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Why strong yield is the new best investment strategy
While investors have previously shied away from investing in units, recent tax changes have prompted buyers to chase the typically higher-yield assets rather than focus on pure value growth.
Over the past couple of weeks, the Australian real estate market has been in flux following changes to property taxation, prompting investors to rethink their wealth-building strategies.
Property Strats founder Steve Ash said there was a flurry of activity as investors tried to complete their purchases before the budget changes took effect.
“After that, almost on a dime, everyone just did a pivot.”
Ash said that while post-COVID-19, investors had experienced strong value growth, changing market conditions had created the need to build a more well-rounded portfolio.
“If you are trying to build a portfolio, it’s a necessity to target cash-flow-focused assets,” Ash said.
While investors used to forgo units in favour of houses for their land and value growth prospects, Ash said that apartments had become of significant interest to buyers seeking a steadier income stream, with higher yields.
“It used to be the contrarian play to buy units; now all of a sudden they make total sense,” he said.
“So now the contrarian play, particularly down in Melbourne, has become looking at houses and, if you can afford to hold it, you are going to have one of the bargains of a lifetime.”
For investors considering the apartment market, Ash said the two-bed, one-bath unit should be firmly on their radar.
“As long as you do your due diligence on the body corporate and construction risks for the building, there’s some real opportunity to still get in and enjoy a pretty good run.”
Additionally, he said there was an opportunity for investors to buy into a boutique block of units and achieve strong yields.
He said that by targeting older assets with fewer amenities, strata fees would be lower, and there would be fewer opportunities for issues to arise that could create unanticipated extra costs for investors.
“They are just bread and butter. There just isn’t much potential for things to go wrong.”
Ash said one of the major challenges investors faced with a yield-focused strategy was understanding that all of the power lay in the hands of the tenants.
“I think we have come to a time where you have to play a bit of defence on the portfolio and make sure that your rentals are pretty strong and that you can hold onto it.”
For new investors looking to build their own portfolio, Ash said the most important thing they could do was to block out the noise of the broader market and focus on their own plans.
While market changes had created hesitation among investors, Ash said that those who acted in the space could generate real opportunities to enhance their portfolios.
“I don’t think it is a bad time for people to potentially sit on their hands and see how the dust settles, but for people who do have borrowing capacity, just keep it easy.”
“If you’ve got the borrowing capacity, use it and get a good high-yield asset with growth potential, and you will be very happy with the value over time,” Ash concluded.
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