I have made a decision to stay out of the Sydney real estate market and not purchase my own home. This choice raises a few options on where to park my cash. I am young, have a long investment time frame and a large appetite for ‘risk’. Therefore, investing in real estate or the share market seem like two options that fit my circumstances and goals. Term deposits, cash or bonds are terrible ideas that I will discuss in another post.

Rentvesting in Property

Since sharing with the world my disdain for Sydney real estate, many people around me have suggested I buy an investment property elsewhere in the country. Locales such as Brisbane or Adelaide provide much more affordable entry points into real estate compared to Sydney. It makes sense that many love this idea. After all, real estate has proven to be a brilliant investment over the last decade .

However, it is my opinion that the real estate market will face a strong headwind over the next decade. Every investment market returns to it’s long term average growth eventually. Despite what you may hear from the spruikers and the never-ending onslaught of sponsored Facebook advertisements from biased parties (you know who I am talking about), the real estate market is no different.

Rising interest rates are inevitable.

I have no idea when they are coming or how much they will rise to, but they will come. This has the potential to seriously disrupt the heavy upward trend property values have been enjoying since 2012.

This is possible even if every current home owner can afford to make their mortgage repayments at these higher rates.

Banks control property prices in Australia

You see, this is how your typical person in this country buys a home.

They go to a mortgage broker/banker and find out how much money the bank is willing to lend them (i.e. they determine their borrowing power). They then go out and buy a house as close to that maximum as possible. As far as they are concerned, this is what they can ‘afford’.

By controlling how much they lend to each customer, banks control how much money is in the market to buy real estate.

Thankfully risk management principles and government regulation moderate the banks to prevent out of control lending behaviour.

Rising interest rates lower borrowing power. This in turn means less money is entering the market. This causes property prices to rise at a slower rate and hence decreases the equity growth in property. This further limits the amount of money available for investors to make their next purchase.

If interest rates rise far enough, house price growth can completely stall for a few years.

It’s not all doom and gloom, the increased borrowing costs will moderate on the supply side by lowering new home development. Additionally, the Reserve Bank of Australia (RBA) will be watching real estate closely when making interest rate decisions to ensure they don’t upset the market too much.

This will all hopefully cause what is called a ‘soft landing’ for Australian property.

I’m not completely against real estate as an investment vehicle. However, it certainly is not my preferred investment choice over the next few years as I begin my 10 year retirement plan. I maintain that I will have another look at property investment once interest rates rise and I have a chance to see their effect on the market. I feel the best time to get into property for me is when interest rates are at their highest. This is because when they begin to lower, we will see more money enter the market and push prices up.

Rentvesting in Shares

For now, I’m deciding to instead focus on rentvesting in shares. This is the same as the traditional way people think about rentvesting into property, but instead of buying an investment property, I buy shares and ETF’s.

Rentvesting in shares has so many benefits:

Shares as an investment are immediately cash flow positive. That is to say as soon as you buy them you can start to earn a positive income from them.

You can buy as much or as little as you can afford.

No need to be leveraged to get the benefits of investment in shares.

They are much easier to manage than property, with ETF’s I use a ‘buy and forget’ strategy.

In Australia, you can buy shares that give you franked dividends, which means that tax has already been paid for them!

Rising interest rates will also affect the share market. However, I don’t have to be leveraged up to my eyeballs to invest in shares. I can ride the investment roller coaster down and all the way back up and I’ll never be in a position where I am forced to sell because of cash flow problems .

In a market that is going sideways or going down, leverage will not only see you have several years of negative returns, but it will also kill your cash flow and with it your ability to keep investing while the market is down. This is the best time to invest!

I may be completely wrong about the above, it wouldn’t be the first time. However, I don’t have a crystal ball. We all have to make our own investment decisions using the information before us.

To be honest, as long as you’re investing in something, you are very likely to do much better than not investing at all.

An un-leveraged portfolio of shares seems the most sensible option for me. This way, when the next downturn does happen, I can continue to invest and take advantage of the cheap investment environment.

So what do you think?

Are you rentvesting in shares?

I have a lot of real-estate-investing friends and I would love to hear from those who still love it and from those who regret it, so send me a comment.

Shuffling through my options.

Pat The Shuffler

And the legal stuff.

This post and my entire blog is about what I plan to do with my money. Nothing I have written here today or any day should be considered investment advice. I am not a professional and am not qualified to give any advice on investing or money whatsoever. If you try to copy anything I plan to do, you do so at your own risk. You should seek professional advice for your own personal circumstances.

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