Rentvesting is all about renting property in areas that you’d love to live in, and buying property in locations that you can actually afford and renting that out to either pay down your debt or deliver an income.
It all sounds pretty simple – if you get it right – and it may even allow you to tap into the lucrative tax benefits of negative gearing.
But get it wrong, and you could be left with a dud property that no one wants to rent, or fails to deliver you the income you need to service debt or save.
Here are my golden rules to making this work for you.
Dos: Buy affordable assets with strong rental yields.
If you want to be a rentvestor you need to buy property which a strong rental yield upwards of 5 per cent, and if you are smart with your hunting, find a property which also has good long term capital growth prospects.
The idea is to buy properties in locations close to popular cities or townships, and where employment rates a solid to strong, and indeed where your budget still allows you to save for the next property.
Don’ts: Avoid buying property with low rental yields.
Properties that have rental income which represent 2 per cent and 3 per cent of the purchase price (which is how you calculate the rental yield), are going to leave you having to pay the difference between the rent coming in versus the expenses going out.
Dos: Consider the 50/30/20 spending rule.
That’s where 50% of your income (or less) goes toward your essential life expenses. That’s stuff like paying for housing, food, transportation, and utilities.
If you’re paying expensive rental costs, think about what might help offset this such as lowering transportation costs by walking to work or car pooling.
30% of your income can be put towards your wants. That’s hello beautiful shoes, trip to Bali, salon haircuts and Italian restaurants.
Remember you need to be honest and strict. Bread is a need but are those Oreo cookies more of a discretionary purchase and a want?
Everyone spends more on “wants” than they think. A threadbare minimum of warm clothing is a need.
Anything beyond that – such as shopping for clothes at the mall rather than the discount outlet – qualifies as a want.
20% of your income must go towards savings and or paying down debt.
If you want to be a successful rentvestor this portion is not negotiable.
If you carry a credit card balance, the minimum payment is a “need,” which counts towards the 50 per cent.
Anything beyond that is an additional debt repayment, which qualifies towards this 20 per cent.
Don’ts: If you are not disciplined, rentvesting is never going to work if you don’t stick to this 50/30/20 budgeting rule.
This is something I was fortunate enough to adopt at a young age thanks to reading “Money Made Simple” by Noel Whittaker. I recommend having a read too!