Whether you are a first-time investor or if you already own a home, there is no denying property prices are becoming more and more unaffordable across Australia, and the so-called Australian dream is well out of reach.
The problem is, the traditional mindset towards property (pushed into you from young age) is that rent money is dead money, but in today's market this is completely wrong. Rent money should never be thought of as dead money!
We believe you should be able to live where you want and invest where you can afford. Okay, this sounds great, but what are the financial benefits in rentvesting versus buying your own property?
We designed The Rentvesting Calculator to help you look at the numbers, and see what makes sense FINANCIALLY for you based on your income and how much you would pay to buy a home.
This calculator uses your individual situation and calculates whether it is better for you to purchase a property or to rent and invest. If you purchase a house, it uses the long-term mortgage repayments and costs of running the property, versus if you were to rent somewhere.
Whichever strategy leaves you with the most surplus income financially - makes more sense to do!
If there is a surplus of income from renting, the calculator assumes that you will direct this into a portfolio of investments each month. For this investment, this is also a margin loan.
A margin loan is a loan that you take out when purchasing investments that aren’t property, such as shares, or managed investments. For example, if you invest $1,000 of your own money into shares such as Telstra shares, you can take out a loan on top of this to buy more Telstra shares. Now you have $2,000 to invest in Telstra shares rather than $1,000.
Through using a loan, you can help ‘leverage or gear’ your investments. Leverage is a term used when referring to doing more with less, in this case borrowing funds now to help the long-term growth of the investment.
When you purchase a property to live in, you naturally experience leverage because you are using a small deposit to purchase an asset of greater value. As the property value grows this leverage helps the overall return on your contributed funds. This is why we decided to include it in the rentvesting strategy.
On any loan, including margin loans there is a thing called a Loan to Value Ratio (LVR). This calculator assumes a margin loan with a LVR of 30%.
What figures do you need?
Let’s work with an example, Jill - she lives in Sydney, works full time and is trying to decide if she should buy a property or purchase something as an investment.
Then drum roll, we crunch the numbers through The Rentvesting Calculator.
For Jill who is on $150,000 living in Sydney, she would have an additional $10,945.71 in AFTER TAX income that she could put towards investing.
The Rentvesting Calculator then assumes she invests this amount monthly after initially investing her deposit of 20%.
Our calculator obviously makes a few assumptions, including:
And a few more caveats around these including
It seems easy to use The Rentvesting Calculator!
Yeap, we tried to make it as simple as possible!