Investors are increasingly chasing high yields in an effort to help them hold onto their properties and grow their portfolios - but how can you tell if the numbers actually stack up?
Blogger: Josh Atherton, Portfolio Property Investments
Historically, property investors have desired a healthy mix of yield and capital growth prospects, and for good reason. What investor of any asset class wouldn’t want that?
However since the GFC and the mining boom afterwards, a property investor's desire to achieve a high yield has been paramount, even to the detriment of capital growth.
I’m a big advocate of a high yield, after all, if you cant afford to hold a property then you won't be able to buy it. One largely negatively geared property could also retard your ability to further invest. Taking into account the banks' interest and repayment scoring system to calculate your serviceability and before you know it, a low yielding or underperforming property will put you behind the eight ball for years.
So, as investors chase for yield, especially in capital city markets, we can historically see a trend that sacrifices the capital growth of an asset in return for a higher than average yield.
Does this mean that you shouldn’t buy a property if you cant get into a blue chip location due to its low yield? Absolutely not! Having exposure to the property market to some extent is better than not at all, even if the capital growth is a little lower than the good performing suburbs.
The default option for investors when chasing high yield is to go for units or apartments, more often than not, at the detriment of the growth of their house counterparties. However many investors fail to truly calculate the holding costs of a property, meaning that body corporate fees often don’t truly get reflected when assessing the cash flow of a property. Body corporates will often consume about 1% of the yield of a property. A unit at 6.5% will look attractive, but compare that to 5.5% in a house which may achieve higher capital growth I know which one I would prefer, depending on location of course.
Another factor to be considered is that as the market grows, so do yields. As you buy a property with a 5% yield today, the outcome will be much different in 5 years time and the property will start to contribute to building your passive income.
About Josh Atherton
Josh’s passion to see people achieve more in life led him to found PPI from a background of avid property investing, developing, construction and real estate experience. Josh is continually sought after to provide commentary and opinions in some of the countries leading magazines and property forums. Through innovative property investing methods Josh provides platforms for PPI’s clients to build property portfolios outside of the norm.