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.
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.
8 investment property considerations you shouldn’t ignore
Looking for a great investment property is not an easy task, especially when you don’t really know what you’re looking for. It’s vital to understand which factors should be considered that make an investment property a great decision.
If you want to purchase an investment property that will be effective in creating wealth for you, there are a number of things to consider. Some are essential, some less so — some you really can’t afford to ignore.
Let’s look at eight considerations that are a must when it comes to buying an investment property
- Know your goals – If you are to take only one thing from this article, it should be to “Agree upon, Set and Stick to your goals”. Generally, people who invest in property are looking for four main factors. These are:
-Growing Wealth through Equity
-Saving for retirement
-Increasing their income from rental yield, and
-Minimising their taxable income through Depreciation & Tax Credits
It is imperative that you know WHY and HOW this investment is going to benefit you in the long term. Providence always takes the time to establish your goals and circumstances before presenting properties that match your criteria.
- Capital Growth Rate – If you are looking to build your wealth via equity with the goal of either creating a property portfolio or paying off your home loan faster, you are going to need to know the 10 and 20-year capital growth averages of the suburb you are looking at investing in. This data will give you a conservative and accurate understanding of what to expect the property’s value to increase by in the years to come.
Take note that for the best chance of achieving your financial goals, you should do the figures to ascertain when you will be able to afford to purchase your next property, and how many properties you need to strive to own.
- Rental Income – Most Australians use their property’s rental income to service their investment loan. You should always obtain multiple rental appraisals from local agents to minimise surprises and use the average of all three to create your budget.
- Use a professional property manager – Poor handling of your property and its tenants could seriously hinder your wealth creation journey. Engage and pay for a professional who will take care of all aspects of your property’s management. Remember, the rental management fee is tax deductible, so choose a rental manager who minimise any potential stress and maximise your property’s performance. Get a rental manager to take care of everything, from paying water rates and body corporate fees to land tax and council rates. You pay them to manage your property so get them working for you.
- Vacancy Rates – In order to make sure you are buying a property in an area where there is low supply and high demand, it’s important that you know a suburb’s current vacancy rate. Vacancy rates represent the amount of properties in a specific area that are vacant or unoccupied at a particular time. Vacancy rates can be affected by a number of factors, one of which is the amount of new properties that are being built. This is why you should always be up to speed with local council development applications. You can find this information on most local council government websites.
- Employment Drivers – It’s very important to know what employment centres are going to sustain and stimulate job growth near your property. Why is this important? Because job growth will promote steady population growth. As more people gain employment in the area, they are likely to want to live close to work too, resulting in increasing demand for property. And more demand will only continue to drive property values up.
- Transport – Location is and always has been a crucial factor when choosing where to live. People are frequently willing to sacrifice the size of their land or even the size of their home for a desirable location. Easy access to amenities is sure to increase the desirability of any area, so when looking at a property’s location, ask yourself: is it practical and easy to travel to local amenities, education centres and entertainment venues? What public transport infrastructure is already established or coming?
- NAPLAN Scores – In 2008 NAPLAN was introduced into the Australian school system. Its impact on the property market: Suburbs within catchment zones of high NAPLAN-scoring schools have seen increased demand. Parents are seeking out homes which allow their children to attend these schools that will potentially give their children a higher level of education.
Property is likely to be the biggest investment of your life. With the right support and guidance, it can also be the best investment you ever make. Speak to Providence today about growing your property portfolio. Email us at firstname.lastname@example.org or call 1300 25 25 50.
Blacklists – the truth behind the bank’s ‘high risk’ suburbs
Chances are you’ve heard of the banks’ property ‘blacklists’ – the suburbs that the banks really don’t want to lend you money to purchase in. If you’re shopping for a loan to buy in a bank’s blacklisted suburb, you will find they will decrease the Loan to Value Ratio (LVR), therefore requiring an additional deposit of 20 or 30 per cent and reducing the perceived risk to the bank. Or they simply won’t lend to you.
A quick Google search will give you results like an article in October 2017 that claimed 600 towns and suburbs were on NAB’s property lending blacklist. But how valid are these lists and how transparent is the information provided? What agenda is driving these suburbs to appear on the list one month and gone the next? How valid are these blacklists, and how they can affect people as purchasers, whether you are an occupier or an investor?
The central question here is how does a bank decide that a suburb is too high risk for their liking and should belong on their blacklist?
There are two reasons why a suburb might appear on blacklists.
Reason 1. The banks believe a certain suburb has too much supply, with an excess of development being carried out. This could apply to suburbs with high density housing or low density new house and land estates.
Reason 2. The banks have too much exposure in one particular suburb. For example, the bank may have lent too much money to investors and/or owner occupiers.
Looking at the first reason, a suburb being on a blacklist can be a good reason to dig deeper and look at the supply and demand in the area. For more on how to utilise supply and demand figures in real estate, take a look at our recent article ‘The danger of misunderstanding figures for supply and demand in property’. Don’t just accept that the suburb you’re interested in is on a bank’s blacklist and scratch it based on that fact alone, because it just isn’t enough — as is clear from reason two.
Reason number two is a crucial reminder that different banks may treat your lending needs differently based on their own interests. While one bank may be looking to limit their exposure in a certain suburb, another may not have that same overexposure.
The truth behind blacklists is that banks may very well choose to blacklist suburbs because of their personal, circumstantial risk assessments, not to protect potential lenders from a poor performing suburb as some may be lead to believe.
When property blacklists and results don’t align
Over the last 12 months the Sydney property market has declined 0.32%, however the suburbs NAB Blacklisted in Oct 2016 have performed very well.
This list shows Sydney suburbs that were on that NAB October 2016 Blacklist, demonstrating that while a 20 per cent deposit was required to gain a loan to purchase in these areas, they performed well.
Chatswood NSW: 12 Month Growth House 4.42%, Apartments 7.07% growth
Average 10 Year Capital Growth: House 9.91%, Apartments 7.58%
Putney NSW : 12 Month Growth House: 31.58%
Average 10 Year Capital Growth: House 8.99%
Newington NSW: 12 Month Growth House 5%, Unit 2.64%
Average 10 Year Capital Growth: House 7.78%, Apartment 6.29%
Auburn: 12 Month Growth: House 9.48%, Unit 5.66%
Average 10 Year Capital Growth: House 9.32%, Unit 8.04%
Baulkham Hills: 12 Month Growth: House 10.91%, Unit 14.04%
Average 10 Year Capital Growth: House 9.22%, Unit 7.65%
The Ponds: 12 Month Growth 7.14%
Average 10 Year Capital Growth: 14.15%
The impact of blacklists on selling
Blacklists aren’t just a buyer’s consideration — if you’re selling in a blacklisted suburb, you could be affected too. We frequently help clients through the process of selling property, and a blacklist is something we take into account when timing a sale.
Even if a suburb has been performing well, reluctance from banks to lend to buyers interested in your blacklisted suburb or requiring a larger-than-normal deposit means you could experience reduced interest or find your buyers require more time to secure finance.
The broader impact of blacklists
Understanding that blacklists are not always what they seem is essential because they are often referenced as a means of assessing the state of the property market.
Lending blacklists that keep coming up from banks seem to be the basis of many articles that feature in publications, such as the Financial Review as an example. These articles use these lending blacklists as an indicator of what’s happening in real estate more generally. However, as we’ve explored throughout this article, while a suburb appearing on bank blacklists could encourage you to explore its potential risks, there are many bank-centric reasons why blacklists feature the suburbs that they do from one month to the next.
Certainly major economic occurrences such as a downturn in the mining industry will trigger a bank to place suburbs on a blacklist, but only when the major industries are slowing down. In this instance, the property market would have already started to cool when banks announce the suburbs to go on the blacklist.
In summary, while you shouldn’t base property decisions solely on blacklists, they are still something to add to your research arsenal. Never let a bank’s property blacklist deter you from a purchase without doing the research yourself.
Better yet, enlist our help in assessing the optimal property investment choices to reach your goals. We take a three-tiered approach to property research and our experienced team of property investment experts can use our proven strategies to help you discover advantageous property opportunities. Contact us here or call 1300 25 25 50.
Written by Lynton Stevenson, Managing Director at Providence Property Group.
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.
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.