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The rise of ‘rentvesting’

When it comes to living in major Australian cities like Sydney and Melbourne, the idea of the ‘Aussie dream’ – raising your growing family in a gorgeous house on a large block is fast becoming a fantasy for most. Quite simply, property prices are just too high. According to the ABC, in Sydney alone, the median house price is sitting close to a million dollars. So even if you find your dream home at that price, you still need to get approved and cough up a 20 per cent deposit – a whopping 200,000 dollars for the privilege. And, to put that into perspective, according to EY Oceania’s chief economist Jo Masters, the average Sydneysider will save for over nine years to purchase a house and seven years for an apartment. Ain’t nobody got time for that.

So who’s feeling it the most?

There’s a variety of people feeling the pinch – city dwellers that are currently residing in apartments, keen to expand their family and purchase a larger home as well as millennials who are trying to step onto the property ladder. Research conducted by Core Logic revealed that the proportion of millennials priced out in their 20s had risen from 20 per cent to 34 per cent in the last two years. Should people have the fundamental right to purchase a home? What’s the long term impact if prices keep rising and a whole generation could potentially miss out? According to Lisa Claes, Core Logic’s CEO, “if millennials’ affordability disillusionment continues, we risk entrenching a generation who become disenfranchised from society. It raises serious issues around intergenerational equity and should be a catalyst for policymakers to address affordability at a foundational level”.

Whilst this all sounds pretty bleak, it’s not all doom and gloom. There are ways that you can step on to the property ladder, build your financial portfolio and increase investments. Whilst it may not look like owning a luxury home in Darling Point, it’s all about turning the concept of purchasing on its head. Let us explain.

Is it time for a change-up?

As Albert Einstein famously said, “insanity is doing the same thing over and over again and expecting different results”. The economic landscape has changed so much for Australians, yet, in our heads, we feel that purchasing a home is the only way to build security. As we’ve discussed before, it’s not just houses that are expensive. It’s insurance, private education, cars, transport and the general cost of living. In her report, Jo Masters asks us, “why do people compromise on quality of life just to buy a home?”.

Maybe we need to change the way we approach the idea of building wealth – and people are already on the bandwagon. Welcome to the concept of ‘rentvesting’.

What exactly is ‘rentvesting’?

Essentially, ‘rentvesting’ involves someone purchasing a property, more so from an investment perspective that can support and pay for itself through methods like rental income. This then frees you up to rent somewhere that you could never afford to buy – a large home on acreage, a beachfront property or even a slick-city pad – whatever may be important to you or your family or meets your lifestyle expectations. Some people want to be in walking distance to work, live in affluent suburbs or be close to family and friends.

There are sceptics out there that would be screaming at the top of their lungs, “rent money is dead money!”. However, it’s important to note that ‘rentvesting’ actually allows you to use renting as part of a smart investment strategy – you can be accumulating wealth without compromising on lifestyle expectations as long as everything is structured correctly. And, there’s evidence out there to suggest that ‘rentvesting’ can be just as financially effective as purchasing a property, so much so that, in some circumstances, it can even lead to higher capital gains. It’s important to note that there’s a variety of factors that can impact this, so it’s imperative that you engage a professional financial adviser when you decide to go down the ‘rentvesting’ path.

Does it always have to be property?

Not always. Treat the idea of ‘rentvesting’ as simply using alternative funds that would be normally used towards a mortgage for investment purposes. Purchasing an investment property may not be to your liking or suit your lifestyle and, when it comes to any investment, there are always risks involved (particularly when the market becomes unstable). In a recent article, the Sydney Morning Herald looked at this argument, quoting research from completed by EY – the research found that people could still build wealth even whilst renting. They did this through economic modelling. In one particular model,

“two home seekers were given the same starting capital. One invested in homeownership, with the other renting a similar housing in the same location while also purchasing an ASX200 index fund.

The performance of their combined housing and investment choices over time were then compared. It revealed that the renters that maintained a leveraged investment in the ASX200 were better off than those who owed a property in the same area”.

Interesting stuff right? As you can see, there are lots of alternative investment options including building up a diversified shares portfolio or purchasing commercial real estate instead.

Ready to consider the ‘rentvesting’ approach?

If we’ve piqued your interest, you might have some further questions regarding ‘rentvesting’ and how it might apply to your financial situation. At Talem Wealth, our priority is our clients – making sure we’re doing everything in our power to provide the best possible financial advice and guidance. Ready to see if ‘rentvesting’ might be suitable for you? Reach out to us, we’d love to help.

 

 

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