Give me a home among the gum trees... or give me a rental among the gum trees and an investment property somewhere else. In the second part of The Adviser’s collaboration with La Trobe Financial, Lucy Dean finds out why rentvesting is an attractive prospect for young professionals and their families.
THE AUSTRALIAN DREAM of a white picket fence, a tyre swing and a Hills Hoist in the backyard is nearly gone. Throw in a location within 20km from the CBD. And schools, cafes and restaurants within walking distance? Tell them they’re dreaming.
That’s what Cory Bannister, VP chief lending officer at La Trobe Financial, says, and not without supporting statistics. According to State Custodians Home Loans, 74 per cent of Australians think that rentvesting is a good idea for those struggling to catch a break in the property market.
As Mr Bannister explains: “This utopian version of property ownership has all but been removed from reality by the rapidly increasing house prices and low wage growth environment we have been faced with in recent times. For many, if you weren’t in the market before 2014, you may have missed the boat.”
However, that doesn’t mean it’s game over. Rentvesting, the process of renting a property that meets lifestyle needs while simultaneously holding an investment property, can be another boat pass.
“Rentvesting is often a young professional family’s only choice if they wish to remain living in the area to which they have become accustomed, but may be unable to afford,” he says.
“As a family grows and looks to upscale the family home, they consider moving to a home that is within walking distance of schools, shops and transport, to be high on the list of priorities. This is closely followed by a short commute to work to ensure maximum time is spent with the family at the end of a day. This list is popular but hard to achieve in an ever-growing population. That is why affordability is becoming an issue for so many.
“But wait. By this stage, the family members have embedded themselves in the local community, perhaps started their children at schools and sporting clubs, and developed friendships and support groups. A move out of the local community has simply become a last resort,” Mr Bannister adds.
This situation goes a fair way towards explaining the appeal of rentvesting for this demographic. Simon Pressley, managing director at property investment research service Propertyology, agrees.
He says that, for rentvestors, there are two factors that go into the decision: the lifestyle choice and the ability to put their money in whichever market they like.
It sounds like a win-win prospect, but Mr Pressley concedes that there are some challenges.
“The biggest obstacle for someone to become a rentvestor is the personal or emotional considerations, like if I become a rentvestor, what happens if I can’t put the nail in the wall, or I’m not allowed to have a pet, or in six months’ time the owner decides to sell the property?
“They’re genuine considerations,” Mr Pressley says. “There is no right or wrong, but some people, when they get the idea of rentvesting and they start weighing up the pros and cons, they just can’t get comfortable with those, and that’s fair enough. You have to be comfortable where you’re living.
“But others will go: ‘Yeah, those [negative situations] could happen. But what can I control?’”
To that point, the researcher argues that rentvestors can still exercise a degree of control by investing in different parts of the country. He says that they should think about their investment strategy as: “I’ve got this leverage — whether it’s $50,000, $100,000 or $200,000 — and I understand the importance of putting that in property. But it doesn’t matter where I live; my market is all over Australia.”
A cultural shift
The CEO and founder of Empower Wealth, Ben Kingsley, says that the emergence of rentvestors signals a big shift of thought and culture away from the Australian Dream.
“It’s definitely a big shift in mindset in those professionals. It doesn’t live with that Great Australian Dream concept and that’s why it’s coming off a low base. But more and more people are saying, ‘Well, yeah, some of these $2 million dollar properties are only yielding around 1.5 [per cent] to 2 per cent, and in inverse the mortgage might be at 4.5 [per cent] to 5 per cent.’
“So, there’s that differential that people are looking at and basically saying: ‘Well, why would we put ourselves under that much stress?’
And it [rentvesting] gives us a little bit more flexibility because one day we’re not going to have kids and we’re going to have to downsize again as well.”
However, Mr Kingsley adds the same refrain: rentvesting is not for everyone. It raises the question, for people who aren’t rentvestors: how will this affect the property market? Will rentvesting herald a generation of renters and landlords? Will affordable family housing continue to be pushed to the urban outliers?
According to Mr Pressley, there’s a short answer: no.
“If every single couple who didn’t already own the family home became a rentvestor, that wouldn’t be sustainable, but that’s never going to happen. There are more people who don’t prioritise buying the family home than those who do. I don’t understand that thought process, but the facts are the facts.”
He argues that financial literacy isn’t most people’s forte, and as such, they don’t prioritise buying the family home. It would be better if they did so that the percentage of older Australians who aren’t reliant on the pension can grow from 18 per cent.
Nevertheless, “the human race does not prioritise financial literacy and financial independence, whether we’re 18 and potentially a first home buyer or whether we’re 60 and towards the end of our career. We just don’t do that,” he says.
“So, in terms of sustainability, it just never would have happened where we’ve just had so many people who have adopted the rentvestor strategy that we had no one who owned properties and everyone was just renting — it just never would happen.”
Responding to the same prompt, La Trobe Financial’s Mr Bannister says that the lender has a great belief in the power of investment in residential property, but cautions that investment in property needs to be a long-term plan, rather than an attempt to pick the start of the boom.
“Australians have a long-held fascination with property, simply because they understand it and how it works (in terms of value), and they can talk about it with their friends and family around a BBQ.
“Residential property is one of the largest asset classes — $7.3 trillion in this country — outstripping all the assets in our superannuation system ($2.3 trillion) and the Australian stock market ($1.8 trillion), and so it remains a compelling investment proposition for many.”
The current market isn’t a property bubble, Mr Bannister says, provided that population growth continues as it is now. Nevertheless, caution needs to be exercised.
“The old adage ‘it’s time in the market, not timing the market that delivers the best returns’ is a great one and should be one that is promoted by lenders, brokers and financial advisers.”