Latest / The Follio Property Podcast / The Future of Property is Rentvesting: Why It's The Best Strategy for First-Time Buyers | Mini Ep

Transcript

The Future of Property is Rentvesting: Why It's The Best Strategy for First-Time Buyers | Mini Ep · The Follio Property Podcast

• 0:08
  Lachlan, why so many first homebuyers turning to rent vesting? We're seeing this a lot in our strategy meetings, Rhys, because the affordability gap in the market is pushing people to have to look at the fundamentals of what makes a good investment versus where they want to live. And typically where they want to live now is unaffordable. We've seen this early on in places like Sydney. Are you seeing this across the board now? Yeah.
• 0:30
  Yeah, pretty much nationally. Obviously, locally in Perth, it wasn't a strategy that was commonplace two or three years ago. But now I'm seeing more than 50% of our meetings as a business that we're having are getting, the conversation is around rent vesting. Because typically, where they should be investing and where they want to live
• 0:52
  are completely different. They're sort of often states apart, let alone asset types apart as well. So the best investment option for capital growth isn't where they should or want to live. Is this just first time buyers or are you seeing people who have been in the market actually sell off those assets maybe towards the top of the cycle and then look at rent vesting as their next option?
• 1:15
  Yeah, a meeting that we've seen last week, he had four investment properties yet to buy his own occupier. So there's one that still hasn't made a conclusion on where he wants to live or where he wants to have the family home. So that strategy has worked for him. But absolutely, for the first time, I'm seeing people sell down, prime in place of residence, and not having the ability to go to that, upgrade a home. So using rent vesting as a strategy is like a stepping stone. It's like, okay, I'm going to have to do the hard yards, rent for two years.
• 1:45
  get a capital growth asset that's going to outperform potentially that family home, and then try to use that to get into that next level of property. How would you best describe rent vesting? So we've heard this terminology for quite some time. Some people perceive it as a fad, but you've mentioned that it's not just first-time buyers or people in unaffordable capital cities like Sydney that are using this. How would you best describe rent vesting?
• 2:08
  So reinvesting is people that have properties in their portfolio and sometimes it's multiple properties, like I said on a recent example, but are still currently renting. And sometimes renting is shunned upon in the real estate community. It's like, oh, you're renting, then you can't be an investor or you don't own your own home. Pay someone else's mortgage. Yeah, that's it. And it's the Australian dream to own your own home and you don't.
• 2:30
  For me, I had four properties in my portfolio before I ever bought the home that I lived in and then I moved in and I absolutely hated it. So then I immediately become back to a rent investor and rented that. It was a good investment property, but it was a terrible place to live. So I think I'll probably be rent vesting again in the next six months. So it's a strategy that doesn't, it's not like you do it once and you set yourself up and you're happy. You can play in and out of that as a strategy because where are you going to live for the
• 2:56
  In 2025, people on average now sell a home much faster than they did previously, right? So the transactions have gone from typically the average home ownership has gone from 12 years to seven years to now 3.8 years. So how do you know where you're going to live for the next 20 plus years? You don't. So rent investing takes the pressure off. Yeah. You know, it takes the pressure off from where you're going to live for the next 20 years.
• 3:20
  and B, what's going to be the best allocation of your debt? We talk about it on the show that,
• 3:28
  Your debt levels and where you allocate that debt is your opportunity cost. Through rentvesting, you can have all your chips in the best capital growth assets possible. Do you see rentvestors using it for lifestyle choices or affordability choices? So getting in that desired location that they wouldn't be able to afford necessarily or wouldn't want to put towards a purchase, or is it more an affordability play actually? You're looking at comparable options there from a mortgage repayment per month
• 3:56
  versus what they'll pay for rent. That's the reason they're choosing it.
• 3:58
  I think first time rent investors, it's all about lifestyle. They want to be close to their friends, city, beach, cafe strips. And so they're looking at what they can buy and where they want to live. And it doesn't match up. You know, a local example might be, I want to have a house in Scarborough. Okay, well, my budget doesn't allow that. Okay, but I still want to be close to the breach. Okay, my budget doesn't allow that. But I want to be in the market and invest. So I think for first time investors, it's typically lifestyle driven, but they still want their money working for them.
• 4:27
  As people get older and the strategy changes, like in my personal circumstances or where you're trying to get a stepping stone asset, I think it then goes from affordability point. I'm going to use rent vesting as a strategy to get ahead. And for our clients, when we're talking about meetings and the gap between where they are and where they want to be, you know, is quite drastic.
• 4:47
  we need really quality A-grade investment properties to bridge that gap because we believe a good quality investment property should outperform the market and has done for the last 15 years. And so we'll likely outperform the primary place of residence that you as an individual in the market on a daily basis will buy. So to bridge that gap, rent investing becomes a really strong strategy.
• 5:08
  What about like a market like Perth, for example, extremely hot, it's had its serious amount of growth. We've talked about it on podcasts and market updates where it's the lowest amount of listings that they have at the moment. If you've got someone who's toying up the decision, do I look at rent vesting as a strategy, maybe buy it in another market where it's, you know, the start of the cycle? Or do I try to pay rent?
• 5:30
  What's perceived overs, I guess, to get in the market, which will probably be the market rate in three, four months' time anyway, but it will push their price point up. What sort of advice would you give to someone who's toying with the decision on, do I go the rent vesting option or do I get into the market because the market is still moving really quickly?
• 5:49
  The question would be how long do you plan to live in that home? If it's purely for a primary place of residence and you want to buy in the market and you're going to stay there for a long period of time and it's going to be home, well, then that's probably the strategy for you, right? But if it's any way, shape or form investment related and or...
• 6:05
  You don't know where you're going to be. There's any uncertainty around where you want to live in the next two, three, five years. Then that investment option always comes first. And I'd say eight out of my ten conversations with clients at the moment, there's so much uncertainty about where they want to be, what they can afford. I'm tearing towards rent vesting. And, you know, I'm driving that as a strategy. We talk about various strategies on the podcast.
• 6:28
  Rent vesting in this market when there is a lot of uncertainty, there is a lot of affordability gaps and the gap between people where they want to live and what they can afford has never been greater, rent vesting is the strategy for them.
• 6:40
  What would be the biggest pros to rent vesting then, in your eyes, if we were to fire those off quickly? Yep. You get the greatest exposure to capital growth. So you've got blue chip A-grade assets in your portfolio because not every family home or private place of residence is the best investment option. And we know that through apartments and lifestyle assets.
• 6:59
  B, it gives you the second point there. It gives you the flexibility in lifestyle to still live where you want to live and not change any lifestyle factors. So they're probably the two biggest wins, I think, when you're looking at rent investing. Yeah, what about scaling a portfolio? Does it help you achieve that scalability?
• 7:14
  It does because it gives you the ability to look at your income. So you understand when you're investing, someone else is renting your property. So that income gets added to your serviceability. So it actually increases your borrowing capacity. Okay. And then what about cons? What's the biggest cons? It sounds like you're very pro on rent vesting, having done it yourself. You mentioned you want to get into it again. What's some cons you see with the rent vesting strategy?
• 7:37
  you miss out on that primary place of residence tax exemption, right? And for me, as I talk on, so if you do know where you want to be and you're in the right market, the best investment is your primary place of residence. So you miss out on that ability. And I always tell people, depending on where you're at in the cycle, it will depend on whether you really maximise that PPOR. So that's, for me, that's the biggest negative. And B, it probably doesn't give, you know, there is an element, not everything's about making money.
• 8:01
  Right. So owning your own home, having the ability to rip down walls or not ask permission off a landlord if you want to do something with the garden or the alfresco and having people around that are in and enjoying your home in your neighborhood. There's something to be said for that. So I think that is the Australian dream. So that is a con by reinvesting. You certainly don't get that ability. But again, if you use a strategy to help you with that stepping stone.
• 8:24
  What's going to make you really appreciate that home when you've had to earn it, had to stay in the market and play the markets to get that forever home, whatever period time that forever home remains. Okay. We're comparing these. You said the pros and cons. I've kind of given an example of hot market. Do you buy your house? Do you rent this? What sort of pre-work should you do to determine if that's the – what decision is right? Is there any sort of –
• 8:49
  I'm thinking here for more of a financial play. Obviously, you're going to have to save a deposit for a house. You've got to look at that. You're going to look at the stamp duty, but then you've obviously got to look at the rental play as well. I'm assuming, look, you're going to have to do the same thing with it if you're buying an investment property anyway. But is there any reductions when it comes to owner-op versus investment? Any sort of analysis that we can look at there?
• 9:05
  Well, we do it in our strategy meeting three. So it's sitting down and looking at both pros and cons from a numbers point of view. So looking at the data. And we do all that through PropStack and the portfolio review. So it's either speak to someone like us or speak to a mortgage broker, financial planner. They can, you know, if you're not well versed with that sort of data and analysis, speak to someone to do it for you.
• 9:24
  Lachlan, if you were living in Melbourne, we spoke about this on previous podcasts, it's in a growth opportunity at the moment. Would you look to rent vest inside your backyard or outside your backyard? So investing in Melbourne or outside Melbourne?
• 9:37
  In Melbourne, like I said previously, your best investment is your PPOR when you buy certainly early in the cycle and you can ride that market. So for me, the clients that we're speaking to in Melbourne come into me saying that we want to buy investments. My first question then is, are you going to buy your primary place of residence in the next three to five years? If that's yes, then let's bring that forward because you're going to pay more for it in three or five years than you are now. And you're going to benefit from the tax exemption. Yep. Same question with our backyard.
• 10:07
  still on a, you know, we've spoken about this before, on a really big run at the moment, would you suggest to a rent investor they invest inside Perth or outside Perth? Be circumstantial with Perth, so it's not a definitive, yes, you should be in Perth, because it's later in the cycle. If it was a rent investor that's got an established portfolio, the likely answer would be now outside their backyard. Most of the portfolios, you'll see two, three assets in Perth, overexposure in the one market. I would look to be investing, rent vesting,
• 10:35
  outside of Perth in that scenario. For a first-time investor, there would be a window remaining in Perth, but for a long-term rent investor where the strategy is over a course of three to seven years, we'd be likely investing outside the backyard. You've been listening to a follow mini clip. More of these to come. Link in the bio.