Rent-Vesting: live where you want, Invest where you should
Is lifestyle a preference or a choice?
Work-life balance is what people are looking for today. After a tiring day at work, they would want to go out with friends or family for dinner or hang out at some exciting cafes. They keep their careers and their leisure a priority. A flexible housing option that allows them to move in/out easily is what they prefer.
“Move to What Moves You”
Your home is where your comfort lies.
Let’s discuss how you can live in your dream house through rent-vesting!
The rent-vesting strategy involves purchasing an investment property in an area that suits your budget, generally outside the city. At the same time, you rent a property in an area that suits your lifestyle.
So, essentially, you are finding the perfect balance between owning an affordable property and living in your dream home - that you can’t currently afford to buy.
To put it simply, rent-vesting is when you buy an investment property in a suburb you can afford, while you continue to rent where you want to live. It means that you can maintain your current lifestyle while still entering the property market.
Here’s an example of how “rent-vesting” is financially benefitting:
Isha’s currently renting a house in Lavelle Road that’s close to her office and in close proximity to all her friends. Although she would love to own the home she lives in, she can’t afford to purchase a property in Lavelle Road.
Isha set out to do some research to compare buying or renting her dream home in Lavelle Road. The average cost of a 2-bedroom home in Lavelle Road will cost her about INR ₹2,50,00,000.
If Isha paid a 20% deposit, she would have to take out a home loan of:
Isha is currently renting her home for ₹80,000 per month
₹2,27,096 – ₹80,000 = ₹1,47,906: difference in mortgage cost and rental cost
After doing some research on the property market, Isha has seen that North Bangalore would be a great investment option for her because she is happy with the rental yield as well as the potential growth prospects.
She found a beautiful home in Devanhalli for ₹1,00,00,000. If Isha paid a 20% deposit, she would have to take out a home loan of:
Isha will also receive tax benefits on her mortgage for the Devanhalli property
She gives out her property on rental to a couple for a monthly rental of ₹ 25,000 which she can also use to make payments towards the Lavelle Road property.
How does Isha benefit?
Pros of Rent-Vesting:
The freedom to live where you want
The main advantage of using the rent-vesting strategy is the ability to live your dream house, while still climbing up the property ladder.
Entering the property market sooner
Instead of waiting until you can afford to purchase your dream home, the rent-vesting strategy allows you to start building your property portfolio sooner.
Tax Benefits
Owning an investment property allows you to claim several tax deductions that you can’t claim if the property was your home.
Flexibility
When you’re renting, the absence of permanency allows you a degree of flexibility when it comes to choosing a home based on your circumstance. For example, you may get a promotion at a company in another city. Renting gives you the flexibility to move to that city without the hassle of selling a home.
Cons of Rent-Vesting:
Having to rent your home
As much as you may love the lifestyle that comes with renting your dream home, it’s, unfortunately, not your home. This means you may have difficulty settling into the property as if it was your own, and you will have to seek permission and assistance from property managers and landlords if something needs to be fixed or if you simply want to hang a picture on the wall.
Capital Gains Tax
If you own the house that you live in, you are generally exempt from paying capital gains tax on the eventual sale of your home. However, if you sell an investment property, you’re usually liable to pay capital gains tax on the profit you make from the sale.
No access to First Homeowners Grant
As you will not be occupying your new home, and rather investing it, you won’t be able to access the First Homeowners Grant.
Potential Capital Loss
It’s not always guaranteed that your investment will increase in value. Suppose it decreases in value. If that is the case, you might have to sell it at a loss.
Things to Consider before Rent-Vesting:
Crunch Your Numbers
Rent-vesting obviously needs to make financial sense in your specific circumstances. On one hand, if you’re considering rent-vesting as a strategy for your first property purchase, you’ll be missing out on considerable first-time buyer benefits such as the First Homeowner Grant or a reduction on stamp duty. On the other hand, if your property is negatively geared (i.e., it’s running at a loss), you could claim deductions to save on your personal income tax. So, it could potentially compensate for the lost benefits. Either way, you need to check your numbers. It pays to crunch your numbers first to make sure the rent-vesting strategy makes sense for you.
Rental Income
While you may have access to certain tax savings from a negative gearing property, it’s not an ideal situation to be in as a first-time property investor. The high transaction costs paired with the costs of maintaining the property is likely to stretch your cash flow quite thinly. The key to the rent-vesting strategy is to consider your property as a long-term asset. You’ll need to hold on to the property for at least five years for it to realise potential growth. Even if you buy in an area with a strong rental return, it’s not likely that the rental income will cover all the costs.