12 May Rentvesting better than owning a home? Try the Rentvesting Calculator
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!
Rentvesting is a pretty neat concept that turns traditional property ownership on its head.
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?
Is rentvesting better than owning a home? Good question.
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.
So, how does the calculator work?
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?
- Your current income: To determine your current taxable income, tax rate and net after-tax income received.
- What state you live in: To determine stamp duty and settlement costs as these change dramatically between the different states.
- Your current situation: To determine if you have a second income (and living expenses) compared to if you are single and on the one income.
- If you were looking to buy, your house budget? Again this works out how much deposit is needed, and how your after-tax income would be affected.
- If you were to rent, how much would you spend per week? This works out if you were to rent, how much surplus income you would be left over with to invest!
Rentvesting in practice
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.
- Your current income: $150,000
- What state you live in: NSW
- Your current situation: Single
- If you were looking to buy, your house budget? $1,000,000 (a little shack West of Sydney!)
- If you were to rent, how much you would spend per week? $500
Then drum roll, we crunch the numbers through The Rentvesting Calculator.
Should I rent or should I buy?
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%.
Do you make any assumptions around this?
Our calculator obviously makes a few assumptions, including:
- Marginal tax rates for the 2016/17FY.
- Income Return – 4.2% p.a.
- Growth return – 3.6% p.a.
- Principal and Interest Mortgage repayments over 30 years.
- Home deposit of 20% required.
- Mortgage interest rate at long-term averages of 7% p.a.
- Stamp duty state by state
- Margin loan interest rate at long-term averages of 8% p.a.
- Property expenses – $2,000 p.a. insurances, $1500 rates p.a.
- Other ongoing property costs (maintenance, water, etc) 0.5% p.a.
And a few more caveats around these including
- This page shows you an approximate idea about your overall cash flow from either buying or renting. This is the financial metric that determines what strategy will leave you with the most after tax income, while also taking into consideration what percentage of your income you would spend on buying a property or renting. Therefore it may be better for some of you to buy or for some of you to rent.
- The ultimate decision does come back to you on what your priorities are in life, having somewhere to call your own or moving around while being able to build wealth.
It seems easy to use The Rentvesting Calculator!
Yeap, we tried to make it as simple as possible!