More young Australians are becoming junior investors, with most of them ‘rentvesting’ to enable a start in property without compromising their lifestyles.
If you don’t know much about rentvesting, John McGrath explains how this is one of the most important emerging property investment trends in Australia today in his article featured at switzerbroker.com.au:
Rentvesting is where young buyers – typically Gen Y, purchase their first property for investment purposes rather than living in it themselves.
Unlike the Gen X and Baby Boomer buyers before them, Gen Y is not willing to sacrifice their lifestyle in order to own real estate. While Gen X and the boomers didn’t mind purchasing in affordable locations on the outskirts of a city and often far away from work, beaches and CBD nightlife, Gen Y doesn’t want a bar of it. They certainly share their predecessors’ desire to own property but lifestyle is priority one.
So they’re buying for investment first in affordable suburban areas while renting in the trendy inner city locations that are priced beyond their means. Other Gen Ys are remaining at home with mum and dad to save as much money as possible before flying the coop.
These junior investors are typically buying in middle to outer ring suburbs where rental yields are strong and the bulk of the rent covers the mortgage (or possibly all of it with interest rates so low right now).
This means little out-of-pocket expenses, little financial impact on their lifestyles and a great starting point in property. Once you’re in the market, it becomes much easier to buy other properties (either more investments or the dream family home) down the track with accrued equity.
Hats off to these buyers. This is a fantastic example of markets evolving as property values rise and lifestyle areas become unaffordable for those just starting out in real estate.
Rentvesting really took off after the First Home Owner Grant changed. When it was first introduced, the grant was available for all types of first home properties. When the rules changed and the grant became only available to newly built or off-the-plan properties, the incentive for young people to buy their first property for owner occupation was reduced.
Rentvesting is a trend that just keeps on getting stronger. A recent Mortgage Choice survey shows rentvesting has increased from 21% of investors to 37% over the past 12 months alone.
There are two other important trends among Australia’s contingent of junior investors.
Firstly, they are getting in early. Domain research shows the average age at which Gen Y buys their first property investment is 25 years compared to 35 years for Gen X and 45 years for Baby Boomers.
Secondly, junior investors are building larger investment portfolios than their predecessors, who typically aimed to own their own home outright with maybe one investment.
There are a few reasons for this. They definitely want to mitigate uncertainty over the future of the pension; and they understand that their superannuation is unlikely to be enough on its own when they retire. So they need growth and income assets to support themselves.
In addition, Gen Y is a far more inventive and aspirational generation. It’s not uncommon to hear 25-year-olds talking about retiring by 40; and unless they’ve invented the latest app that’s going to make them millions, they’re realising they need assets to fund their mid-life retirement dreams.
Today, Domain research shows 16% of Gen Ys already own two or more properties compared to only 17% of Gen X and Baby Boomers.
What a fantastic start to building wealth.