Rentvesting

Terryw is correct. Rentvesting is what many are doing at the moment. They can’t afford to buy where they’d like to live, so purchase in an area that is affordable (and receives a decent rental return) and rent that out while renting in the area/place they’d like to live.

Hi Brett,

Question for everyone else though – if you eventually move into the property you purchased as an investment, can you theoretically never pay the capital gains tax, or do you have to claim a taxable event when you switch it over to an owner-occupier residence? Maybe someone here might know the answer to that. It might be a decent way to get into a property while renting – set it up as an IP, get the tax deductions for a few years while sharing your rent and living expenses are minimal, and then switch over to a owner occupier loan and not pay the CGT until you sell it (which may be never if it becomes the family home).

AFAIK, this can only work if you move into the house FIRST to make it your PPOR. THEN, you can move out (and go renting – just don’t take on another PPOR) and the house can then be made an IP for up to 6 years with no penalty (and no CGT on sale).

If you set it up as an IP before making it your PPOR, then any gains will trigger a CGT event, but any CG is only for the period from purchase until you moved in (e.g. buy in 2017, move in as PPOR in 2021 – first 4 years of growth is a Capital Gain – then it is your PPOR until it is sold).

There “might” be more to this (and I am not an accredited adviser, so the above is my opinion only) so DO check the above with your adviser. Like, WHEN exactly is that CGT owed? Is it only after you sell the PPOR (could be 40 years in the future), or does the “trigger” bring on the CGT action and you must pay it at the time you move into it as your PPOR? I don’t know this level of detail…..

Benny

PS I rather like that idea of living in a “shared house” if can work in your situation. Certainly it can be a neat way to save money while you get your investing “up and running”.

Hi everyone,
Can I ask what should I watch out for if I choose to do rentvesting ie.tenant, laws?
Thanks

Rentvesting is a good way of earning money and at the same time making use of the earned money by investing. Keep them coming. Thanks for sharing this. :)

I have done rentvesting in the past, but generally don’t recommend it.

Although you will be saving cash at the moment over time rents rise whereas those paying off of home loan would find the monthly repayments generally remain the same over 30 years. Use of an offset account and paying extra can knock this 30 years down to 10. It might actually work out cheaper in repayments about the 5 year mark – that is with rent rises the rents paid would exceed the repayments on a home loan at this point.

Once the main residence is paid off it can help serviceability as you are not paying anything for your living quarters – for a serviceability point of view.

Interest on a main residence is generally at a lower rate than an investment property. Careful planning can allow you to get main residence rates on money borrowed from investment properties.

Land tax is another issue – by not living in one of your properties it may be subject to land tax.

The biggie is CGT though. Not having a main residence CGT exemption is a huge disadvantage.

However, the best strategy is to rentvest temporarily by using a few strategies together.
Find the dream home.
Move into it, establish it as the main residence.
Move our and rent the home out.
Claim all associated costs and negative gear it.
Rent where somewhere to live for up to 6 years.
Keep saving in the offset account attached to the loan on the main residence

Once you think the main residence will have a positive taxable income then you move back in.
Pay down the loan, redraw to invest at owner occupied rates.
Keep paying down the non0-deductible loan splits

Advantage
– full CGT exemption
– Full land tax exemption
– owner occupied rates on at least part of your investment loans
– non-deductible debt being quickly paid off
– servicing improves
– taxable income lower as not paying tax on rental income

Hi Luke

That sure is cheap rent for a property worth so much. It must be under 2% yield.
That is something well worth taking advantage of, but you could still utilise the main residence exemption on another property.

This is what I’ve been doing for the past year and a half. I live in a big house of 5 in inner Melbourne with friends and my girlfriend. It works out to be $600 a month for me which includes everything. I then use my extra money and buy IPs in Hobart that are positive cashflowed.