Chasing yield is one of the most important things for property investors as they don't intend to be dropping in loads of money from time to time to keep their portfolios continuously growing.
Should it actually be an investors' priority to chase yield or should they look for under-market-value properties that can provide capital growth?
wHeregroup's Todd Hunter discusses several factors that need to be considered when starting a business of creating wealth through property with Andy Scott and Smart Property Investment's Phil Tarrant:
If you're an investor that needs a lot yield, how should you build your strategy?
Todd Hunter: I guess it depends on whether you've purchased already or looking to invest. If you're looking to invest then you should be avoiding these places where the rents are looking to decrease. If you already own in these areas, there's probably not a real lot that you can do. You might be able to do a bit of a cosmetic renovation to help keep rents where they are or maybe slightly increase them.
Phil Tarrant: When we look at our portfolio, sometimes I want it to be as close to neutral as possible. We invest in trust structures... When I look at our portfolio, if I find that the income that it’s generating versus the debt that it's carrying [are] dropping me toward a negative position, it influences the strategy that I put in place in terms of the next properties that I will purchase.
Should property investors prioritize chasing yield over capital growth?
Phil Tarrant: I'm always looking for capital growth. It's a fundamental foundation of all property investing. It might change the type of property that I buy next. If I'm looking for a yielding property to look at equalising my portfolio, that might change the sort of thing that I'll buy or whether or not I'll do a renovation or something else.
Todd Hunter: It depends on what phase in investing you're at. If you’re in [the] accumulation stage, then definitely [prioritize capital growth]. You can't keep accumulating without the growth that's there but you also need a nice balance of yield there to be able to afford to service on the next level of debt that you're doing.
Then you can look at people within who own their home, who don't have a home debt, who are buying property now to create a passive income. In all honesty, they don't really care that much about the capital growth. They're actually looking for the income side of things... It's [about] getting a good yield in a good safe area that the rents will continue to keep increasing... There are different strategies and in that accumulation phase, most definitely, you are looking for a balance with a good yield but you're definitely looking for that capital growth.
How could chasing yield potentially harm a property portfolio?
Phil Tarrant: I imagine there's a principle around this. Investors that chase yield over capital growth is dangerous and a lot of investors have chased yield into mining towns and have been hurt as a result of it. Properties which were bought for way over the price that they were valued are now sitting empty with no one in there.
Strategy, which is based around yield, strategy which is based around taxation, strategies which you hear a lot of the spruikers talk about are very, very, very dangerous things. Strategy for me in property is about buying places that are going to go up in value.
What would be your final advice for budding property investors?
Phil Tarrant: This is all very cyclical... Yield is about supply and demand. If there's more properties available to the marketplace, therefore there's not as much pressure on rents and they're going to stabilise or go down.
Tune in to Todd Hunter's episode in The Smart Property Investment Show to know more about whether investors are in trouble if they're relying on yield and what inevitable rate rises mean for property investors.