THE RENTVESTING
MINI-GUIDE
Written by Peter Mastroianni
www.rentvesting.com.au
The Rentvesting Mini-Guide
BY PETER MASTROIANNI
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.
Interestingly, I also hear that statement the other way around as
well, especially when it comes to housing affordability.
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The Rentvesting Mini-Guide
THEN AND NOW
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.
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The Rentvesting Mini-Guide
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?
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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The Rentvesting Mini-Guide
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.
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.
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The Rentvesting Mini-Guide
WHAT IS
RENTVESTING?
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.
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The Rentvesting Mini-Guide
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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The Rentvesting Mini-Guide
WHO DOES RENTVESTING SUIT?
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.
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.
PROS
1
Live 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.
2
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.
3
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.
4
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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The Rentvesting Mini-Guide
5
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.
6
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.
CONS
The cons are largely around the fact that you may not be able to truly make
the property your home because:
1
3
4
It's temporary in nature
(the landlord may want
to move into the property
one day or sell it).
2
You're usually only allowed
to make limited changes to
the property.
There could be less choice. Mind you, finding a dream home
to purchase is just as difficult these days.
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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The Rentvesting Mini-Guide
THE “WHY"?
Importantly, you still need to consider
factors such as:
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.
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.
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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.
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The Rentvesting Mini-Guide
LIFESTYLE TRANSFORMATION
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.
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.
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The Rentvesting Mini-Guide
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.
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.
RETHINK. REINVENT. RENTVEST.
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