Latest / The Follio Property Podcast / Is Rentvesting The Only Option For First-Time Buyers?

Transcript

Is Rentvesting The Only Option For First-Time Buyers? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit Property Podcast, where we separate real estate fact from fiction. I'm Rhys Bertel, and in every episode, we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delahunty. He's seen it all and isn't afraid to call out the bullshit when he sees it. Let's jump into the first topic then, Lachlan. Rent vesting will be the only strategy for first-time buyers to get into the market. It's very topical. I think we've got a lot of listeners that can probably relate to this.
• 0:34
  I totally agree. I think the first thing would be what is rent vesting for those that don't know what rent vesting is? Yeah, it's having exposure in the market without living in the home that you've purchased. It's renting for periods of time, often for decades for some of our clients, whereby they choose to
• 0:53
  Rent in their desired location for lifestyle purposes often and best typically borderless outside their state or city that they're currently renting in. So they get exposure to other markets that they wouldn't have if they chose to obviously live in the home that they purchased. And the reason we come across this topic quite a bit from a day-to-day, whether that's customers or...
• 1:15
  people we see through social media channels talking about it. Or even our staff members is, you know. Correct. I'd say 50% are in this position themselves. Yep, yep. I guess, yeah, myself, I think that was my first move to get into the property market was rent vesting too. Why do you think it's gaining traction in an area like Sydney right now? I think the reason I call out Sydney...
• 1:35
  A lot of customers I am speaking to or potential investors are all coming from Sydney, all reinvesting. And different situations though, but why do you think it's getting traction there over other capital cities?
• 1:47
  Yeah, I think just the affordability play, right? You look at the median house price of Sydney, well over a million dollars. But I'm seeing this start to become more of a trend, not just in Sydney, because you've got a median house price pretty well in every capital city, with the exception of Darwin, now almost at or north of $800,000. So for a lot of people that are trying to enter the market for investment purposes, that's a price point that they certainly...
• 2:11
  can't afford or don't have the serviceability. So I think why it is so prominent from the conversations having with people in Sydney, just the sheer inability to get into that market. And particularly when you look at investing and the different strategies, obviously, where budget allows, there's always typically a preference to buy some land.
• 2:28
  you're just not going to be able to do that in Sydney realistically under probably $1.5 million to get anything that's remotely close to amenity, you know, ocean and or CBD proximity. So I think for those people...
• 2:43
  In particular, in 2025, no one really wants to give up lifestyle. And typically, the conversations we've had, there are probably people in their 30s to 40s. They're in their sort of period of their life where they want to be amongst the hustle and bustle. They want to be close to a man. They want to have a local cafe. They want to be close to the beach.
• 3:02
  So having all those lifestyle opportunities at your fingertips, to do that, they need a budget of, in Sydney, $4 to $7 million to get some land in those locations. Or they can rent somewhere for as little as $700 a week to have the same lifestyle, but being able to invest with a much lower budget, anywhere from as little as $350,000 in other markets around Australia.
• 3:29
  And the people that you come across that are utilising this strategy, the topic is targeting people, first-time buyers, it's becoming a popular option. What other types of investors do you see choosing this part? Is it purely first-time buyers just to get their toes into the market or in the unaffordable cities like your Sydney's? Or is there other types of investors that will go down this strategy and keep it as a long-term strategy too?
• 3:54
  Yeah, look, I've got investors we've had, I've worked with over 12 years that still endorse this strategy. Personally, I did this for over a decade and I look at my own journey. I was in Victoria, Melbourne when it wasn't a good time to buy Melbourne, but I was renting there and investing in other parts of Australia. And then moved to Perth, you know, 2014, which was the worst time to buy in Perth. So we didn't take a position here. So I invested on the East Coast while I continued to live here until 2019, when I actually made the first purchase to actually live in something here in Western Australia.
• 4:23
  So, yeah, personally, I did it for myself for over a decade, but I've got a client that I spoke with late last year that had been doing this strategy for 15 years, and it's probably more due to his line of work, right? He's very much a – flies a lot internationally and does a lot nationally in Australia in different markets in mining-related sectors.
• 4:44
  and he sort of doesn't want to sort of pin himself down in any one location as well as having complete unemotional bias to any market and the conversation every time we catch up for a 12-month portfolio review is where's the best market in australia right now because i don't have a bias you know i'll rent where i want to rent when i come to australia and i just want to invest in the best opportunity and i think that's where a lot of things have changed in the last probably five years if you look past as a
• 5:11
  I didn't even know, honestly, you know, I wouldn't even know what rent vesting was until the last couple of years. It definitely feels like, I know you've been in the game for so long that you said yourself, you've been doing rent vesting yourself for 10 years. I even mentioned my first purchase of rent. I didn't even know it was rent vesting. I didn't even know it was a thing. But it definitely feels like the last couple of years, there's a lot more either education out there or a lot of influencers maybe pitching this as a strategy and it feels like more people are starting to take this up as a strategy as well.
• 5:40
  Yeah, I think there's sort of two reasons. I think the fear of borderless investors, borderless investment is reducing with the amount of knowledge available at the fingertips. So borderless investment is going outside your state, your city or the area that you've got local expertise.
• 5:55
  Because a decade ago, and you talk about a lot, accidental investment, that's the older generation, the baby boomers, et cetera, have got a portfolio of really A-grade blue chip properties because that's what they bought in the 80s and then they upgraded in the 90s and again in the 2000s and they've just continued to rent those properties.
• 6:12
  With the amount of knowledge, technology and the available of data at our fingertips, the fear of living in Perth but investing in the East Coast or vice versa has been reduced dramatically. And that's come a long way in the last decade. So now I think people are more comfortable.
• 6:27
  Even with like buyer's agents as well. Exactly. That wasn't a thing probably 10 years ago, especially in Perth. In Perth it wasn't a thing three years ago. So people are getting more comfortable to be able to appoint people or get drawn specialists to help them with that. So correlate that with the fact that the median house prices across Australia have risen.
• 6:46
  significantly in the last 10 years so from an affordability paid point people can't you know get into the markets that they want to live that's one element but equally they're okay to invest outside their backyard to get a better return on their investment and you're seeing that it's never you know you should when you look at an investment you should never you know look through the lens that i want to invest locally because that's where i understand and that's where i know it's a
• 7:13
  and often talk clients out of this constantly and still having conversations and they can't get their head around it. It's a stupid strategy, straight off the bat, because straight away you're limiting your investment portfolio. If it's somewhere to live, probably a place of residence, absolutely, I completely agree that you want to live locally, I can't argue with on that, but that should never dictate your investment strategy when we're looking purely as an investment. Yeah, I totally agree, and I think...
• 7:37
  the accidental landlords that I love talking about all the time. I think that sort of accidental landlord and people that may be nervous to do borderless investing, they're the types of people we want to sort of educate and podcasts like this and other influences out there, the education I think is going to help people get more confident to join the pack where everyone else is doing in terms of this rent vesting.
• 8:02
  You've just noted yourself as an influencer, which is other influencers. I've got to set up my new influencer page. So in terms of like rent vesting now, typically, obviously I've referenced Sydney and that's probably because a lot of the people I speak to are Sydney. But as you mentioned, you know, Melbourne hasn't been a place to invest for the last four or five years itself. What areas are current rent investors targeting at the moment? And when I say that,
• 8:29
  I'm talking, is this certain asset types, budget types? What areas are they looking in terms of cities or regionals?
• 8:37
  Yep. So I think the highest demographic of rent investors are really following the trends of many biisation institutes out there, right? And they're typically going for- Influences. Yeah, influencers. They're going for very affordable regional areas. So if we look at the trend shift from-
• 8:59
  the early sort of 2020, it went from regional Victoria. So you look at your Ballarat and Bendigo's entry points there were 350. Once they sort of get to 650, they start to cap out and then they move on to the next market and then follow to regional WA where you see a lot of investors through buyers, agents or types, similar to that, investment groups buying in Rockingham and Mandurah.
• 9:21
  And then it went to regional Queensland. So you've seen a huge uplift in places like Gladstone. Townsville's been a huge hotspot for the last eight months. Putting those places on the map, I think. It really has. Like overnight and you're seeing massive uplift. You're sort of seeing 20, 30% returns in very short periods of time. I do have concerns with that, which I've spoken about in other podcasts, where going to areas which are solely saturated by investors is dangerous because...
• 9:45
  you know it's okay during the upswing and you really need to be educated on telling those markets correctly because if you don't you sort of don't want to be the last person holding the hot potato because once the investors come out the markets fall just as quickly as they rise the latest you know movement towards that is is darwin's come on on to flavor just at the lower price points so they generally go for the most affordable markets really in australia
• 10:07
  And that's what you'll find because a rent investor typically use the asset as a stepping stone asset. They may be in their early 30s. It's unfortunate maybe in their late 20s. Some may be even into their 40s just haven't been able to save for a deposit or their income hasn't allowed them to get in on the property ladder. So often it's a stepping stone asset to get them. Is that all you like the stepping stones is interesting because that was kind of one of the things I had in my head.
• 10:35
  Do you see this strategy as just a stepping stone? So get into the market. You're in an unaffordable city, so this strategy will help you get into the market. But then once you've accrued a bit of equity or got some capital growth, then exit that strategy? Or can you, let's just say, back to the initial topic, with the rent investor being a first-time buyer, can that strategy continue on their portfolio growth or is it a short-term stepping stone, as you said?
• 11:03
  It really depends on their goals and objectives and I'll address sort of what the perfect methodology of how to sort of time your rent-vesting into your primary place of residence in a moment. But you'll do fine that it is a stepping stone asset to build equity and try to build it quite quickly to allow you then to continue to expand your portfolio. Look a lot of people will want to buy a primary place of residence at some point in time.
• 11:28
  That timing can vary for individual to individual depending on what their family make-up is, if they're in a situation where they're having a young family, and that timing can change and that's the conversation. The primary place for residence is arguably one of your best investments, as I've discussed before, because it's the only vehicle that you don't pay capital gains, so it's a tax-free environment.
• 11:51
  But when you don't have a time horizon that you absolutely need to lock away that primary place of residence, the best time to activate that would be at the bottom of the cycle if you could. So if you're in a cycle, for instance, such as Perth at the moment, where it's gonna be really probably unaffordable for individuals now to enter the market for primary place of residence,
• 12:10
  and you don't need a place to live you'd have a family where you need that sort of security because why do people want a house to live right it's it's important to have that security that the tenant the landlord can't kick you out at any point in time you may want to embed yourself in the community so you want to you want that security for a period of time that's typically why people want
• 12:26
  a house over their head and somewhere to call home. It's a great Australian dream to own your home. So if that time is now and there's no flexibility on that, then that's what you gotta do, you gotta buy your private place of residence. If you've got a, let's say, an unlimited amount of time when you need to locate that, so let's just use a decade. Look, I'm happy to buy it now, but if I don't find the house that I'm gonna live in for the next five to 10 years, then that's fine. Then I wouldn't be advising someone in Perth, for instance, now to lock away that private place of residence.
• 12:54
  albeit it will cost them more in five years, I'd be saying, look, let's time that in the next cycle and explore other markets. It may represent better value so you can start to build that equity base. So when the property prices may dip in the future, you're in a better position to activate that and buy that at the bottom point of the cycle. Yeah.
• 13:10
  Does that make sense? That makes complete sense. And I mean, you and me had a conversation about my personal circumstances, not necessarily rent vesting, but about your principal place in terms of where do you see yourself in that property in five, 10 years? Or do you see yourself in that property in five, 10 years? And I think-
• 13:26
  I couldn't give you an answer. So I think this strategy, especially, and as you get older, like, you know, I've noticed over the last 10, 12 years, maybe I've changed in terms of what matters to me. And the big city life might not be as appealing to you as you get a little bit older. So actually the rent vesting strategy, you know, you're not locked in. And actually, you know, to go to another example, you know, I've been speaking with a lot of people
• 13:52
  in Sydney again, are rent investors. They've got multiple properties, so I wouldn't say they're first time rent investors. And I was asking them, okay, what's the strategy? Is it to get your principal place? And they're like, no, I wanna go up north and head to Queensland. So actually they're,
• 14:08
  they're doing their renting strategy in the big city life, accumulating assets outside there, but their goal is actually to get out of there as well. So that can, I mean, that's a pretty powerful story to say, you know, why maybe necessarily rent vesting doesn't need to go down to the principal place is that's where the acquisition should be next.
• 14:24
  Yeah, exactly. And that's where the conversation with yourself is and other people. Things change. And if you don't know where you want to be in three to five years, then the uncertainty of that, don't put so much pressure on having to buy a primary place of residence if those goalposts could shift a little bit, right? Because to buy a property with entry fees and stamp duty, and if you use a buyer's agent, buyer's agent fee, then selling fees and exit fees...
• 14:49
  You don't want to be trading your prime and price of residence every couple of years because your personal situations change and that's why renting's so good. Fortunately for me, when I was rent vesting, I got to live in so many different locations, got to experience the city life, then a bit of a coastal life and you get that flexibility to almost try before you buy. But a great example of where rent vesting would be so much advantageous in comparison to buying price of residence was good friends of ours who...
• 15:16
  lived in geelong and and bought in there at arguably the top of the cycle you know 2021 and the data when they come to speak to me about you know we're going to buy a home we're going to live in geelong conversation was you're going to live there for a period of time because it's at the top of the cycle where we deem the top of the cycle and you know buying at the top of the market is never advisable um unless it's going to be home for the next 10 20 years and you can push through to you know second third fourth cycles it's going to be okay and
• 15:42
  No, we're really comfortable. We think the fundamentals are good because at the top of the cycle, what happens? It's almost that this market's never going to stop. It's going to continue to rise. You almost can't foresee the cliff that it's about to run off. And same thing happened in Geelong. No one could foresee that market cooling because it was so hot at the time. It was peak FOMO. And sure enough, they went to an auction, picked up a property in Newtown, which is quite a blue chip suburb in Geelong, for one, two, five.
• 16:11
  And two years later, things have changed. They want to go back to Melbourne and try to take that property to market. And they may not get a million dollars for it. So that's unfortunate because at the same time, where we're investing at the point, if there had been a rent investing strategy, try before you buy. Live in Geelong for a couple of years and see if you like the more relaxed lifestyle that that brings compared to Melbourne.
• 16:35
  and and rent there and then get exposure into perth at the time we're buying heavily in perth obviously then arguably that million dollar purchase would have been one five one six and they've built 700k of equity they could now probably take back to melbourne now and buy something more substantial so it's it's understanding and you know you can never forecast out your personal life and how it's going to play out but if there's any element of doubt in terms of where you're going to be in three or five years
• 17:00
  and sometimes it can be quite stressful, that emotional trying to look away, well, what do we want in three years? How many kids do we want? That pressure can put a lot of stress where the rent-vesting strategy, it's sort of far less stressful because there's no emotional ties to it. You are buying for the facts and figures of what the data suggests and what is deemed a good A-grade investment asset.
• 17:20
  So it takes all emotional bias out of it. And the idea is in those situations where it's to get you ahead or a stepping stone to build equity to buy a home is to get you the best asset in the country that's going to give you the most amount of uplift in terms of capital growth. That's the brief. In terms of the quality, what it looks like, what it feels like, and some of these properties, typically things that you may not want to live in, but that doesn't come in the conversation because you're not going to live in it. Yeah, and it's taking that emotional...
• 17:49
  the emotional side out of things as well. I think, you know, we've talked through some of the benefits.
• 17:54
  you know, from the borderless investing, from an affordability standpoint, what about from sort of tax? I know obviously, look, we're, disclaimer, we're not here to give financial advice, but in your personal circumstances and just your knowledge, what about from a tax perspective? Can you still use negative gearing or utilise negative gearing on these when you're investing? And that's probably question one. And then what about from, you know, from a mortgage perspective, what about, you know,
• 18:22
  Is it harder to gain a mortgage with this strategy if you don't have your principal place?
• 18:29
  Good question, so first off, rent vesting leans into capital to negative gearing because obviously you don't get that benefit on your prime place of residence. So it is, for those that pay too much tax, it is often a, what I call it a haven, but it's something they lean into for tax benefits. So ticks the negative gearing aspect, absolutely, and that's why you find typically higher income earners, or doctors, medical professions,
• 18:57
  who pay far too much tax will typically want to accumulate assets that have high land value, high land content, not necessarily higher rental amounts because they want that negative gearing benefit as well as getting high capital appreciation.
• 19:13
  The second point, which was around serviceability being, you know, do the bank's favour, would actually assist your serviceability because that rental income that you get from your investment property then gets added to your income. So if you buy a property that, you know, rents for $35,000 a year, well, that gets added to your income. Increases borrowing capacity. Exactly. So if you're on $100,000, you buy a property that's...
• 19:35
  rents for $30,000, then all of a sudden your income goes to $130,000. So it can be really difficult for people, you know, if they buy their place, former place of residence, and they have a high debt to income, say if they bought a place and the debt to income on that property was five times, then going and then trying to buy an investment property becomes really, really difficult because all your serviceability is up in your primary place of residence, right?
• 19:59
  and banks don't love that because you can't draw an income versus expanding your portfolio from one, two, three, when they've all got incomes and understand over the course of three, four, five years, the likelihood to get rent increases, whether it's P&I interest only, you may have paid off a bit of debt, you've seen capital appreciation, so your ability to expand your portfolio is certainly more favourable under the rent investor model.
• 20:24
  arguably, than those who go out there and probably over-capitalise or overexpose themselves with their primary place residence. Yeah, that's a good point. In terms of looking at last year's data, 21.4% increase in first-time buyers were investment loans.
• 20:41
  21.4% increase in rent investors. Sydney leads the charge with 31.4% increase, which is all the points we've discussed in the podcast already in terms of affordable, that's probably a huge factor driving that, but a 31.4% increase in first time buyers choosing the rent vesting option in 2024. So it's definitely on the rise. With that in mind, do you see rent vesting becoming the new normal for younger generations in Australia?
• 21:08
  Without a doubt, as capital cities continue to rise in values and the entry points becomes more unachievable for those trying to enter in the market, we're going to see more of that rent-vesting strategy as a stepping stone asset to help them, hopefully in time, get into those capital cities. So that's one element.
• 21:24
  But, you know, the more investment groups out there that continue to talk about it as well, it's becoming, you know, anyone that looks on social media and clicks on a post will get sort of flooded with inbound media around rent investing as a strategy. So I just think there's more of a push to it as well because it is a quicker way to increase your investment portfolio as we discussed previously.
• 21:47
  I mean, that sounds like a great way to wrap it up. So just to finish it off, Lachlan, what's the verdict? Rent vesting will be the only strategy for first-time buyers to get into the market. Fact or fiction? Do you call bullshit?
• 21:58
  It won't be the only strategy, Rhys, but we'll certainly see this become the primary strategy, I think, particularly the next generation coming through. So I'll have to go on a limb and say bullshit on that, just being the only strategy. I think that probably covers off on that, but certainly it's becoming more topical, certainly becoming more popular. And I think moving forward, this will be a primary strategy for those entering the market. Make sure to join us next episode. Stay informed, stay curious, and keep going on the bullshit.