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.
How property rewards those who wait
Australia has one of the most impressive track records for long-term property yield in the world, but often, the biggest mistake property investors make is not being patient enough to truly reap the rewards.
Just how well has Australia’s property market performed?
Well, according to a recent report from the Switzerland-based Bank for International Settlements, the long-term rise in Australian house prices since the early 1960s has been the most sustained property market upswing in the world.
But that doesn’t mean the country is immune to stagnation and slumps. In fact, these are a normal part of the property cycle – that is, the habitual rise, fall, stabilising (and then rising once again) of property prices.
Like many other types of long-term investments, it pays to be patient and remember that in many cases short-term volatility is being underpinned by long-term growth – you just have to hold on!
Take some of our clients as an example:
In 2008, we negotiated the sale of a block of 91 two-bedroom, two-bathroom, one car apartments in Sydney’s southwest. The sale price was $405,000 per apartment.
We sold all 91 apartments and a couple of years on, some clients mentioned that the apartments had only grown slightly in value and that rental yields were low. We reminded these clients to be patient, mentioning that they purchased in a good suburb and at a good price and that they will see the greatest results if they hold onto their properties.
Nevertheless, a few became restless and sold in 2010/2011. After costs, they made little profit, most just breaking even.
Nine years on the apartments were recently valued conservatively by a bank at $875,000 – and they’re expected to continue growing in value. Over this period, we have seen rents wax and wane, some years increasing by as much as 5%, others decreasing by a few percent as more property came onto the market, followed by years on flat growth before increasing again.
The takeaway here is to be patient and to consider the long-term growth in value of your investment – though that’s not to say there won’t be a time when selling is the best option. This could be because of unexpected life events requiring you to free up your money, or to take advantage of a suburb/city boom that may be short-lived (e.g. holiday towns). You may consider selling a property to finance the acquisition of an investment with greater potential.
In any of these cases, the team at Providence can support you with advice and services to help you make an informed decision about buying your next home or investment property, or deciding which agent to use and which approach to take when the time comes to sell.
But remember, be patient!
Ultimately, the message here is to be patient with property. In many cases, the longer you hold on, the greater your returns. Fluctuations in market, including stagnation and slumps are normal in all property markets, though in almost every case, and certainly in Australia’s big cities over the past half-century, the overall property price trend is pointing one way… up.
If buying your ideal investment property for less sounds appealing, download our latest free report for the complete 7-step process for securing the perfect investment property in your price range. DOWNLOAD HERE.
Providence Property Group is a specialist property advisory firm providing unparalleled research-driven insight into the Australian residential, industrial and commercial property markets. Providence is a strong advocate for responsible and informed investing and supports clients to find and secure successful investment opportunities across Australia.
Property Cycles and You
Wash. Rinse. Repeat.
Many people apply this methodology to hair, but there’s a similar pattern that exists within the property market – and understanding it can be incredibly empowering.
Have you heard of property cycles?
If you haven’t, you’ve at least experienced them. Think a steady (sometimes surging) period of property growth, an inevitable downturn and then the stabilising period where a ‘new normal’ (average house prices) is set. Property cycles are not often experienced nationally, in fact they are usually localised.
For example, rarely will every Australian capital city be in the same stage of the cycle at the same time. Each market is influenced by unique factors, which impact price and demand. Sometimes even within cities, different suburbs will experience their own cycles.
In any case, this phenomenon is commonly referred to as Boom. Slump. Recovery.
Many factors influence the property cycle, including social, economic and political trends, along with population growth and property supply. Despite fluctuations, history has shown that property cycles are quite predictable and come with a reliable set of markers during each stage.
Here’s a breakdown:
Boom (growth phase) – rental yields increase, restrictions on property lending loosen, properties sell faster, house prices start rising slowly and eventually begin to peak, increased media attention and urgency around property affordability is also common
Slump (the value phase) – the market starts to slow and eventually stagnates, property prices can fall but not always, rental vacancies increase, properties take longer to sell, investor cash flow is reduced and stricter lending conditions often come into play
Recovery (correction phase) – property prices begin to show positive growth again, rents and cash flow increase for investors, properties begin to sell quicker and cautious optimism from market observers typically ensues
We’ve documented the overall property cycle and its nuances extensively. A full cycle is, on average, made up of around 18.5 years, including:
- First upswing / return to growth – 7 growth years
- Mid Cycle Slowdown – around 1 year typically of sideways or slightly negative movement
- Second upswing / The boom – 7 growth years
- Peak, crash, recovery – 4 years negative growth
These property cycles have been tracked since the 1700s and aside from interruption from very significant global events, typically world wars, they have been remarkably consistent.
How to use the property cycle to your advantage
This is the part you’ve probably been waiting for. We know the property cycle is real and we know that harnessing it is a strategically smart way to maximise property returns and rental yield. But how do you determine where various properties are in their cycle?
Many clients come to us asking this question and fortunately, we have an entire service based around providing expertise in this area.
Our research begins by considering market cycle timing using in depth analysis of cycles.
We recommend areas that are close to the bottom of the cycle and which are poised for an upswing or which have just commenced their upswing. In this way investors get an immediate equity lift in their portfolio from the market itself.
In addition to market timing insight, we review broader national and international themes and trends that will benefit particular geographical areas of Australia. Our data comes from overseas government research, Australian federal, state and local government departments, leading economists and analysts along with research from international and Australian banks and property research firms.
The result is an informed purchase for you, and one which has the greatest chance of reaching your short and/or long-term investment ambitions.
Get serious about learning more about property cycles
If this blog has whet your appetite on the topic of property cycles, we encourage you to explore our services and learn more about how we can use our expertise to seriously support your property-purchasing efforts.
Get in touch with our team and benefit from our research-driven insight and high-level strategic advice.
3 things you should know before investing in Sydney
As the most sought after and populated capital city in Australia, it’s no surprise that people get excited about the prospect of investing in Sydney.
Over 70,000 people make the move to Sydney every year! With our world-class landmarks like the Opera House, Sydney Harbour Bridge and incredible beaches, it’s really not surprising that so many people want to call Sydney home.
While our beautiful city and culturally diverse suburbs have many drawcards for people choosing somewhere to live, is investing in Sydney really the best option currently?
Considering investing in Sydney? Read this first.
As leading data and research professionals for property in Sydney and beyond, at Providence we spend much of our time analysing the performance and cycles of Australia’s property market in various regions. Our role as Buyer’s Agent, Selling Agent and more means we combine our extensive knowledge with on-the-ground expertise to be able to provide you with valuable property market insights. Here’s what you need to know before investing in Sydney:
- High premiums
In the past seven years since 2011, the Sydney property market has gained over 76% in capital growth (averaging 10.85% per annum). As a result, Sydney buyers are now paying the highest premiums in Australia. Compared to other states, as much as 50% more than Brisbane and 30% more than Melbourne.
- Weak yield
You are also receiving the lowest rental yields. Which means the cash flow return on your money invested is the lowest in Australia at around 2.8%. Not so attractive when compared to Perth at 3.7%, Brisbane at 4.1% even Hobart at 5%. As a result of Sydney’s weak yield, ability to service their loan is now becoming out of reach for most investors.
- Market currently cooling
Did you know, between 2001 & 2011 the city of Sydney was the worst performing capital city throughout the whole of Australia with an average yearly growth rate of only 4.4%? How did this compare to other cities? During this time Hobart had a higher average yearly growth rate of 4.6%, Melbourne 7.1% and Brisbane 7.68%. Our research suggests that the Sydney Market will cool over the next twelve months and capital growth numbers will probably normalise to similar levels we saw between 2001 and 2011.
The good news is that the investment dollar is transferable. This leads investors to explore opportunities in other major capital cities where historically during this phase of the property cycle they have benefited from above average increases in capital growth.
So where should you invest next? That is something we can explore with you, to ensure you have the best chance of choosing an investment that works hard for you and gets you the results you’re looking for. Contact us here.
Should you buy an old property or a new one?
It’s a straightforward question with a less than straightforward answer: when investing should I buy an old property or new?
If one thing is certain, both have clear benefits and disadvantages, with experts divided on which is the preferable option. Generally, all properties need to be viewed and assessed independently – some older properties will easily outclass their new counterparts, and vice versa. There are however, a set of general guidelines which apply to both new and existing properties worth thinking about while you shop around.
Benefits of buying an older property
One of the most attractive benefits of nabbing a pre-existing property for investors is the generally lower purchase price compared to a new dwelling. Adding to this, older style properties are not only cheaper, but often come with value-add opportunities in the form of renovations. As long as renovations are aesthetic (as opposed to any costly structural changes), then renovating an older property gives you the opportunity to substantially increase its value.
Whilst on the topic of price, since purchase costs are lower, you’re generally less likely to have shortfalls with bank valuations, so financing the property may be easier.
Another benefit includes the ability to inspect the property (if comparing with new ‘off the plan’ options) that extends to greater assurance of the property’s build quality.
Lastly, buying an older property in an established area can give you a more accurate idea of its value since you can compare it with other pre-existing dwellings. This is a helpful benefit when purchasing and potentially selling the property later on.
Benefits of buying a new property
Newer properties are a mixed bag of house and land packages in outer city suburbs as well as redevelopments closer to the city and off-the-plan apartments and townhouses.
These new home options aren’t created equally in terms of investment opportunities and returns, though buying new, for potential savings and tax depreciation, is a generally universal benefit. For investors, there are much larger tax depreciation advantages (for new homes) that reduce the holding costs of your investment property. Meanwhile, significant stamp duty benefits can mean thousands of dollars in additional savings.
Other benefits include the generally lower maintenance of new homes as well as generally higher rental yield and lower vacancy rates for investors looking for a rental investment.
Disadvantages: older properties
In the case of older properties, it’s especially important to lean on building inspectors, surveyors and solicitors to ensure that your investment is ship-shape before proceeding. Older properties can have structural issues that require costly repairs, whilst easements or caveats on the title may affect your plans to subdivide or renovate the property.
Disadvantages: new properties
If you’re looking at a new property as an investment, focus on areas where there is limited supply, or you’ll risk slow capital gains growth and weak rental demand. You should also do your homework when assessing the builder. What you save in taxes you may end up paying back in repairs or legal fees if you buy a property built buy a sub-par builder seeking to make a quick dollar.
If shopping for apartments in particular, over-supply of new establishments can make your investment difficult to rent out, so be wary.
So, should you buy old or new?
Yes we know, we still haven’t answered the question. As you’ve probably guessed that’s because there is no single answer to suit every person and situation. Older properties are generally less expensive and if you find one in a good area that’s structurally sound and can be easily (and inexpensively) renovated, then you’re probably on to a winner.
On the other hand, new homes provide outstanding tax benefits for some investors and they’ll generally be less of a headache as long as they’ve been built well. They may even make for an excellent investment as long as they’re in low supply, in a high demand area.
If you want expert advice or a second opinion when comparing new versus old properties, get in touch with our team at Providence. With over 10 years of experience, we can assist you to identify investment opportunities that suit your budget and goals, assisting you throughout the process, from research to acquisition.
Get in touch with us for an obligation-free chat about increasing your portfolio.
Written by Lynton Stevenson, Managing Director, Providence Property Group.
Delay your investing and you could pay the price
If investing in property is on your list of things to do, it’s worth getting serious about planning when you are going to take action. Delay investing in property and you could regret it.
When it comes to making big investments, or any big decisions really, we tend to take our time. Being careful and considered is definitely important, but it’s also vital to be aware of the potential cost of choosing to delay investing property.
We live in a digital age where almost every man, woman and sometimes even child has a mobile phone device or tablet that gives us instant access to an entire world of opinion and information. What a time to be alive! Unfortunately the information superhighway has become saturated with literally millions of articles on every facet of investing. It is almost impossible to distinguish fact from opinion. Pile on top of that the normal demands of life, it’s no wonder many investors fall victim to procrastination and eventually deciding to revisit the idea of buying their next property in a few years.
It’s important to realise though that the cost of delaying your investment by only a few years is significant — and a decision that could cost you tens or even hundreds of thousands of dollars!
If you delay your investing for just two years, the cost is NOT the return from years one and two. It is the return you will miss out on in the latter two years of your investing. We’re talking about the difference between years 24 and 25 in the case of a hypothetical 25 years of ownership.
Consider this example. You decide to purchase a $500,000 property using a 100k deposit with an 80% LVR on purchase. For this example let’s assume that the yearly capital growth of the property is an average of 5% over the life of your investment.
Now looking at the difference in equity between holding the property for either 23 or 25 years – if you were to buy today or delay for two years – this two year delay results in a difference of $157,416. That’s a difference of $78,708 per year! Very significant I’m sure you will agree.
If you have been thinking about investing in property, but are yet to take action, now is as good a time as any to get serious about your wealth creation.
We can help you make informed and wise choices when it comes to your property investment options, so you don’t have to do it alone. Don’t delay investing in property – talk to us about getting started.
Written by Lynton Stevenson, Managing Director, Providence Property Group.