Rentvesting with shares
Rentvesting with shares
Despite the steady tempo of headlines on falling house prices, many are still troubled by the cost of housing. Median house prices in Sydney sit at a record record $1,144,217, according to the most recent housing data from Domain*.
The same report states Melbourne house prices hit a median of $882,082, a 0.5 per cent increase on the previous year.
While prices remain high, the FOMO (fear of missing out) of yesterday now risks becoming FONGO (fear of not getting out) for some investors, and those with a short-term view may look to sell to avoid suffering from the property downturn we may see across the next few years.
This brings the topic of rentvesting into the spotlight. Rentvesting is simply renting a home (instead of purchasing) and then investing the leftover money elsewhere, in the hope of making greater capital gain in the long run.
Many financial experts are camped firmly on either side of the rentvesting fence.
But, with the average loan repayment on a mortgage in Sydney just topping $4,300 per month**, rentvesting is looking like a legitimate wealth creation strategy.
Despite rentvesting strategies centralising on brick and mortar investing, there are a number of pitfalls given the current financial climate.
Firstly, the banking royal commission and government legislative risk has made it difficult to obtain finance. To add to this, investors often want to sell their investment property at some stage to get into the market, which may generate a profit, but also attracts capital gains tax.
An online study from home loan deals marketplace HashChing reveals the ins and outs of rentvesting.
The study found that 56 per cent of people living in a rental property while leasing out their mortgaged property give their lifestyle a stress rating of six or higher***.
The study also found that 49 per cent of 'rentvestors' are considering refinancing their mortgage in the next 6-12 months.
The additional and ongoing costs involved with being a landlord: renovations, repairs and maintenance, strata fees, land tax, landlord insurance and property manager fees were all seen as additional pressure.
But, the greatest downside to rent vesting in property is that when tenants are hard to come by, not only do you have to pay your rent but you also have to pay your mortgage.
Property can also take some months (in some cases, years) to sell and has significant purchase and selling costs.
Rentvesting in shares
The other less discussed strategy in rentvesting is to invest in shares and managed funds, which can result in higher long-term gains and provide much greater liquidity.
Obvious benefits of shares are that they can be immediately cash flow positive: as soon as they’re purchased a positive income can be received from them.
Shares with fully franked dividends also give a healthy tax-benefit, which is a benefit if you are rentvesting and saving for your own dream home.
You’re also not going to have the risk of losing rental income, which in the crowded Eastern seaboard markets is a luxury many need to consider.
Gearing may get you there faster
If adopting a conservative and diversified approach to rentvesting, your margin loan can be an additional wealth acquisition tool.
Utilising your margin loan on top of an existing rentvest-ed share portfolio can enable wealth accumulation in a shorter period of time, to then purchase a house at a greater price with a greater deposit.
A strategy could be to rent-vest for a set period of years, accruing at least a 20 per cent deposit to avoid lenders mortgage insurance, therefore starting out with greater equity in your property investment.
To find out more about rent vesting the non-traditional way, please contact your Relationship Manager or call Leveraged on 1300 307 807.
***HashChing Rentvestors Report, June 2018 per HashChing
Things you should know
Gearing involves risk. It can magnify your returns; however, it may also magnify your losses. Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, read the relevant PDS and product guide available at www.leveraged.com.au, and consider seeking professional investment advice. Not suitable for a self-managed superannuation fund.
Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.