With rental yields contracting in many of Australia’s capital cities, one property research firm has warned investors to steer clear of certain property price brackets.
Aviate Group’s Neil Smoli said investors with a larger borrowing capacity are often tempted to purchase more expensive investment properties, despite their questionable performance.
Mr Smoli highlighted properties around the $1 million mark as particularly risky choices, and said properties around half that price tend to perform much better.
“Firstly, there is concentration risk to consider,” he said. “Just like purchasing two investment properties in the same development represents an inappropriate risk, so does committing too much money to a single property. If the suburban market were to inexplicably turn, or if the property was subject to unforeseen circumstances, the risk exposure to the investor is too great.”
Mr Smoli said it made far more sense for investors to diversify.
“To generalise, investors with a $1 million borrowing capacity would be much wiser to purchase two properties priced around $500,000 each instead of putting all their eggs in one basket. The capital growth opportunity generated is greater and the risk is more evenly spread.”
“Sound investment properties” generally yield around five per cent per annum, he said, which can be jeopardised if the purchase price is too high.
Mr Smoli cites an example of an investor who recently purchased a $1 million property in Sydney’s northern suburbs, which generated a yield of just 1.8 per cent.
Mr Smoli said this represented a $32,000 shortfall when compared to what an investor should typically expect from property yields.
“The tenant market for more expensive properties is limited, as those who can afford the asking rents are more likely to choose a mortgage on their own home. The differential rents achievable between a $1 million property compared to a property half the price is not proportionate, and it’s up to the investor to fund that shortfall,” he said. “Hence more expensive investment properties can quickly become too arduous to hold, regardless of the financial position of the investor.”
Mr Smoli reminded investors that their properties should be treated as businesses there to create wealth and provide financial security.
“In this respect, investment properties don’t need to break price records. Investors should not pay a premium to secure the most prestigious apartment. Investment properties should not be considered alongside sports cars as a status symbol.
“The best investment properties are economical to hold, reliable in terms of attracting and keeping tenants, with minimal maintenance requirements, and efficient in terms of providing steady returns.”