Be conscious of the implications when investing on rent yield alone as an investment strategy today.
Blogger: Steve McLean, National operations officer, NPA Property Group
Banks are very aware, higher rental achieved today may not convert to cash flow later.
In fact, many bank economists today, are assessing the rental income on these loans at a much lower rental yield, say between 6 and 9 per cent yields, even if the property returns 13 to 15 per cent returns. This tells me long term forecasts of the lenders have shown that this rent will not be around forever. Then what? The risk is just too high for them.
Further evidence and pain is that many of these regions have been, what’s called post code listed. When an area is post code listed the mortgage insurers will not allow banks the lend greater than 80 per cent, this has a massive effect on your tax effectiveness or can reduce your cash supplies as extra deposits or equities are needed.
So why do so many investors look towards investment strategies that provide high rental yield, a one trick pony? This is on the thought, that if they make profit, the extra cash flow will assist in further investing as properties increase in value and makes cash money.
Long term educated investors have come to the realisation that when purchasing investment properties as a retirement strategy, a conservative combined return of 14 per cent overall is common ground and much wiser. That is when a rental yield of 10 per cent is achieved, more than likely a only a 4 per cent capital growth will follow and vice versa.
Very rarely do you achieve high rent yield and high capital growth without massive risk.'
Think for a moment if and when the rental drops suddenly and you no longer achieve high yields. Not only do you forgo cash flow, but now your investment is unlikely to provide capital growth. An even more dangerous thought is the fact that when yields drop, normally a higher vacancy follows and this compounds the problem.
So we select to sell the underperforming asset. Most of the regions achieving high rent would be found in areas of lower Owner Occupied area.
When we look to sell the investment, who is now our target market, other investors that will be looking for a bargain. Is it fair to say, the investment may even end up costing us, as now it performs at a lower rate then when we first purchased it?
Short term gain, normally is followed with long term pain, I see this too many times.
When selecting any investment property, always consider more than one buying motive and have investment properties with a sound balance of rent and growth. The region needs to be in the strongest sector of the property cycle and have strong economic conditions. Consider the supply and demand balance of the region and you are now minimising risk and increasing comfort levels.
There is no fast fix to investing in property, don’t be fooled into thinking so!
About Steve McLean
Steve is the National Operations Manager of NPA Property Group, Certified PIAA Investment Consultant, Mortgage Broker and Real Estate Saleperson.
His current role is expanding the network of NPA Property Group. Understanding the Australian Property Cylces movement and the factors that influence these movements. Sharing this information freely with clients, as he firmly believes that Investors are not focused enough on self education and reply too much on Advisors, Agents and Consultants. The property is only 50% of any Investment Strategy.
Prior to joining NPA, Steve ran his own small business enterprise for 7 years. Steve has been personally investing and building his portfolio for over 23 years.
Through his mortgage broking business, Steve specialises in finance structures, using knowledge gained through developing and building his own property and business portfolio. NPA strategy recommends clients understand how to maximise Capital Wealth in their portfolio through understanding Market movements, tax benefits, depreciation allowances, rental reveiws, while having correct structures and stategies. Risk management is crusial in controlling comfort levels.
Steve has always helped clients build thier portfolio by successfully guiding them through the process from property selection, finance application to settlement, then continuing with regular reviews.
Steve endeavours to provide the highest level of customer service, and is determined to meet and exceed your expectations. Whether you are buying your first home or investment property.