Surprising factors that can impact rental yield
For decades now, owning investment properties has been considered by most Australians as an outstanding means of building wealth and long-term security.
And for good reason.
Property markets in Australia have enjoyed moderate (and in some cases, dramatic) long-term growth over the past 50 years, which have provided excellent returns for countless investors. What’s more, many have taken advantage of generous tax deductions – including from negative gearing, which can reduce the amount of tax you pay on earnings at tax time. Meanwhile, the equity in investor portfolios has been a valuable resource, allowing investors to secure finance to achieve other goals – whether they be investment or lifestyle focused.
Pretty good, right?
Then there’s rental income – arguably the most obvious and sought-after motivation for investors to purchase additional properties.
Renting out your investment property gives you an income to contribute to your home loan, which usually means you can pay it off sooner. Provided you pay your mortgage off, investment properties can become a long-term income stream that typically increases over time.
At this point we should pause to mention that the aforementioned benefits depend on a few factors. Market conditions and economic trends play a significant part, as does the importance of choosing a good investment in the first place (we can help you with that). And even in an ideal environment, it’s important to be aware that fluctuations happen, including with rental returns. Let’s look at some of the reasons why.
Why rental income fluctuates?
Interestingly, weather is one of the biggest influencers of rental demand. According to a study conducted by realestate.com.au, data shows that demand for rentals drops at the start of winter and recovers before spring. This is particularly true of beach side suburbs, which typically reside in areas that are less popular in cooler months.
Rental properties up for grabs at the end of the year can also be impacted by decreases in demand. Both June (winter) and December are generally the easiest months to find a rental property, according to realestate.com.au, with far less competition in the market – which can force prices down.
Meanwhile, rental properties in suburbs close to universities can also experience fluctuations depending on the time of the year. During university breaks, demand often peaks, whilst throughout semester (when students are immersed in their studies), it plateaus.
Other factors which can impact rental returns include the economy of the town or suburb where the property is located – for example, an emerging or exiting major business or industry in the area, such as mining can drive demand up or down. How scarce similar rentals are in your area (i.e. supply and demand) is also another major factor. Whilst supply of new properties on the market is inevitable and can have a short-term effect, you can safeguard against this by buying in a suburb with low vacancy rates and by checking with the council on the number of new development applications in the pipeline. Another potential impactor includes the holiday season – availability of lease options via websites like Airbnb can create upward pressure on rentals when there’s fewer long-term options on-hand.
The key takeaway
Investors should expect some fluctuations in the rental yield of their investment property – it’s normal. Ultimately, the most important thing investors can do to shield themselves against fluctuations is to invest wisely in the first place. Choosing an investment property that will be ‘ever-green’ in its appeal to renters – through factors such as location, style and features is a way to help ensure consistent results that cannot be underestimated.
Like basically all investment properties, your rental will do best when viewed in the long-term.
Over the years at Providence we’ve gained a reputation for achieving superior results through research-driven insight, meticulous property selection and the highest levels of advice and customer service. Our services enable you to save time and money in the selection of property with ease, simplicity, confidence and proven results. If you’re interested in finding an ideal investment property, get in touch with our expert team.
Buying to invest and renting where you love
As many of us know, buying where you can afford does not always equate to buying in an area you love. Even the worst house on the best street can be way out of budget these days. So how can you enter the property market to become a home owner AND live where you really want to live? It’s simple really: rent where you love while buying to invest where you can afford.
Though often overlooked as an option, there is no rule that says you need to own your principal place of residence in order to invest in property. In fact, it’s a really effective double play with many potential benefits.
Of course, you’ll need to make some smart decisions for this to work for you. But when done well, buying an investment property while renting in your dream location can give you all the benefits of property ownership without sacrificing your lifestyle.
There are other perks too. Let’s consider them:
Effective wealth creation — sooner
By the time you saved enough or waited until circumstances allowed you to afford to purchase in the area you truly want to live in, chances are you will have missed out on a lot of capital growth. Not to mention strong rental returns from your property (again, it’s all about choosing wisely — this is where we really shine for you).
Purchasing to invest rather than live could even enable you to generate cash flow. Down the track, or right away in some cases, rent from your investment could be paying off the property, and contributing to or even covering your rent! Compare this to owning your own home — you won’t generate any cash flow from it and in fact won’t really know if you have any profit from it until it comes time to sell.
Tax advantages on investment properties
As an owner of rental properties, there are many tax benefits for you to lessen the cost of property ownership. Many of your property expenses such as improvements, maintenance and repairs, can be offset against your rental income. Depreciation of your property can be a tax deduction. Even the interest on your property loan can be claimed as a tax deduction, if your property is negatively geared.
When done properly, the cost of paying down the loan on a rental property should be achieved by the Tax Man, the Tenant and to lesser extent, You, the investor. The debt on a rental property is good debt, as opposed to owning your principal place of residence, which is bad debt.
We can help you get the most out of your investment property (and the tax man), just chat to our team.
Continue to rent in the location you love, while in the meantime your investment property increases in value or you buy more properties to create an impressive portfolio. Buying to invest means you could go on to purchase additional investment properties without the need to sell up and pay capital gains tax.
By living in a rental, you can change where you live without the need to pay expensive fees like stamp duty.
And if you do still want to purchase a principal place of residence, you’ll have equity behind you to perhaps even end up buying in that dream location after all!
Share the investment
Depending on your financial situation it may be worth considering buying an investment property with a trusted family member or friend. You would be unlikely to do this when purchasing a home to live in, but sharing income drawn from an investment property can work.
Explore your options and make the right property choice to suit your circumstances and goals
Your property goals are our property goals at Providence Property Group. With a focus on research and a commitment to results that exceed your expectations, you can trust our team of property investment specialists to guide you in the right direction based on your goals and budget. In fact, we can do more than just guide you — our services and expertise extend to helping you right through the property research and purchase journey, and beyond.
Is buying to invest right for you? Start a conversation with us today by calling 1300 25 25 50 or email firstname.lastname@example.org. Alternatively, just pop your details into this contact form and we’ll get back to you.
The danger of misunderstanding figures for supply and demand in property
Supply and demand is always a hot topic in property. It’s something we get asked about all the time, and in investing it is very important to know whether the area you’re considering has an oversupply in property, or an undersupply.
This is something we keep a very close eye on here at Providence, and in this article we will take a closer look at some of the key numbers. It’s very easy to get distracted by photos or videos of lots of new homes being built in housing estates or new apartment blocks going up in a given suburb. We see plenty of articles in the media that jump to fast conclusions about the state of supply but provide zero quantitative research to reach their conclusions.
To draw our conclusions we use a range of data; some of it in the public domain, some of it from fee for service databases. This data may not be perfect, but we believe it is quite accurate and a good basis on which to draw our conclusions.
Supply and demand in Australia’s property market — the real figures
What we will look at today is overall capital city supply and demand data focusing on Sydney, Melbourne and Brisbane. This consideration is one of many – considering the supply within and around any given suburb where you’re considering investing is essential. As part of the work we do, we examine and analyse supply and demand data both at macro/city level and at micro suburb level.
Looking back a few years, through the GFC there was certainly an undersupply across the capital cities. Developers couldn’t get funding for new developments, so less developments were built. Meanwhile, migration rates stayed the same or even increased during that period and so there was a consistent undersupply for a number of years.
As we moved our way through the GFC and banks began to loosen credit for developers and home buyers to access construction funding, we’ve seen a supply response, particularly over the last 4 years. Whether you’re in Melbourne, Sydney or Brisbane, there have been a lot more cranes in the sky and more properties being built.
As part of our analysis, we’ve looked at population growth, establishing what population growth is occurring in each capital city. We then looked at the predicted demand based on a requirement of 2.6 persons per household (the average number of persons per household, according to the ABS).
Our research then takes into account the number of dwelling approvals and the approximate dwellings that will be completed based on those actual dwelling approvals. Then we have to make an inference about the number of dwellings that will actually be completed, because of course all the dwellings that are approved are not necessarily completed. So we’ve done this on the basis of the statistics for the last 30 years. We also make a subtraction for a number of demolitions, because not only are there properties being built, there are many properties being demolished to make way for the new.
We often see highly emotive articles about oversupply based purely (and erroneously) on the number of development applications that have been submitted – not taking into account these other factors. A significant proportion of development applications do not make their way to completion. The media frequently talks in crisis and generalities to drive circulation, to get eyeballs, and to do whatever it is that they need to drive advertising. So it’s really important that when supply and demand is discussed, it is based on facts and data, not emotion.
Supply and demand in Sydney
Take a look at the chart below and you’ll see that in Sydney in 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a surplus in all the following years. Not a massive annual surplus, but a small one. This has created an accumulated surplus of around 29,990 dwellings to date, which as a proportion of the total dwellings in the city is a very small percentage. We don’t see this as anything to be concerned about at a macro level. However it is certainly meaningful on a localised area basis, and there are absolutely areas where this concentration of excessive construction will have an impact. These would include Zetland, Epping and Holroyd.
Melbourne property oversupply or undersupply?
Now let’s take a look at Melbourne. We will see that once again during 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a small surplus in all the following years. This has created an accumulated surplus of around 31,521 dwellings to date which, once again as a proportion of the total dwellings in the city is a small percentage. We don’t see this as a concern at a macro level, however areas where this property oversupply is concentrated and would be of a particular concern would include Southbank, Docklands and the CBD.
What about demand? The ABS predicts that Melbourne is increasing in population by about 1800 people per week. So based on dwelling size, the number of people per dwelling being 2.6, Melbourne requires 700 new dwellings per week. So that 30,000 oversupply that we are talking about is about 40 weeks of excess supply based on current growth numbers.
Now we’ve seen from those numbers that supply moves in waves. There are periods of oversupply and undersupply, and what we’re seeing in bank funding to developers is credit has been tightening dramatically.
Importantly for the supply numbers not only in Melbourne but also in each of these three cities, we are seeing the trend of expected completions falling significantly. You can see that in the figures. We expect to continue to see lower completion numbers across Sydney Melbourne and Brisbane in the near term.
Brisbane’s supply shortfall
If we take a look now at Brisbane, we see supply shortfalls in 2011/12, 2012/13 and 2013/14 and again in 2016/17 and 2017/18 resulting in an overall undersupply/supply shortfall of 13,248 dwellings. This is interesting news considering we have seen reports of oversupply in various articles on Brisbane.
There has certainly been an oversupply in specific suburbs – such as Brisbane CBD, Fortitude Valley, Hamilton, Albion and the East side of Chermside. But an overall supply shortfall is an interesting revelation and is one of the reasons we think parts of Brisbane make it an appealing property investment destination.
Dwelling-type specific oversupply in property
Another interesting dynamic we’ve seen in areas with apparent oversupply in property is that there are always markets within markets. Although there may be an oversupply of a certain type of property within a specific suburb – for example, small living area, high volume, commoditised, apartments in high rise buildings – there can be in fact a very strong market in that exact same suburb for higher-quality, more scarce/lower supply property.
For example, higher quality, lower density dwellings or premium quality oversized apartments eg 3 bed, 2 bath, 2 car. We’ve seen a number of examples of this in various suburbs around the country where these scarcer types of properties have demonstrated rental yields, vacancy rates and capital growth as if there was no oversupply in the suburb. In effect, a two-speed market for properties in that suburb. This is something that we will explore further in later research posts.
If you would like further detail or to discuss supply in any particular markets you’re considering, please feel free to contact us and we can put you through to one of our research analysts.
Understanding Tax Freedom Day
We’re all known to wonder where our money goes or try to make sure it goes to the right places, but do you really have a clear vision of your expenses? Understanding Tax Freedom Day is a sobering concept, but one that is vital for you to take control over your financial position and ultimately pay less tax in Australia.
Prefer to listen to this information via podcast? Click here.
What is Tax Freedom Day?
What do you think your biggest expense is? Your mortgage? Private school fees? Your passion for travel? For the majority of people taxes are your number one expense.
If you look at your pay slip, you’ll see that PAYG figure that denotes the sum that the government’s hand has swept in and taken before you’ve even noticed. If you work for yourself or run a business, you might PAYG too – if not, you probably end up paying a lump sum of your earnings out to the ATO at the end of the financial year.
When we look at it, we need to remember that it is actually calculated on the total taxes collected by all three levels of government. We are not just paying tax directly to the ATO – we pay all these other indirect taxes too, including GST and council rates.
With taxes at front of mind as your biggest expense, Tax Freedom Day sounds quite important doesn’t it? Tax Freedom Day is the number of days that we work for the tax man at all three levels of government before we start earning for ourselves.
Over the last 50 years we’ve seen the trend in taxation whereby Tax Freedom Day is moving out later and later in the year, and it’s getting worse.
In Australia in 2016 you had to work until May 9 to pay all your taxes to the Australian Government. This is similar to the US and UK, who have Tax Freedom Day on April 24 and May 8 respectively.
What is particularly sobering for Providence clients to learn is that if you are paying off a mortgage, you spend most of the year working for both the government and the bank. That’s what you spend your time and effort doing for weeks and months of the year. Needless to say, this is far from ideal. It’s no surprise that we all look for ways to pay less tax in Australia.
Pay less tax in Australia
A key part of the work we do at Providence it to help our clients to move Tax Freedom Day back as early as possible in the year for themselves. This certainly isn’t about evading tax, as we all have an amount of tax we need to pay. However, the tax system and the code is written with room for allowable deductions for certain things.
Tax benefits of owning an investment property
Owning an investment property has many benefits and is a way that we guide clients to manipulate Tax Freedom Day for themselves. Through investment property ownership, you can move your Tax Freedom Day and effectively have the tax man become a contributor to your wealth creation strategy.
The best way we know to do that is to find a growth property that the tenant and the tax man pay off for you. And what we are seeing is the longer that you leave this the more money that you are letting slip through your fingers. It’s very important to take action.
When identifying property opportunities to meet our clients’ goals, the key factors that we look at are capital growth, yield, cash flow, depreciation and other allowable deductions. These help contribute to funding a property, so we’re analysing all of these factors and also ensuring that there are three parties paying for the property. That is, the purchaser, the tax man and the tenant. The tenant will usually pay around 60% of the cost, the tax man can pay roughly 30% and the purchaser covers around 5-6%.
Once you own that property for three or four years and the rent starts increasing, the tenant actually starts contributing to more of that. And importantly, in terms of Tax Freedom Day, the tax man is typically contributing about 30% to the cost of that property.
Let’s make that clear – in this wealth creation strategy, the tax man ends up contributing to you paying off that asset and your savings for retirement and you pay less tax in Australia.
While rental yield and capital growth are the most important when it comes to investing in property, there is a lot to be gained from a tax flow perspective too. Whether you’re a first, second or fifth time investor, if you’d like to learn more about the contributional tax benefits that you can generate from owning an investment property, our team has the expertise you need. You can contact us here.
Listen to Simon Harris and Jay Pace talk about Tax Freedom Day in this podcast episode and discover how you can pay less tax in Australia.:
Written by Lynton Stevenson, Managing Director, Providence Property Group.
Why savvy investors choose Brisbane property
Brisbane is a hot favourite amongst property investors and with a range of infrastructure upgrades and developments pegged for the city and surrounding regions over the coming years, the trend looks set to continue. So why invest in Brisbane property? There are plenty of reasons.
Brisbane (compared to Sydney and Melbourne in particular) is more affordable and benefits from a higher income return for property investors. Many experts agree that whilst interest rates are low, Brisbane is a standout city for growing your investment portfolio.
This sentiment is echoed by investors.
According to a survey by the Property Investment Professionals of Australia (PIPA), Brisbane remains the top capital city pick, with 43 per cent of investors choosing it as their preferred destination for property investment.
So, let’s take a look at what makes Brisbane such an attractive investment location.
The population is migrating
Sydney house prices are nearly double those in the other capital cities. This, combined with rising job creation in Queensland, is creating an influx of migraters. According to research, when these factors have aligned in the past, more than 134,000 people have trekked up north over a 3-year period, predominantly out of NSW.
Wealth is transferring
Migration shifts like the one described above result in a transfer of wealth – with estimates of up to A$8.1bn of equity being injected into the Brisbane and South-East QLD housing market over the coming years. In turn, this will impact consumer spending too – boosting the Queensland economy.
As interstate migration goes up, property oversupply balances out. In Brisbane’s case, this means balancing any current oversupply of apartments whilst putting upward pressure on house prices.
The city is booming
Perhaps one of the most exciting (and important) reasons Brisbane is becoming the property investors top choice is the significant services and infrastructure upgrades taking place across the city (and beyond) over the coming years. Some highlights include:
Brisbane Live – An entertainment precinct penned to be Australia’s equivalent to New York City’s Madison Square Garden. The development will include a 17,000-seat world-class arena along with a 4,000-capacity rock club, multiplex cinemas, restaurants and bars, and a giant screen and amphitheatre to accommodate up to 15,000 people. The precinct’s other attractions include a proposed signature 90-storey residential tower and dining precinct.
Queen’s Wharf Brisbane – This will develop into a world-class tourism, leisure and entertainment precinct in the heart of the CBD, which is expected to create permanent employment to more than 8,000 workers once completed in 2022. The development is estimated to attract 1.4 million additional tourists yearly via five new premium hotel brands, three residential towers, a department store, an iconic ‘Arc’ building that will feature a Sky Deck, a riverfront moonlight cinema, a Queensland Hotel and Hospitality School operated by TAFE Queensland, and redeveloped public realm covering an area of at least 12 football fields.
Cross River Rail – This project will improve Brisbane’s public transportation landscape with a railway connecting Dutton Park and Bowen Hills. Between the destinations will be five new stations at Boggo Road, Woolloongabba, Albert Street, Roma Street and Exhibition, including 5.9km of underground tracks beneath the Brisbane River and CBD.
Herston Quarter – Upon completion in 2027, this precinct will include a 132-bed public specialist rehabilitation and ambulatory care centre, a new private hospital, childcare and aged care facilities, retirement homes, student accommodation, private apartments, dining and retail areas and renovated heritage buildings. Approximately 7,000 new jobs will be generated over the development period.
Interested in investing in Brisbane property, but not sure where to start?
As you can see, choosing to invest in Brisbane presents an incredible opportunity for property investors, but knowing where to begin can be difficult. As a specialist property investment and advisory firm, we provide our clients with responsible and informed investing advice – with expert knowledge in major Australian cities. We can assist with all aspects of the investment journey from professional guidance, to property negotiation and purchase, finance and further assistance.
Satisfy your curiosity and get in touch with our team to find out how investing up north can supercharge your wealth.
Written by Lynton Stevenson, Managing Director, Providence Property Group.