is now the perfect time to consider this strategy?
Key takeaways
Liveinvesting is a retirement strategy that involves investing more in your family home to live in a better location with strong growth potential, then downsizing your home as you approach retirement and using some of the equity to support your retirement.
Building equity in your home is a highly tax-effective way to build wealth, and investing in a high-value home can secure a property in a prime location that should experience stronger capital growth over time.
Downsizing your home provides a way to boost your super balance when you reach retirement age. You can contribute up to $1.56 million into super, which is another zero-tax environment.
Liveinvesting has a few drawbacks, including the fact that home loan interest isn’t tax-deductible. This makes home loans more expensive from an after-tax cash flow perspective, and you give up a current tax benefit in the form of negative gearing.
Melbourne property prices are relatively low by historical standards compared to other cities, and mean reversion suggests that Melbourne’s growth rates will likely improve over the next decade. Therefore, now could be the perfect time to implement a liveinvesting strategy.
In a blog I wrote back in late 2018, I introduced the term liveinvesting.
It’s inspired by the concept of rentvesting, where you rent a home in your desired location while investing in property elsewhere.
Considering that property prices in certain capital cities like Melbourne are currently more affordable relative to other locations, it’s a good time to reassess the advantages and disadvantages of this strategy.
What is liveinvesting?
Liveinvesting involves investing more in your family home to live in a better location with strong growth potential.
The idea is to position yourself in an area that’s likely to enjoy significant capital appreciation over time.
As you approach retirement, the plan is to downsize your home and use some of the equity to support your retirement.
In a recent blog, I estimated that to ensure you never run out of money, you’d need $2.75 million in investable assets, assuming you spend $120,000 per year.
If you expect to have around $2 million in superannuation in today’s dollar by retirement age, then perhaps the remaining circa $1 million could come from downsizing your home.
To make this retirement strategy successful, the key requirements are to (1) maximise super contributions and ensure super is invested wisely and (2) manage your mortgage repayments effectively between now and your retirement date.
Better to have one awesome asset
Thirty years ago, buying property in almost any location would have left you with a substantial amount of equity today.
In a rising tide, everything tends to rise.
However, as I’ve discussed before, the rise in property values over recent decades has been largely driven by increasing borrowing capacities i.e., people could borrow more money with the same income level in the year 2010 compared to 1980.
However, over the past decade, borrowing capacities have been decreasing and are likely to remain stable in the future.
Consequently, future property price growth will be largely dependent upon rising incomes or other sources of wealth, such as inheritances or bonuses.
If this forecast is correct, properties in locations that appeal to the wealthiest 20% of Australians will likely enjoy stronger capital growth.
Liveinvesting offers a unique advantage: it merges the benefits of owning an investment property and owning a family home.
Owning one great property is arguably better than owning two average-quality ones i.e., a home and a separate investment property.
Potential benefits of liveinvesting
Few things in life are tax-free, but building equity in your home is one of them, thanks to the main residence CGT exemption.
Accumulating equity in your family home is a highly tax-effective way to build wealth.
Generally, spending more on a property means attaining a better location and/or a higher standard of dwelling.
By stretching your budget and investing in a high-value home, you can secure a property in a prime location, which should experience stronger capital growth over time.
Even a small differential in capital growth over a long period of time has a massive compounding impact.
Owning a well-located home also offers significant lifestyle benefits.
Living near work, shops, restaurants, and other amenities enhance your quality of life.
Additionally, living in a reputable public school zone or close to revered private school/s, almost certainly positively impacts the property’s capital growth.
One of the challenges with building super is that we are limited by the concessional contribution cap of $30,000 per person.
However, downsizing your home provides a way to boost your super balance when you reach retirement age.
You can potentially move up to $1.56 million into super – which is another zero-tax environment.
Each spouse can contribute up to $480,000 in non-concessional contributions if you do it on either side of a financial year, as I explained here.
Plus, if you meet the eligibility criteria, each spouse can also make a $300,000 downsizer contribution.
Potential shortcomings of liveinvesting
The main drawback of liveinvesting is that home loan interest isn’t tax-deductible.
Unlike property investors who benefit from negative gearing, you miss out on these tax savings.
This makes home loans more expensive from an after-tax cash flow perspective.
Although you avoid a CGT liability, which is a future tax saving, you’re giving up a current tax benefit in the form of negative gearing.
Today, tax savings are more valuable due to the time value of money.
Additionally, while it’s possible to get an interest-only home loan, it’s not common and typically comes with a higher interest rate.
Therefore, there is a financial incentive to agree to principal and interest repayments which adds to the cash flow cost of maintaining a large home loan.
It’s crucial to be aware of the concentration risk with liveinvesting, as it involves putting most of your eggs in one basket.
If the property doesn’t deliver the capital growth you anticipated, perhaps due to a poor selection or unforeseen factors beyond your control, the strategy might not work as planned.
You can take steps to mitigate this risk, such as working with a reputable buyers’ agent to guide your purchase.
It also stands to logic that a higher quality asset exhibits lower risk as it has a higher probability of delivering above-average growth over the long run.
The final potential downside to consider with liveinvesting is that you might not want to downsize when you reach retirement.
There are several potential reasons for this.
You might not want to move to a different location, or a smaller property like a townhouse in the same area might not free up enough equity to make the strategy work.
Emotional attachment to your home can also be a significant factor.
Given these potential obstacles, it’s crucial to be conservative with your assumptions and stay realistic about your ability to downsize when the time comes.
Could now be the perfect time to implement this strategy?
Property prices in Melbourne, Sydney, Canberra, and Hobart are currently rising much slower than in other capital cities, with Hobart and Melbourne even experiencing slight declines.
Back in August, I highlighted that Melbourne property prices are relatively low by historical standards compared to other cities.
Mean reversion suggests that Melbourne’s growth rates will likely improve over the next decade, as the city plays catch-up.
Additionally, the average interest rate over the next decade is likely to be lower than current rates.
This means that if a home loan is affordable today, it should remain manageable in the future, barring any changes to your personal circumstances.
Given these conditions, now could be an ideal time to consider a liveinvesting strategy in Melbourne and possibly other locations.
