Hello, and welcome to the Australians Money Puzzle podcast.

I'm James Kirby.

Welcome aboard everybody.

I don't think there's any segment actually of the residential property market that has less attention and is quite as significant as the concept of rent investing.

You know, it's a major social trend for aspiring home buyers.

They don't buy the home.

They don't buy a home the first time they buy.

What they do is they purchase an investment property.

They get the tax deductions related to that, and then they build up equity and it allows them basically to lead frog into the house that the house of their dreams, there forever home, as they call it.

I want to talk about this and I have someone who's ideal for it.

It's our June Paliwal of the Investigate Group, which is a buyer's advocate group.

First time on the show, but I know I've been listening to you on this issue.

You're very good on it, so I was I thought would be ideal way to bring you in.

How I are.

June, Yes, great, my friend, and definitely a hot topic at the moment the world of rent festing.

It is a hard topic and you know more than that.

I mean, there's always been sort of anecdotal.

One of the frustrating things I think is that there's a lot of anecdotal commentary about it.

It's like the bank of Mom and Dad.

You know, everyone talks about it, but it's very hard to get stats on it.

But I was listening recently to one of the bank results, the Bendico Bank results, and the CEO there, in releasing the results actually, you know, made clear reference to Richard Fennell.

He made clear reference to.

Their observation as a bank of the number of people, younger people now doing this rent vesting the rent basically and own an investment property.

And I think, intriguingly, there's also a speculation in the market that the banks, more than one are working on a product that will be like basically aimed at this area rent vesting mortgages, and that will really I think, move it up along the line whatever they come up with.

But you've really had a look at it, and you, I mean broadly, you think it's pretty good for the right people in the right place.

Is that would that be a fair comment?

Absolutely, it can play a key part of people's journey to building wells and even transitioning to their end of goal of buying a home.

I am a personal success story of that.

I now live in my dream home.

So you definitely here to say that you don't have to be a rent vestor forever, but it can be a transitional journey that's an absolute game changer.

And I want to take you through very quickly some of my own journey in earlier parts of my career, jumping in and around different suburbs to essentially be living from a performance and lifestyle basis.

And I'll give you some examples of performance performance being one of my properties that I was renting at in the suburb of Bella Vista and Sydney was about a thirty second walk from my office in Bellavista and Sydney, So it was a growing phase of career business things like that, So it allowed me to have proximity time there and those extra hours.

If you do the math over a fifty weeks a year or fifty two weeks, takeaways the man you leave.

But the key is that math of a few extra hours per day around your different audience rather than traveling and coming home, you're at the office and you're in and around places of people you have greater performance.

It gives you that efficiency, both financial efficiency and living efficiency.

Yeah.

Absolutely.

Now tell me you were talking particularly about the nature of revesting that most of our listeners obviously would be familiar with the broad term, and I'm sure it's worked well for you, that's why you're on the show.

But you've made a particular observation that about reinvesting.

You might explain this to our listeners who wouldn't have heard it before, the way it works with the yields being so low in big cities, the yels are two or three percent.

Out in the bush, there are six seven eight percent in country towns.

But would you explain to our listeners how it made your concept about where it makes more sense to do this.

For sure, let's do the math on it.

So before I talked about performance space for investing, of where proximity gives you performance in your home, your lifestyle, your business, your career.

Now if you move that over to financial analysis of renvesting, let's take a three million dollar home and you might go, why is are you using a three million dollar home?

It's intentional for a very specific reason.

If someone was to have a eighty percent loan against that or even a ninety percent if someone wants to get there with lower deposits and an eighty percent loan is two point four million, and at today's interest rates of say five and a half percent, that's one hundred and thirty two thousand of interest.

We're not talking principle where everyone talking about buying your place is pushing the loan down.

We're just talking about the interest itself.

Now, with that one hundred and thirty two thousand of interest, if you divide that by fifty two, that's two thousand, five hundred and thirty eight dollars a week.

However, a three million dollar property does not cost you two and a half thousand dollars per week to rent.

Usually, rental yields, like in some suburbs of Sydney, can be as low as two to three percent or even one point seven to two and a half percent.

So if we took a two point two percent rental yield and divided that by fifty two, that's about twelve hundred and seventy dollars a week in rent versus you know, more than two and a half thousand an interest alone, and you're not talking council rates and other things I see.

So is the concept basically that the Australian property has become so expensive in the metropolitan areas that the rental yields are so low that there's actually an opportunity for the agile investor property investor to exploit this.

But because the yields are so poor for those very expensive subverbs that if you want to the way to play it is or to optimize that are exploited, is actually to rent in it because you're actually getting a better deal because rents have never kept pace with prices.

Is that the underlying.

Logic, absolutely the underlying logic.

And so the thing here is that the more premium the suburb is, the greater the disparity between rental yield and actual interest on a mortgage if you're owning.

So if you're going to live in a regional part of Australia in the most affordable suburb in a unit, it's likely that the rat was yields high, so rate vesting might not be for you if you plan to live in that location for some time.

So that's the flip side of what we're saying.

Right, there's the logical flip side of what we're saying.

Absolutely, then in areas where the property prices are not so relatively high, the deal on rent isn't as good.

And we know that because the rents are six seven percent or whatever, while in the middle of the city is there are two and three percent.

It's a really good theory, not just theory.

It's a really good I am sure for many people.

It has a lot of pluses.

Now let's go a little bit deeper.

If the person is deciding to do this rent vest and they say, Okay, we know how we're we're going to buy a good investment property in their city, it's going to we know this suburb is on the rise.

We don't actually want to live in that soburb.

We want to live this other suburb which is more expensive and is also close to where we work, and we can cycle over something like that.

Okay, that all makes sense, but let's just have a look at it more closely.

Now, should the renvestor then should they do interest only?

It would seem to me that that's probably on the table here.

Absolutely, So, I think firstly, each financial position would be different betweening on the goals that they're after and seeking their own advice and guidance.

But when you look at investment debt and the renvestor is now renting in that great premium location for performance, lifestyle and financially, the next thing is what they do with their money.

Because they still have capital that isn't tied.

Up, they must invest to make it work.

I am acting our joy.

Absolutely, they can't go and spend it on a boat.

That blows your theory pretty quickly.

I imagine you're spot on right.

Renting has its advantages, but the money needs to go to work, right and when you're going to work with that money.

Yes, the interest on those investment related debts can be deductible, and so if they're deductible, then making sure you're not just pushing down that repayment in those early Welsh building stages is actually, you know, not in your favor.

You want to actually have the debt that's there and focus on every bit of dollar towards acquiring more assets, whether there be in other vehicles or property or so forth.

You don't want to go and focus on taking all your cash flow just to pay down debts whilst you're in what I call an acquisition phase.

The Welsh building phase.

Right, Yes, okay, so there's two things then in its favor.

It seems to me.

One is a natural market issue, as you mentioned about the basically for investing, the value is explicit in expensive what we call relatively expensive parts of the market because the user a little.

The second part then is the tax advantage.

How dependent on tax advantages specifically negative gearing is the whole rent vesting notion.

It plays a part.

But even if there was no tax advantages in favor from that negative gearing, there is the wealth building advantage because the location that you're in to live in from a lifestyle or maybe live in what you can afford, because you can't live in that premium location at all times.

If you feel that that cost is too high, ins why you're investing there.

But if you now went to another suburb and you decided to pull all your money into buying a home to live in, you've got to take a moment to question tax advantages aside.

Is there a location in Australia where the data is better for me to actually invest in than the place I'm going to sink money in, which is the home And if that is better, you're now actually onto something and renvesting can build your wealth faster than the home you're in because that tax advantage does matter.

Now you already are going to actually focus on building wealth with data, not just the tax advantage behind it.

Very good, and we're going to have a look at that broad issue of the data you need in the second segment of the show.

But just to play Devil's Advocate with you on manfesting, the criticism of it is that sooner or later, right when you're renfesting, it sounds like it's good at the start, but it seems to me if a few years later, as time passes, your rents rise and if you had a mortgage then you would have been basically even inflation will be helping you as you because you own the home, So does it weaken as time goes by?

That initial sort of sugar hit you get from the renfesting idea.

It's a really good point to raise and the short answers know with the right moves made.

So I want to give you a live example of the right moves, but the numbers behind it.

If I go through three core reasons will help explain.

The first core reason is you usually when someone has a desire for a home that they feel is better than what they can afford.

That particular part is what creates this satisfaction between, oh, look, home is unaffordable.

I can't go and achieve what I want because it's not exactly what I desire versus the position I'm in.

And so with rent vesting, the step one that you're doing is you're matching the desire to the position that you're in.

And it starts to have a perfect match now because now you can have this performance upsides, I can rent somewhere where I wanted to live in.

That first part is there for you.

The second part coming to now is your career and time.

As you map out income and age, it's close correlation that is age and time and workforce and experience in workforce builds income tends to as well.

And so as you're growing on the rent vesting journey and maybe you're now getting the lifestyle upside that you didn't once have and you're now investing in money, there is growth occurring, not just financially in your actual investment, but there's growth also occurring professionally.

So now when you are returning to the home buying goal, of the future.

It's not the same argent that was there at twenty five as he is in thirty five and forty five, and so your different capability allows you to now get closer match to your preference and the home you want to live in.

The third part is rent vesting involves building wealth through property across Australia with data, not by emotion or things that feel comfortable.

I imagine since you're a buyer's agent that your notion of the afteromen way to spend the money that becomes available as a renvestor is to put it back into property.

You don't suggest to go outside property where we know there's very good turns, for instance in the market of double digits every year in recent times.

No, you can actually do that.

Even then, that could still work under the rent vesting umbrella because you have cash that's there that wasn't there before because it would have gone into your own mortgage.

Now you have a lifestyle upside of the performance upside, and you have the free flowing cash flow if you wanted to put it to indexes and other things, and you still live the same lifestyle of that multimillion dollar home, but not the multimillion dollar mortgage.

You can do that.

At the end of the day, rent vesting is your choice of where you invest the money.

But the main thing here is this third part is as home prices have gone up, rents have increased because you were a performance driven not I'm going to get the best home I can in my twenties or thirties for the income I have today.

You're able to have an outperformance and that outperformance will come back and help you.

And an example I can think of with that is a couple i'd met by the name of Danny and Ron.

They were in banking as she's an executive in the Big Four and if you'd wind the clock back to twenty twenty, her budget would have allowed her a unit to live in the inner West of Sydney.

Now that budget itself, whilst it would have gotten her unit, that wasn't her ideal home that she wanted.

That it wasn't the ideal location that she wanted, so she could have parked them in that way.

Instead, we purchased a property in Brisbane for five hundred and sixty thousand, which has doubled in value in the five years later.

And then she'd use the equity to go to three other locations.

Now built over one point one million dollars in equity across three point five million dollars worth of assets in four different properties.

So all of this wealth building allows you to do that.

Interesting.

Now what we must do is let our listeners hear what Arjen has to say about using data to optimize the notion of rent investing back in a moment.

Hello, Welcome back to The Australian's Money Puzzle podcast.

Today's guest is Arju and Padival, who is head of Investor Kit, which is a buyer's advocate agency.

He operates out of Sydney, but it's a nationwide operation and I'm going to resist asking you which is your favorite.

I certainly wouldn't spend a whole segment on it, but just quick before we go into the issue of data.

Everyone i'm on the show in recent weeks has been asked one single question, what city is the best value in the country at the moment and the answer is.

I would say the answer is Melbourne.

Very good.

And you are now adding to the majority week by week.

Yeah, that's interesting.

We're building a consensus here now about data and collection of data the point I think in the first part of the show, which was really interesting folks with Arjun, was this notion of the perfect match in the property.

And if I've got it right, I mean, I think what he's driving at is it's not just the notion of re investing, and it's not just the notion that you rent and you buy an investment property, but because you're buying the property on strictly investment criteria, you optimize your possibility of making the very best investment.

So a lot of it comes down to what and where will I buy, which is nothing to do with where I want to live?

Is not it basically arguent?

So how do you approach that?

And what data?

You've mentioned data a few times, what do you mean and what do people look for for sure?

So from a data perspective, the key thing to point out that I believe in property is true is that capital growth does not exist without competition.

Capital growth as an outcome is simply there because competition in a fewer amount of houses for sale has created growth and someone willing to pay more.

And this multiple events happen again and again, and new comparable sales arise at high amounts and So when you understand that concept without any data points or KEYAI terms, machine learning, or anything fancy behind it, you now realize that what you're really looking for is signals of data that points to high competition occurring, which increases the likelihood of property prices to grow.

Right, And so when you're looking at that, there are really competition in two parts of housing markets.

One is the rental market and one is the established market for sale.

So competition and the rental market can be shown by is there a low amount of rental vacancy so vacancy rates are low?

Or secondly, is there are decreasing speed which is increasing speed which is decreasing days on markets, which means rental properties don't take on average two weeks to find a tenant, they take on average one week to find a tenant.

Then, if we move on to the sales data, is how many properties are there for sale and the trend of those properties for sale.

Is it a decreasing trend of properties for sale at any one point because there is more buying occurring, sales volumes increasing, Is there a decreasing days on market because people don't take two weeks to make a deal, they do it in the first open or they don't take three or four inspections, they're doing the first inspection.

And is there a listing price that now has far less discounts or are having sales occur beyond the listing price.

So there are over thirty different data points we look at, but if you just simplify to these three to five, you have found competition and competition equals capital.

Growth, right, So maybe we just go through them.

The obvious thing obviously in price days on market, that's something you're looking at some of the sounds of it very closely.

What are the signals for you that this suburb is going to fly basically or outperform.

Of course we'll do it as a dock point signals then, So the first one is listing levels below five year averages, so substantially lower levels of property listings in comparison to what's normal.

The second one is surging sales volumes, so increasing number of deals happening.

The third one is depending on which cities, increasing auction clearance rates and above sixty five percent auction clearance rates as a clear benchmark, but increasing trainings as well.

Then the fourth one is decrease days on market, and if I had already mentioned that when prior, this is just the time to sell and it's getting faster or quite low.

And then the fifth one here is having lower levels of vendor discounting.

They're listing price in what percentage comes off it or a positive vendor discount event the listing price, and how much more it sells than it.

And so if you just use these five as a blanket statement, it's basically one paragraph.

Someone over the barbecue at the sausage ses are saying, hey, mate, I'm at this market and I saw that it doesn't have a lot of properties for sale.

There's less properties for sale today than there was five years ago.

A lot of people are buying properties in the suburb, and they're actually buying it twenty percent more than there were last year.

And then on top of that, it used to take a month to sell, it only takes two weeks to sell property here on average.

And then looking at properties in this area, they used to have list prices of eight hundred K and that often sell at seven point fifty.

But now the eight hundred k listings are there and they're often selling at eight fifty to nine hundred.

So that's someone having a casual chat.

I wonder I had doubt, but I would be skeptical about obviously says above the reserve, since there is underculting in the market, and we know there is across the market, and it's always a problem, especially when the market's starting to lift.

Which of your data points do you, at the moment think is the most powerful.

The most powerful data points?

I would say it's an equal tie between listings and sales volumes.

But if I was to use listings as an example, here's where that's important.

If you have listings well below a five year average and it's extremely low levels, it means any sort of interest or any sort of sales volumes or insights from elsewhere will showcase that there's a lot of demand that is showing against the supply that's there.

Because it's all relative to each other, you could have listings come down, but if there is still a lot of transactions not happening, then all of a sudden, that's still considered a lot of list So you want to see those two data points together.

But the second part of sales volumes is that if all of a sudden, you had fifty transactions per month on average in a suburb, and then that number is now eighty to one hundred.

Well, either it means a there is a lot more building supply that's arrived in the market, a lot more properties for sale, and they're just transacting at a higher amount, which is a false positive, or it's the lower level of listings.

It's just transacting far more frequently because properties come on, then they get off, then they come on, then they get off.

So these two data points would be the most telling ones, and they flow on to all the other indicators I've mentioned, because the other indicators don't get faster unless these two move right.

Very good, very good, And if you are thinking of manterfesting, obviously this is I suppose the point being are doing is that when you're not thinking of buying a home, you're thinking strictly rationally.

Then you're thinking strictly on data points.

And if you find that perfect match of data points, it doesn't really matter of where it is.

I am it sounds to me it doesn't matter where it is.

You could be in Sydney and you could find it's in Brisbane, or you could be in Brisbane and find it's in Perth or whatever is that fair to say?

This is an absolutely like the most critical point to consider an investing.

Too many myths go on that people think your backyard or regional markets or other capital cities aren't as good as the place you love and know the bakeries, the cafes and the proximity to the city of eighty five percent as pro totality data over the last twenty five years of LGAs have had five percent or greater compounding growth levels.

And so if you now took away the fifteen percent from those markets that did not perform, and you took away towns with a single industry economy, and then number two, you took away towns that had a population of less than fifteen thousand that had those LGAs present in you now are now taking that number to above ninety five percent, which actually means every city, town or suburb across Australia and when you exclude those has its time in the sun one day.

And so your goal as an investor that's now national and borderless, should be thinking about where a that time is happening, because long term holds everywhere will do well eventually.

And then b, how can my portfolio create the greatest diversity, because again, when something's happening in Adelaide and Brisbane doesn't always mean it's happening in Sydney and Melbourne.

They can happen at different times, and the data suggests that when you look at twenty twelve to twenty seventeen, Sydney Melbourne boomed, but then when you look at twenty twenty to twenty five Perth, Adelaide Brisbane substantially outperforms Sydney and Melbourne.

That's right, that's right.

Borderless.

I like that, borderless absolutely.

Okay, we'll take a break just before we go LGAs just in case our listeners weren't familiar with the term.

It means local government areas.

Yeah, local government aias.

Okay, so folks, all right, we'll be back.

We have some great questions which we have kept for today.

Back in the moment.

Hello, Welcome back to The Australian's Money Puzzle podcast.

My guest today is Argent Paliwal from Investor Kid.

As you have probably discovered by now, a property expert, a buyer's agent operates out of Sydney, and some very interesting observations already on the show about rent investing.

I think it's a very convincing case Argent puts forward based on his key observations about the optimization of that about being borderless basically in your approach and having that strictly financial rational approach to it which optimizes your chances basically.

And do keep in mind that.

I thought it was interesting also that Argian about the point that tax is favorable, but it's not actually mandatory the tax.

Your arguments are not entirely based on tax.

They're helped by the tax situation, but they're not crucial, all right, Sus says.

The biggest barrier to downsizing and upsizing for that matter is stamp duty in Victoria.

It's yet another tax, and on indexed I might add a real barrier to people having the right size home.

As an buyer's advocate said to me, you should budget ten percent transaction cost of buying when you have properties, and that's a huge disincentive.

Yes, there are disincentives, that's for sure, Sus.

Thank you for that.

And obviously Victoria, with its menu of taxes ten particularly different property taxes, has done itself no favors, certainly in terms of investor sentiment or right.

A question this time from Tim, is it possible that by allowing new home buyers into the market with a five percent deposit, that's the that's the government's new five percent universal five percent deposit first home scheme.

Anyone anywhere can get their first home with a five percent deposit, ten percent covered by the government.

Tim asks, does the government run the real risk of negative equity in the future years?

Falling rates coupled with reduced deposits appear already to be pushing first home buyer market upwards.

I don't doubt this at all.

If you have people who were not expert and were not familiar with the points you've been making, Arjen, and they had ninety five percent mortgage, and if we have many more people with the ninety five percent mortgage under this scheme, does it create some new risks in the market?

Do you think?

It depends for how long?

And it depends how many get going.

I feel like there's a couple of things to share here.

Firstly, Australia's debt position overall presents a low risk.

We have just over two and a half trillion dollars worth of debt in this country on houses against over eleven trillion dollars of value, so most of it still sits at a low loan to value ratio.

So if there was some movements in prices, it would have to be so large for that ratio to come together, and so many properties have to go online and not sales for that to happen.

But that's the first core structure piece.

The second part here is that when it comes to those owner occupy or like those properties that we have across the country or more than a third of them actually have no debt individually, like a third of houses or the ten point four million dwellings don't have that, so it does take many more years of high leverage debt with high volume of places, by the way, which is only for a first home by segment up to certain price points.

It's not for everyone.

So I don't think structurally that problem there is as bad, but I guess the key points to also mention that the last forty five years of housing data, there have only been ten events occur in which we've seen some national house price steps, of which the largest one was actually in recent times in twenty twenty two, where we had like over nine percent did some some markets which which really quickly came back, and so the largest amount of dips has been that eight nine percent.

Secondly, it wasn't on all cities, it was on a select few.

And then thirdly it's only had ten events where we've seen national price tips in forty five years.

And so when you think of the Australian housing market, it would have to be some major shocks that causes that negative equity.

And if we look at long term compounding growth rates, it's likely that within twelve months someone's ninety five percent if the national averages play out, is suddenly down to ninety percent loan by the nature of them paying down and growth occurrent.

We'll so the wider picture being Tim and thank you for the question, Susan, Tim, and there are This is information, of course, not advice.

But the wider issue is that there is actually substantial stability in the system, not just because we have Opera or other regulators, but because, as Argent points out, there's a substantial portion of the population that have no household debt at all, which we don't pay much attention to.

They don't make the headlines, but they probably do their bit to stabilize the market.

Terrific, Hey, Ardyne thank you very much for coming on the show.

Nice to have you on.

Thank you so much.

That was Argent Pollowell of the Investor Kid group.

Let's have some more questions and comments.

Always happy to have comments, just like Susan's comments today.

They're very good, they're very welcome.

You can ask multiple questions of course, anytime the Money Puzzle at the Australian dot com dot au.

Talk to you soon.