A golden rule of property investing to earn income is there must be people wanting to pay rent to live in your property.
Investors will not earn a cent of return if a rental market does not exist.
Too few potential tenants in your local area, and you can quickly face cash-flow problems.
This is why Australian investors should feel upbeat about the rise of ‘Generation Rent’. First, a little context:
Anyone with an eye on mainstream press this decade will know Australia is experiencing a boom in property investment.
Conditions have been, and continue to be, prime for building wealth by investing in investment-grade bricks and mortar, and leasing it to tenants.
Interest rates remain at record lows. The jury is out on whether they will fall or rise in coming months.
Homeowners in Sydney, Melbourne and pockets of other capital and regional hubs have watched the values of their owner occupied homes skyrocket since the GFC. Most have enjoyed value windfalls.
Many Australians keen to build wealth ahead of retirement have dipped into their primary residence equity pots to buy income and capital-value-generating property assets.
OK, but what is ‘Generation Rent’?
‘Generation Rent’ is the term used by industry commentators to describe people who will rent for life – or for very long terms.
Who are these people and why do they rent, not buy?
- Many jobs are no longer for life and many Australians are studying longer to prepare for jobs that may or may not yet exist. Lenders have tightened lending criteria, making it harder for some people to secure finance if they do not have a permanent income.
- Some ‘Generation Rent’ renters on low wages say they have been priced out of the inner and middle-ring buying markets of Sydney and Melbourne, but still need to live in these cities for work and family reasons.
- Some are short- and medium-term contract workers – ex-patriots, miners etc – who just do not want the heavy financial and living commitment of mortgages.
- Many of the people in ‘Generation Rent’ are young adults, potential first-time buyers, who cannot afford to buy where they live for work or study.
- A cohort of cashed-up baby-boomers preferring the freedom of renting in later life. They can travel for extended periods and not worry about empty houses back home.
And remember, ‘Generation Rent’ includes a big bunch of landlords.
This savvy group are stepping on the property ladder by buying investment properties in areas they can afford and continuing to rent where they want to live.
As you can see, there are many reasons large swathes of Australians are choosing to rent instead of buy.
Yes, rental demand is growing beyond metropolitan levels of supply in Melbourne, Sydney and parts of Brisbane.
Today’s property investors stand to gain considerably in coming decades, if they offer well researched and appointed rentable homes to these growing markets of generational renters.
This is obviously excellent news for Australian investors in real estate, but I also believe it is good news for ‘Generation Rent’ itself.
Modern life is all about choice. ‘Generation Rent’ faces unprecedented choice of how and where to live.