Rentvesting or Main Residence as Your First Property? Let’s elaborate on them one by one
1. Buying the main residence first
One of the most popular strategies is to buy a house to live in & then later invest. We look at some pros & cons of this option first:
Pros:
- ACQUIRE TAX EXEMPT ASSET: Your principal place of residence (your home) is a capital gains-free asset, so you pocket all the gains, when you sell it, acquiring it first, means you will pay down non-deductible debt first, freeing up cash flow for investing later along with having a capital gains exempt asset in the back pocket to use for downsizing strategy for retirement.
- IMPROVED SERVICING IN FUTURE: As a general rule most people pay down this debt aggressively because you can’t claim any tax deduction on it, overtime logically freeing up cash flow to invest down the line.
Cons:
- ACQUIRE LARGE NON-TAX-DEDUCTIBLE DEBT: Buying the main residence first means you a large loan which is not tax-deductible & can be argued to be an inefficient use of capital in the short term because you don’t get any tax deduction etc on it like an investment property.
- LIMITED INVESTMENT SERVICING NOW: It also takes away the majority of available income taken up in loan repayments, rates, etc., hurting your ability to invest in the future.
For above-mentioned reasons most generally favour getting the main residence first. Oh well at least if you can afford to buy it because many these days will struggle to buy the affordable main residence closer to the city because of the high costs involved.
2. Rentvesting – Buying investment first
The idea of Rentvesting has been around for years & has developed into a strategy on its own, let’s look at the pros & cons of it.
Pros of Rentvesting:
- Rentvesting Helps in TAX SAVINGS:
- Buy & rent it out for years to get tax savings & then move into it because while it’s rented you can claim several expenses as a tax deduction.
- Move-in initially, gets the 6-year rule working, and then move out and rent it. The six-year rule allows you to move out of your residence, rent somewhere else and rent out your former home, and then sell it before the six-year period is up without having to pay capital gains.
- FOOT IN THE DOOR: while you are still settling into stable employment, or relationship & unsure of where to buy, etc. Buying an investment property first or rentvesting could give you access to the market to build long-term wealth instead of keeping on renting as the old cliche goes rent money is dead money.
Cons of Rentvesting:
- INEFFECTIVE DOWNSIZING: If you might not want to live in the investment property you are not getting any tax-exempt assets that can be sold later to help with retirement coming sooner via a downsizing strategy for retirement.
- COSTS: You might also end up paying a higher interest over the loan term due to all the debt being investment debt, and often with smaller loan amounts for each loan. Multiple properties might cost extra with land tax as well.
- CASHFLOW: You use up cash by rentvesting or buying rental properties first, which could have been used to fund the main residence. This will result in non-deductible debt later closer to retirement.
3. To sum up, as a rule of thumb
a) For anyone with cash savings, they could look at buying your main residence first and then go for investments by debt recycling. Debt recycling is a strategy that aims to help pay off your non-deductible debt (eg your home loan) as quickly as possible, while also building up your wealth in a tax-effective way over the longer term.
b) Little cash could try to borrow off parents to buy the first investment property with 105% finance. Ideally get something you could move into now (and out again) or later.
c) Try to invest where you want to live in the future so you could move in.
d) If you can’t do the above, consider a sacrificial investment property which you pay down as quick as you can with the aim of selling it later and getting that main residence.
Paddy Boyal – South East Wealth
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Before you act on any of the above, please obtain tax advice as well as credit advice from a specialist.
Disclaimer: Articles in this blog are just the author’s or authors’ personal opinions. The author or authors cannot be held responsible/liable for any content in this blog. It may or may not be correct. Please do your due diligence and seek professional advice according to your circumstances. How to Interview on Zoom Call. Tips and tricks for interviewing on zoom
