Mike Mortlock: Welcome to Geared for Growth. This week we're chatting with Peter Mastroianni who is a property finance expert. He's also an author and the host of his very own property investing podcast, The Rentvesting Podcast, which you can find at Rentvesting.com.au. We have a chat to him about rentvesting as a strategy, the whole wealth creation journey, and his journey so far, and also everything around property investment finance. Here's Peter. Peter Mastroianni, thanks for joining us on Geared For Growth.
Peter Mastroianni: Mike, thank you very much for having me on.
Mike Mortlock: It's a pleasure, and I've been a fan of your podcast for a while, which we'll talk about of course. But for the listeners that maybe haven't heard of you, Peter, can you tell us who you are and what you do?
Peter Mastroianni: My name's Peter Mastroianni, I run a mortgage broking business by the name of Loans Only where we specialise in working with both retail and sophisticated investors to support their property investment borrowing needs. I guess we work with a pretty wide range of everyday individuals, and help them grow the largest asset base that they can with the money that they can afford.
Mike Mortlock: Awesome, and we really want to get into the nuts and bolts there, and there's a bit more to what you do as well, right?
Peter Mastroianni: A little bit more. But the mortgage business is what keeps me busy, so in the background I have been active in property investment myself since my early 20s and I used some practical experience to publish a couple of books. So, my last book that I put out into the marketplace probably was released this time last year called, "The Property Investor's Buyers Guide." That sold reasonably well, but there's the wannabee author side in me, Mike, but-
Mike Mortlock: I think you were book of the month in Money Magazine. Is that right?
Peter Mastroianni: That's right.
Mike Mortlock: That takes the wannabee out of it from my perspective, Peter. I think you're selling yourself a bit short.
Peter Mastroianni: You don't make any money out of writing, though. Well, I don't anyway, so I need to get a better publishing deal for the next one at some point in time at the future. So, that was quite good and was a useful tool for me, and I also champion the rentvesting cause, one through the podcast, The Rentvesting Podcast, and also through the website, Rentvesting.com.au.
Mike Mortlock: Yeah, awesome. We're going to dive into that for sure, Peter. To get a bit of an insight into the real Peter, as it were, what posters were given prime real estate on your bedroom wall as a youngster?
Peter Mastroianni: Oh God. My mom was pretty anal actually, Mike, so I wasn't really allowed to have-
Mike Mortlock: No Blu Tack?
Peter Mastroianni: No, no Blu Tack. The old man spent too much time painting the walls of the house to put Blu Tack up, but I couldn't tell you, actually. I don't recall actually having any posters up. Is that strange? A bit sad?
Mike Mortlock: There's been a few people we've interviewed that had a pretty strict anti-Blu Tack policy. In your own childhood utopia, and shunning all the rules, who do you think you would have pinned up?
Peter Mastroianni: Oh, God. If I could, it would have been like Pamela Anderson or something back then, I guess in my school days. But if it was something inspirational, I don't know, maybe Muhammad Ali. As a teenager, I was quite interested in Quentin Tarantino movies, so Pulp Fiction was all the rage back then and others, so maybe something along those lines.
Mike Mortlock: I can picture them all now. So Peter, can you just explain a little bit your background and how you found yourself getting into property?
Peter Mastroianni: Sure. So, university I studied finance and after uni, I had aspirations of actually becoming a financial planner, and I was there for about five minutes. It wasn't really for me and I actually landed in sales and marketing type roles, which I did quite well in. I was fortunate enough to be paid a good wage at that time, and I was single and had a good disposable income, and I used it to actually invest in property. I was fortunate that I was able to acquire my first investment property in my early 20s and I'd done a few things, made a truckload of mistakes, like a lot of people do along the way. But predominately I've tried to hold property where I can. I've done some renovations and done some subdivisions and things like that, as well.
Mike Mortlock: How important do you think it was for you personally getting into property investing at such a young age? Has that really amplified or exponentially increased your experience and your learning from those mistakes earlier on?
Peter Mastroianni: Definitely. So, a couple of things around that. I think I was always probably pretty keen to get into property and it probably stemmed from a very early age. I have a very vivid memory of my grandfather actually taking me out on a Friday and we would go and collect the rent. So, there was no BPAY-
Mike Mortlock: Wow.
Peter Mastroianni: ... or things of that nature back then. I was about four or five years old and we would turn up to a place and knock on the door and someone would come out and pay us a bit of cash, and then we would go on our merry way, and I'd probably get an ice cream and a play at the park in the afternoon afterwards. So, I thought that was a pretty cool job to the point that if someone had asked me as a kid what I actually wanted to be when I was older, I would always reply that I wanted to be a landlord.
I had this burning aspiration that I wanted to fulfil which probably was a motivator of wanting to actually get into the property market at an early age. I didn't have any strategy or any real plan. I just wanted to go and buy houses, I guess. The first property that I purchased was in Brisbane, in a suburb called Mount Gravatt and I purchased a four-bedroom weatherboard home there for about I think it was 142 or $143,000 to begin with.
Mike Mortlock: Wow.
Peter Mastroianni: So, that's going back a few years now. I held that property, maybe for about 18 months, less than 18 months, and had done a bit of a cosmetic renovation, and sold it. I walked away with a good sum of money and I thought it was fantastic, but it didn't actually dwell on me until I went to purchase another property which coincidentally was again in this Mount Gravatt suburb, so a similar property to what I had sold.
I was paying $260,000 for it 12 months later, so I didn't gain that initial appreciation of buy and hold, instead of chasing a quick flip for a buck, because the debt on the second place was actually more than what it was on my first property. So, that was a good lesson to learn early.
Mike Mortlock: Yeah, and I guess a not so painful one. You did make some money, but then-
Peter Mastroianni: Absolutely.
Mike Mortlock: ... saw the capacity to make even more by holding onto something.
Peter Mastroianni: That's right.
Mike Mortlock: So, as the host of The Rentvesting Podcast, which for the record for our listeners is a far more polished and successful one than this one, so please go and-
Peter Mastroianni: Not at all, Mike.
Mike Mortlock: ... check that out.
Peter Mastroianni: Thank you for the plug.
Mike Mortlock: Can we talk about what rentvesting actually is?
Peter Mastroianni: Sure. So, very simply, rent where you prefer to live, and invest where you can afford. So, you might like the lifestyle that Bondi has to offer. You can afford to rent in Bondi, but you can't afford to buy in Bondi, but you can afford to purchase in Southeast Queensland, for example, as an investment property. So, it's really about a lifestyle preference and using the investment strategy to do the heavy lifting in order to start acquiring a property portfolio.
Mike Mortlock: Now, there'd be a lot of places in Australia that would be fantastic to live, but on paper, quite terrible property investments. So, that factors into rentvesting, as well?
Peter Mastroianni: Absolutely. I think it's becoming more and more relevant as prices in particular Australian cities start to explode. The notion of studying hard and going to uni and getting a job and settling down and buying a house, and living in that property for the next 30 years is a notion of the past. The fundamentals of our society have changed significantly, predominantly in the last 10 or more years.
The way in which people want to engage with their property is also changing, and the style of dwellings is also changing, and people want more flexibility within their lives, as well. Second to that, living in your own home as a permanent place of residence is really bloody expensive. No one has an appreciation that as an asset, it's an asset that doesn't actually produce any income, so you're completely reliant on the capital growth of that property. You tend to over capitalise because you make an emotional investment to get into that property, because you picture the family and the nice picket fence, and all the crap that you want to fill your house with, the materialistic objects.
But that all costs money. You can't claim depreciation on your principal place of residence. No one factors in the interest that you actually pay on your loan, as an expense to maintain that property, and you're completely reliant on your business, or your PAYG income in order to make ends meet. Whereas, if you flip the coin and you live where you want to live and you live for lifestyle purposes and rent in an area, and invest in other locations, you're still acquiring assets and yet, they're incoming producing assets as well, which can go a long way to covering the costs of holding that asset base.
Mike Mortlock: Yeah, and young people are facing some pretty big challenges in saving for a deposit and purchasing a property, especially in some of the areas like Sydney and Melbourne. Typically, what is the sort of strategy that young people are employing to purchase a property? You talk about educating the next generation of investors to rethink that traditional home ownership model which we've touched on, but what are the ways that young people can get into a property sooner?
Peter Mastroianni: So, since APRA has been I guess micromanaging the lenders, for a lack of better description, but obviously there's been a significant change that's happened with the investment lending space, which is certainly had an impact on rentvesters, or aspiring rentvesters that are in the marketplace.
However, in saying that, a large portion of my client base are still looking to actively invest with a 10% deposit. They are still having to pay the lenders mortgage insurance upfront, as well as the stamps. So, if they're looking for a property between 350 to 450,000, realistically they're probably not going to get a lot of change out of 80 odd thousand dollars, after your deposit and all expenses have been outlaid to actually acquire that property, and they're getting into the market by that method.
Now, coming up with 80 odd thousand dollars is a hard task in itself, but it's certainly achievable. Individuals are doing that by genuine savings. Some people are actually getting assistance from family members, as well. Some people do receive inheritance and things of that nature. Look, certainly if there's a will, there is a way, and the rental income and the depreciation and other aspects that these individuals are receiving ensures that there's little out of pocket expense for the ongoing holding costs of that asset.
Mike Mortlock: So, when it comes to finance, obviously the principal difference between rentvesting is if you're buying a property for an investment, it's income producing, right? So, there's only perhaps a small deficit between the interest payments and the rent that you're receiving, whereas if you're living in that property, then obviously you're servicing that whole amount.
Peter Mastroianni: That's exactly right.
Mike Mortlock: Does that mean that banks are more likely to lend to you for an investment property than a principal place of residence? Is that what it's all about?
Peter Mastroianni: I couldn't give a simple answer to that. Primarily because it's going to depend on everyone's situation, and people's situations are completely different. At the moment, lenders are certainly chasing or pricing their products more competitively to attract owner occupiers, in order to balance their loan books. But we're seeing a lot of chopping and changing in pricing from lenders, as well, particularly if they do have capacity on their books to attract investment lending on.
I think that's just going to be the nature of the beast until the dust actually settles within that lending space, which I don't know, could be a couple more years. We'll have to wait and see. But I think for individuals that are keen to leverage that investment strategy, and you're looking at it from an investment lending point of view, it's important to realise that the bulk of the lenders are still probably wanting to see for investment lending that you've got a sizeable deposit.
So, gone are the days of low deposits or high LVR lends on investment lending. So, you've got to at least think 10% POS costs to get the deal over the line. If you're wanting to pay interest only, you've probably got to be doing that deal at 80% or under. There are still lenders in the marketplace that are doing 80+ percent on the loan to value ratio on an interest only basis. However, they're becoming few and far between at the moment.
Mike Mortlock: So, let's talk about the pros and cons of the rentvesting strategy. I found a real world example the other day. A client of mine bought a unit in a development. His friend bought an identical unit in the same development, and they're actually planning to live in the properties for 12 months, and then actually swap and then rent to one another. What sort of wizardry's going on here? What's motivating them to do that?
Peter Mastroianni: I don't know. I could only assume that they've probably picked up first home owner grant incentives. So, they're capitalising on the benefits that they can receive on an upfront basis and living in that property for the minimum requirement. They could possibly be also leveraging, what is it, the six year tax rule, as well?
Mike Mortlock: Yep.
Peter Mastroianni: In terms of having a temporary absence from their primary place of residence, which could mean they're exempt from capital gains tax if they were to sell that property within that six-year period. So, it's providing a lot of flexibility or choices for them. They might be working in, I don't know, in Brisbane, and planning on moving to Sydney for work within that period of time, as well. At least it gives them an option as a way out to liquidate that asset if they need to free up cash at some point in time in the future. But that's a nifty one. I've not heard of that.
Mike Mortlock: Yeah. It's an interesting thing I've come across. It was the first time, actually, and I guess what happens after they swap and they move into each other’s places, then suddenly they've got a rental income, which of course they need to declare, but suddenly the interest component of their loan is tax deductible, suddenly-
Peter Mastroianni: That's correct.
Mike Mortlock: ... they're able to claim the depreciation, so I'm guessing if you analyse all those numbers, there is a positive to that. I guess that speaks to the sort of rentvesting strategy with I guess the tweak that they're getting that first home owner grant. Is that a question that you get a lot? If I'm just buying a property as an investment, what about that first home owner grant, or incentive, depending on where they're buying?
Peter Mastroianni: Yeah, that's a good question because you have to weigh that up. 'Cause it's a fair chunk of change that you can receive, and for some individuals, it could actually make or break the deal for them. What I would suggest is for people to do their due diligence around the first home owners grant, and the stamp duty concessions.
The rulings in each state is different. However, there's grey in between the black and white. So, some states will provide the grant on the basis that it is for your first home. So, you can technically buy an investment property first and still top draw those incentives for a later date when you actually buy your first home. Whereas, in some other states, they'll only provide the grant on the basis that you've not owned property elsewhere in the past. So, in some states, there is still the option to pick up those incentives at a later date if you've actually chosen a rentvesting path to begin with.
Mike Mortlock: Yeah, okay. That's some great advice there. That figure can be pretty significant, too. Like, with a stamp duty exemption itself, we could be talking-
Peter Mastroianni: Yeah, it's huge.
Mike Mortlock: ... $10,000. Depending on where they're buying. If it's a new property, some of the incentives are up around the $20,000, so that really has to be an analysis I'm guessing.
Peter Mastroianni: Absolutely. Again, it comes down to individuals' circumstances and what their plan is. I think it's important to think of it as a strategic approach or an emotional approach. Because it's not going to be suitable for everyone. The strategy is getting into the marketplace and growing an asset base, and the emotional side, and how do you actually price that emotion and the value of that as having a place that you can come home to in the evening and call your own, you know?
Everyone wants to have that aspiration of living in their own home, so I completely get that, but they're the two aspects that need to be weighed up in the decision process, and then it's do the maths. Is this an investment grade property? Is it in an investment grade location? What are the numbers? What does my financing look around that? Does this stick up to be a good strategic investment for me?
Mike Mortlock: So, let's go back a couple of steps and talk about people that are saving for a deposit. Obviously there's talk about housing affordability crisis, 'cause we've had markets like Sydney and Melbourne having some great growth after sitting still for a fairly long period. Do you buy into the smashed avocado rhetoric about first home owners just having unreasonable expectations and not being able to graft and save like generations before them?
Peter Mastroianni: Do I buy into it?
Mike Mortlock: Yeah.
Peter Mastroianni: Yes and no. It's a tough one. I like to think that ... Well, I don't like to think. I know for a fact that owning a property has always been aspirational for people, and it's been difficult for individuals to get into the market at all stages through the last, what, 50-60 or more years or what have you within the nation here. So, I think it's just different circumstances at different times.
Where there's a will, there's going to be a way. I do firmly believe, though, that if you want to get into property, then at some point in time, you probably realistically need to make some sacrifices around that, but the whole smashed avocado thing is probably, has been blown out of proportion now, I think. Sorry, Mike. I'm probably not answering your question here very well.
Mike Mortlock: No, that's all right. It was a bit of an attention grabbing headline, I think. From what I've heard, torn basil is the next one that we'll be talking about.
Peter Mastroianni: Oh yeah. I've not heard that one.
Mike Mortlock: Doesn't have the same ring to it, but I guess your focus is certainly in helping younger people to make that first step. Let's say we're onboard the rentvesting train. Where are we buying? What sort of property should we look at? What recommendations do you make to people that are buying their first property as an investment?
Peter Mastroianni: Firstly, one, do your due diligence and second to that I guess it's ultimately going to depend on the individual's personal strategy and plan that they're looking to put into place. Weigh up the pros and cons of whether it's better for them to leverage the initial incentives or grants that are going to be able to them, or whether or not it's worth buying an established property in a solid location.
So, the fundamentals around asset selection in terms of being in a good location and having good prospects for growth, and being in good employment nodes with transport and things of that nature. Certainly it's going to be an important qualifier for them, so do due diligence and pay to work with someone that is an expert in that area. Whether they choose to work with a mentor or a buyer's advocate or something of that nature.
And look at it again from the numbers point of view, to weigh it up, if it's actually worth buying a new property and leveraging someone with your expertise, Mike, that can help them out with the depreciation perspective and factoring that into the calculation as well. I think it's important to make the decision to qualify whether or not that first investment actually needs to be for cash flow, or for growth.
That'll probably depend on the individual's personal circumstances at this point in time. So, if their income is moderate, maybe it's best to look for that initial property to provide some cash flow positive income for subsequent purchases in the future, as well.
Mike Mortlock: Sorry Peter, I'll let you finish.
Peter Mastroianni: I was just going to say, I guess it just depends.
Mike Mortlock: Yeah, right. With people that are buying their first property as an investment, do you think they tend to be a little bit more emotional than someone that maybe owns their property and is looking at their second or third investment property?
Peter Mastroianni: Emotional? Maybe. I think it's just getting their head around that it's actually the right thing for them at this point in time, and probably a little bit more handholding, just through that process to navigate through the different aspects of what's going to be required. Because there is a little bit more complexity associated to it because you're looking at a different set of fundamentals in the actual decision-making process, as opposed to going out and buying something that you like because it's close to work and it's what you can afford, and you think that you're going to live comfortably there. The decision around it is, "Is this going to stack up for me financially and can I make the numbers work, and is it a good investment grade property that's going to allow me to buy another one within the next 12, 18, 24 months?" Or whatever that may be.
Mike Mortlock: How big of a believer are you in looking at the next property and property as a way of wealth creation? Obviously it's one thing for someone to buy their first property, but how important is property in general for reaching those retirement goals?
Peter Mastroianni: I think it's a fundamental asset class. A lot of people that I've worked with in the past have aspirations of acquiring 10 properties in 10 years, which is awesome, but my first question is why? Why do you need to have 10 for? Why do you need to buy it in the next 10 years? Why can't you just buy four blue chip properties within 10 years and achieve maybe even a better outcome rather than having potentially several duds sitting in your portfolio that are not going to be performing well?
So, I think the more I've come to realise, the more importance I place on having that upfront plan and working towards outcomes that are going to achieve that desired end result, whatever that may be for the individual. But I certainly feel that that property as an asset class is fundamental to individuals' ability to build wealth and retire comfortably on.
But you know, you should probably have some shares in there and some other investments and you should probably start a business as well. I think that's another key area of rentvesting, is that it's renting and investing, so that doesn't necessarily mean that it has to be mutually exclusive to property. You could be investing in yourself, you could be investing in the share market to grow a portfolio of shares to help expedite the process of getting that initial deposit together. Maybe now is better time than ever to bootstrap a business and get your entrepreneurial skills out there into the marketplace and start growing wealth by that method. I think there's a number of different ways to approach it in order to get to that desired outcome that you want to have.
Mike Mortlock: Yeah, some awesome tips there, Peter. Much appreciated. Just speaking of yourself, you offer a pretty complete service for mentoring and planning and management, and lending of course. Can you describe the typical process with bringing a new client onboard?
Peter Mastroianni: Sure. So, one is to get a solid understanding of what their current circumstances are and where they want to be. From that, we'll go through a pretty detailed borrowing analysis to give them an understanding of what their borrowing capacity would be at this point in time. Then, we can start tweaking and manipulating some numbers there to get a better indication of how their current set of circumstances could fit into the short term goal, and what needs to happen thereafter to start unravelling the plans.
I don't sell property myself. I'm not a licenced real estate agent, but certainly know enough people in the marketplace to make some good recommendations for people to connect with. That's the process that'll unfold from there, so whilst property selection is extremely important, it's also extremely important now more than ever to get the actual financing right from the get-go. And having that foundation in place will allow you to continue to leverage into the future, as opposed to having a short term focus and rate chasing. Because that doesn't necessarily mean it's going to produce the best investment outcome for you in the long term.
Mike Mortlock: And that strategy I guess is really important, especially in the current lending environment we're in at the moment. Peter, how do people get in touch with you if they want to learn more about what it is you do and of course, the podcast as well?
Peter Mastroianni: Sure. Jump onto Rentvesting.com.au. There's a stack of information and a lot of free resources there to get more of an understanding of the actual rentvesting strategy. And the podcast is on there, as well, so you can chew through that, and if you want to speak investment lending, feel free to drop me a line at firstname.lastname@example.org, and more than happy to have a conversation.
Mike Mortlock: Awesome. Thanks very much, Peter. I know that you've got to duck off to another appointment, but if I can just get you to suggest if there's one piece of advice that you'd give to property investors, what would that be?
Peter Mastroianni: One piece of advice? Okay.
Mike Mortlock: Yes, I've put you on the spot.
Peter Mastroianni: Well, look, I have to say it's do your due diligence on the finance. Particularly now, a lot of people are getting caught out with what they feel they can borrow and what they can actually afford. So, there's one thing of being able to service a loan and there's another thing of actually being able to afford a loan. So, a lot of people have continued to leverage themselves into positions where they've probably gone past their limit and I think it's important just to realise what that ceiling is.
Because the last thing that you want to be doing is investing yourself into a corner and maybe trapping yourself into a job that you don't like, because you've leveraged too far. So, get that plan into place and have a rock solid understanding of what your financials are, and the cash flow behind that situation. Because it's pivotably important for your overall success.
Mike Mortlock: That's awesome advice. Thanks very much, Peter, for joining us. Very much appreciated.
Peter Mastroianni: Mike, thank you very much for the invitation. It's been great to come on. Thank you.
Mike Mortlock: Cheers.
Lets get in touch and talk about what you'd like to hear on the show.