Understanding what motivates households to become and remain investors in the private rental market

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2009, pp. 1 - 100
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What motivates people to become rental investors? What factors drive or shape their investment behaviour, and how are their experiences and intentions as rental investors linked? This paper reports on a qualitative study of rental investors in Australia, which has sought to pursue these questions. While our understanding of the private rental system in Australia has improved considerably over the last decade or so, most of the literature discussing investor motivations and landlord typologies dates back to, or is drawn from, data relating to the 1980s or early 1990s. Gaps in our knowledge and understanding of the providers of rental housing remain, and an up-to-date analysis of investors operating in contemporary rental housing markets is required. Analysts typically view housing investment through the prism of orthodox economic theory about how markets operate. This leads to an assumption that the behaviour of rental investors is economically rational, and driven by financial considerations alone. However, as Diaz (1999) suggests, "The essence of property is human behaviour...Economic activity is human behaviour ...". The present study was principally concerned with gaining new insights into the motivations, expectations and experiences of rental property investors in a more social behavioural sense, and in exploring the implications of those investment motivations and behaviours for the future of rental housing investment. The project sought to: explore the varying motivations, expectations and experiences of rental property investors, and consider how these might vary between investors assess how the motivations, expectations and experiences of rental property investors shape investor behaviour assess how investors perceive investing in the lower end of the rental market provide a better understanding of investors experiences, motives and actions, as well as the perceptions of investors behaviours among other key players in the rental sector. Why become an investor? This study suggests that there is a range of motivators for people to become investors, including financial factors, personal goals, and personal and family circumstances. In some cases, the motivations are strong and clear; in others they are much less so, being more speculative or exploratory. For some investors, seeking financial gain through investing is about embarking on a clear plan of wealth creation, developing long-term financial security and building an asset base, and securing future retirement income. For others, it is connected to the need to diversify investments, to spread financial risks, establish an alternative to superannuation, and build a balanced portfolio. Financial capability or opportunity is critical in both cases: having accrued enough savings or equity (usually in their own home) over time, or having access to funds after the sale of property, led to a sense of the need to invest. For other investors, the motivation to invest appears to be less planned. In some cases, this is because the capacity to invest is linked to having unexpectedly come into assets or funds via inheritance, or changes in personal circumstances, such as re-partnering or geographic relocation. Whats the attraction of property over other areas of investment? This study indicates that the binary of choosing to invest in property, rather than some other area of investment is, in practice, misleading: most of the property investors interviewed also invest in other areas, mainly shares. Its not an either/or decision for many people. However, shares are generally seen as being of a different (ie, lower) order and scale to property, and are treated accordingly. It also transpires that many investors have previously lost money in shares, and are not keen to repeat the experience. Regardless of whether they have owned shares or not, there are several reasons behind investors choice to invest in property over other forms of investment. The most crucial perception is that it represents a good (long-term) investment, with a sense of low risk and guaranteed return. Most investors have identified long-term investment or capital gains as the most important reason for having invested in property. A related significant factor is that investors report feeling comfortable with property: it is safe, stable, and familiar (particularly when compared with shares). Indeed, sentimentality and informality appear to be important, for property is widely regarded as something relatively easy to invest in (not mysterious or complex like some other investments), with the general impression that lots of people do it. Personal experience and intuition are reported as the dominant sources of information for investors in making property investment decisions. Accountants, estate agents and specialist advisors are much less commonly used (if at all). Investors also feel a sense of control with property: a tangible product; one that can be seen and visited, and potentially adapted or used in various ways. Overall, market conditions-where in the property cycle people have invested, and what is happening in terms of property trends-are seen as being of some importance, but are often linked to the other factors mentioned above. For many, market timing issues are countered by the greater significance of personal circumstances, and the capacity to invest. Indeed, it is important to acknowledge that financial motivation is only part of the overall story! There is also a mixture of other motivators for having entered the investment sector, including direct encouragement by family or others, such as estate agents or developers; observing the success of others (ranging from siblings, parents and children to accountants, friends and employers); and having read investment books or attended seminars associated with wealth creation specialists. Some simply have had the means and the opportunity, but little clearly developed strategy other than feeling good. Factors shaping where and what investors bought This study suggests that location is an important consideration, but often only one of many factors which influence investment decisions. There are also competing priorities in terms of location. Overall, there is a desire for the property to be close to transport and services-factors considered attractive to tenants. Some see inner-city areas as best, offering guaranteed occupancies due to the demand for inner-city living, and also the certainty that property prices would always increase. However, this is not a universal preference. Some select other urban and regional areas, either through choice or because of the comparatively higher prices of inner-city property. There is also a desire to be close to the property for self-management or surveillance purposes, so the location of the investors residence then dictates the location of the investment property. For others still, there are broader or longer-term considerations: the prospect of a future or present home for kids at university, or a holiday/retirement home, and familiarity and comfort with specific areas. In many of the latter cases, projected property value or rental income is not the primary consideration. When it comes to individual property selection, investors are generally concerned with the physical features and condition of a dwelling, and its investment economics, but how they feel about the place is also significant. Personal, intuitive and emotional factors are evident in the selection process, and many investors use their own preferences as a measure of quality, even though they are not going to be living in the property. Investor expectations and experiences This study illustrates how investors motivations are linked to a degree with expectations, and that for some, they are also connected to past and present experiences as an investor. Investors view success in different ways, but most commonly, capital gains over the longer term is what they expect, and this is how success or otherwise in property investment is assessed. Investors generally accept that costs may well outweigh returns initially, and that positive returns are unlikely until a number of years down the track. In this context, for most participants, negative gearing is not a deliberate investment strategy,and has not been a crucial factor in their investment decisions. However, nearly all regard it as a welcome and generous tool or added bonus. There is also the succour of success: previous and current experience has kept investors in the property investment market. Nearly all who had been in the market for several years, and many of the more recent investors, have experienced what they regard as success (mostly in terms of increasing property values). New and seasoned investors alike report very high rates of satisfaction with various aspects of their property investment, including yield, capital gain, and property and tenancy management. These perceptions provide an ongoing incentive for investors to remain in the property market, to increase their portfolio, to consolidate, or to start realising their assets as part of their investment strategy. Investment attitudes over time For some investors, time brings shifts in motivation and emphasis. In some cases, these are due to greater experience and increased level of knowledge, where the rationale and objectives of being a rental investor becomes more nuanced over time. For others, changes in personal circumstances and concerns, or financial or other objectives come to the fore. A common critical factor is age and proximity to retirement, or the formal planning for it. Most investors see capital gains as more important than rental income over the short, medium and long term. Indeed, nearly all regard property as the best investment, and some said they would still invest in property, even if returns were clearly higher in other areas (eg, shares).
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