THE RENTVESTING MINI-GUIDErentvesting.com.au/downloadables/The-rentvesting-mini-guide.pdf · The...

www.rentvesting.com.auWritten by Peter Mastroianni

THE RENTVESTINGMINI-GUIDETHE RENTVESTINGMINI-GUIDE

The Rentvesting Mini-Guide

I talk property all day with my clients. I read a lot of content about everyday Australians priced out of the market and I hear many conversations about how things were so much tougher 20 or 30 years ago compared to what they are today.

BY PETER MASTROIANNI

Interestingly, I also hear that statement the other way around as well, especially when it comes to housing affordability.

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Housing affordability is an incredibility complex area and times have no doubt changed. Yes, interest rates in the late 80s and 90s were in the high double digits and, yes, today’s property prices are through the roof.

But I won't go into the complex mathematics of who was right and who was wrong in the generational argument on property prices, because there are just too many variables to consider.

The truth is, housing is an expensive business. No doubt about it. Baby boomers put forward a valid argument, which centres around 17 per cent interest rates when they first

started in the property market.

No doubt it was difficult. My parents went through this period. And it was tough for them. As it probably was for every family that gave away 50 per cent of their wage towards interest repayments. However, the environment of sky-high interest rates didn’t last forever, because the Australian economy went into recession, and to recover and restimulate the economy, interest rates tumbled.

But here's the thing. Housing won’t ever get any cheaper than it is today in our major capital cities. The market has adapted and people actively pursue property as an investment vehicle to build wealth. Most households also have two income-earners compared to just one in the baby boomer era.

Foreign buyers compete in the market as well as self-managed superannuation investors. Lenders have adapted their products to tailor for any number of borrowing niches to help cater for non-traditional borrowing. These factors create demand for existing property, which as we know, in turn increases its value.

THEN AND NOW

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The cost of construction is also more expensive than in days gone by. We are a high-cost, low-production workforce and the costs of materials are getting increasingly more expensive. Add to that the fact that governments are slow to release new land and it's almost a perfect storm of price growth.

Even though, more recently, there has been some pretty significant construction activity, lenders are tightening their belts and appetites to this market. So while some feel there is a glut – and in some markets there is – the market will eventually absorb it and soon enough demand will outweigh supply and it will go around and around and around all over again.

Affordability is the number one consideration for prospective homebuyers and investors today but many are literally priced out of the areas that they already rent in and would much prefer to live.

So what's the answer to this conundrum?

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Firstly, let's consider that times have changed. It's now socially acceptable to be living on your own when you’re in your 20s and not get married until you’re in your 30s – or not get hitched at all if you so choose.

More women are in the workforce and are returning to work after they have children. This dynamic on its own creates an additional challenge around property because people need flexibility and demand more of it, as they want to be closer to work, schools, public transport and infrastructure.

Many people today want flexibility and smaller dwellings. Hence, the explosion of one- and two-bedroom units that have appeared relatively recently. The way we interact with property is also extremely different and today we generally do most of our research online before physically inspecting any properties – or sometimes we buy sight unseen.

Secondly, the banking system has changed and lending has changed significantly. Lending products allowing you to borrow, say, 95 per cent of the purchase price didn’t exist 20 or 30 years ago. Lenders mortgage insurance also didn’t exist.



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As our society continues to change I believe it is fair to question, and have a legitimate debate on, whether home ownership is actually a necessity. There is a growing trend of bringing simplicity into life, to downsizing, to creating more meaningful work and to giving back to community.

All of which is great to have so why complicate things further by adding unrealistic pressure? Why not focus on creating the life that you’d love to have? Have your cake and eat it too.

That’s why I’m a firm believer in trying to grow the largest asset base you can with the money you can afford. Fractional property investing through crowd funding and the rise of rentvesting are the new alternatives and they're ones that I'm actively championing and will continue to do so.

So while it is tough to save for a deposit, alternatives now exist. A better question to ask your self is what is the opportunity cost of not leveraging a higher borrowing capacity and missing out on potential capital growth over the long term?

So then or now – which was harder? Well, I genuinely feel it was hard for both generations. And it will probably get harder on the generations to come.



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The term "rentvesting" has only really come into vogue in the past 12 to 18 months however, it's a strategy that I have a personal affinity with. That's because it was this approach that allowed me to get my start in property investing.

In reality, rentvesting isn’t a new investment strategy however, as property continues to become more expensive in our capital cities, it's quickly emerging as an important property trend across Australia. You see, rentvesting allows more individuals to break into the property market without having to significantly comprise on your lifestyle.

Put simply, rentvesting is buying an investment rather than living in the property yourself.

Buying for investment first, in a more affordable area, while renting in your preferred location can bring a lot of benefits – as long as it suits your inclinations, budget and lifestyle requirements.

WHAT ISRENTVESTING?



Buying in a middle- to outer-ring suburb can produce a strong rental yield, which depending on your financial situation, could cover the bulk of the mortgage and associated property expenses. This will equate to little out of pocket expenses on a month to month basis, which in turn means little impact on your financial situation. The biggest win with using a rentvesting strategy, however, is a foothold into the property market.

Once you’re in the market, it starts to become a lot easier to execute other strategies, such as buying a family home or further investments. For example, you could choose to pile additional funds into the property and pay down the mortgage or you could use future capital gains as leverage into a second investment.

In my case, I chose a set-and-forget strategy where the properties largely look after themselves and I view them as part of my retirement plan. I’m only in my early 30s but I’m sure it will pay good dividends the longer I hold the assets. Or you may choose to sell the asset in the future and use the funds for something else.

Importantly, and unfortunately, in any of these scenarios there will be taxation, entry and existing costs, and a number of other factors that need to be taken into account. Therefore, it is really important to seek the right professional advice before choosing whether or not this strategy is the right one for you.

In the end, there are pros and cons to both buying a principal place of residence (PPOR) and rentvesting, so you’ll need to consider your own financial circumstances before deciding which option is the best one for you.

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While many people think rent money is dead money, the concept can be a better financial move than you may think. Depending on your financial and personal situation, it could well be a viable option to consider. And a lot of people are more than considering it, they are actively putting it into practice. According to Domain research, the average age that Gen Ys buy their first property investment is 25, compared to 35 years for Gen X and 45 for baby boomers.

WHO DOES RENTVESTING SUIT?

Secondly, younger investors are building larger investment portfolios than their predecessors, who typically aimed to own their own home outright with maybe one investment.

The Domain research shows 16 per cent of Gen Ys already own two or more properties compared to only 17 per cent of Gen X and baby boomers. So perhaps the best way to determine the “who” is by looking at the pros and cons – that way you’ll be able to determine whether it’s right for you or not.

PROSLive where you want:If you’re renting, then you have the major benefit of being able to choose where you want to live and for how long.

Live in a better home: Many people live in the home that they have chosen because that’s the limit of the mortgage they could afford to pay. Even with rates as low as they are today, once the value of the property you’re looking to live in rises above $1 million, the declining rental yields start to swing in favour of renting and investing in smaller, higher-yielding properties.

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Tax deductions galore:Very simply, repayments on a PPOR can't be deducted. On the other hand, interest repayments from an investment property are fully tax deductible, so you can end up making some great savings when tax time comes.

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Greater profit potential:You love the suburb, but would you invest there? Most people wouldn't know the growth prospects of an area they’re hoping to live in and most wouldn't care.

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Ability to adjust your budget:Mortgage repayments can be one of the biggest financial strains on a household. While you can slowly pay the balance down over many years, the first 10 years are often a struggle.

If you’re renting, though, you can adjust your budget accordingly or if your financial circumstances change, you then have the ability to move down (or up) to a property that’s more suitable for you financially.

Flexibility is the key here, and if you’re open to change (and maybe a bit of an adventure), then renting is a no-brainer.

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Say goodbye to entry and exit costs:Selling your own home and then purchasing another to live in will cost you about eight per cent of the asset's value (stamp duty and legals plus agent selling costs). This is how much your property portfolio loses every time you decide to pick up and move. Not so with renting, where the major cost is in furniture removal and delivery.

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It's temporary in nature (the landlord may want to move into the property one day or sell it).

1You're usually only allowed to make limited changes to the property.

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There could be less choice. Mind you, finding a dream home to purchase is just as difficult these days.

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Packing! It’s the moving itself. There comes a point when you’ve moved half a dozen times in half a dozen years... and you just want to throw in the towel. For me, there was one stage I was moving almost every six months. House shares, relationship break ups, bigger and better stuff, etc. but it suited my lifestyle because I needed that flexibility at the time.

One of the other advantages of a rentvesting strategy is the time that it takes to save the deposit, this is because you're probably going to buy a more affordable rental property rather than a more expensive PPOR and therefore the deposit required will be smaller.

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CONSThe cons are largely around the fact that you may not be able to truly make the property your home because:



THE “WHY"?

Simon Senick popularised the term finding your “why”.

So, why should you consider a rentvesting strategy? The key drawcard is not having to sacrifice the lifestyle you want in order to work towards buying a family/dream home later. You can live where you like – be that the city, beach or somewhere with a vibrant nightlife – while using the investment property as an asset vehicle to grow your wealth. This is because buying several cheaper investment properties can potentially be a way to build wealth quicker than buying just one expensive home.

Buying an investment first removes a lot of the emotion that can be associated with purchasing a home. That's because your focus centres on affordability and the value of the property as an actual investment rather than the "feels" that are attached to buying a home to live in, potentially for a very long time. Your thinking becomes different as your investment targets become aligned to finding investment-grade property in investment-grade locations.

Can you really afford it? Just because it's cheaper to buy this property than the one you really want, it doesn’t mean you can automatically afford it.

Complete thorough research into what an investment-grade property and location looks like. You must complete research so you can determine areas that have low prices to buy but also solid yields and that also have a strong likelihood of increasing in value. A wise investor always takes the time to research thoroughly and seek professional advice from others.

Which leads me to the final point – talking to your financial adviser, accountant and broker because you really need to develop a solid understanding of how much you will need to save and what impact this investment could have on your overall financial situation.

Importantly, you still need to consider factors such as:



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Not only do we have a growing population we also have an ageing one. Baby boomers are commencing their transition into retirement. Their peak spending years are now well behind them, as they focus on the preservation of cash for retirement. Generation X will continue to do their thing, but as an age group they’ll remain largely unseen as Gen Y becomes the dominate generation in society. They will be the largest group in the workforce and the biggest consumers as their spending peaks, via the demand of goods and services to accommodate their own needs, and the needs of their now young, growing families.

The property market is maturing, it’s always been in vogue, but now it’s become an obsession. Economic, cultural and demographic trends have influenced this and it will continue to evolve to suit the needs of an aspirational and lifestyle conscious younger demographic.

A big Australia is arriving, sooner than most think. Once the 2016 Census numbers are in, we will see our population sit at around 24 million. By 2030 the predicted population is 30 million, with industry research estimating another 2.7 million homes needed to accommodate that sort of population. Markets currently experiencing oversupply will be short lived, and, unless new construction activity keeps pace with population growth, housing prices will continue to trend upwards.

LIFESTYLE TRANSFORMATION



These tribes will become increasing connected with technology. They’ll become the business leaders of tomorrow, their start-ups of today will be enterprises in the years ahead. More emphasis will be placed on lifestyle as this younger, emerging and hugely influential demographic will search for more meaning in what they do. Rentvesting will become a way of life and these new emerging household groups, focused on lifestyle choices, will have a direct impact on how we all live, along with how property is built, bought and sold.

We have changing demographics and a quickly adapting society to thank for all of this. Therefore, if you plan on becoming a successful investor who maintains a lifestyle, then rentvesting, might just be for you. To live a life that you love, while growing an asset base with what you can afford, then your ultimate success will hinge on how attune you are to a changing nation and property market. Opportunities will be plenty, especially for those flexible and opportunistic enough to capitalise on these new market lifestyle trends.

Australians from all walks of life are opting to invest in property in more affordable markets and live where they want to live. A rentvesting class is emerging that are lifestyle conscious and are at the forefront of building the largest asset base they can, with the money they can afford.

The nuclear family consisting of a couple and their 2.5 children will undoubtedly remain. The new tribes on the scene, though, will be the social singles, lifestyle renters, work from home mobs, multi-generational families and property accumulators. Social singles are expected to be the fastest growing tribe, increasing by two per cent a year to 2030.

RETHINK. REINVENT. RENTVEST.



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