Right now, many property investors are seeking locations with above average rental yields.
Buying properties that offer a positive cashflow situation is always a good idea, in my view, provided the location has the credentials for long-term growth.
But now more and more investors are looking for superior rental yields – because interest rates are rising, and may rise further.
Finding those positive cashflow scenarios has become harder, not only because borrowing costs are rising, but also because recent strong price growth has pushed down yields.
This may encourage some investors to consider real estate in high-risk locations that offer rental yields of, say, seven or eight percent.
But that’s not the way to go, because these kinds of locations often usually resources-related places and they tend to be boom-bust markets and therefore very risky.
So here’s my idea of the correct mindset to bring to this situation – offering a strategy that can deliver above average capital growth potential, safely, as well as the level of yield needed to cover the costs of ownership.
The idea is this: don’t consider a property only on the initial yield it offers.
Think about what the yield will be in a year’s time and in two years, in a climate where vacancy rates are ultra-low and rents are rising.
You might be considering a property at $400,000 which will rent for $400 per week.
That’s a gross rental yield slightly above 5%.
That’s a good yield but may be borderline with the higher interest rates that are becoming common.
But rents nationally have risen 15% in the past 12 months. And they will keep rising, because there’s a serious shortage with no solution on offer.
So, consider what the rental yield will be in a year’s time, if the rent rises 10%, which in the current climate is quite conservative.
In a year, the rental return based on the $400,000 purchase price will be 6.4%.
In two years, with another 10% rental increase, the yield will be over 7% – and that’s starting to look very attractive, even with mortgage rates significantly higher.
It’s important, always, to take a longer-term view with real estate investment – but especially in the current situation.
There remain good options for growth and above-average yields in capital cities like Adelaide, Perth and Darwin, and in many of our good regional centres.
Indeed, in the current scenario of rising rents and less competition from buyers in many areas, it’s a prime time for investors to be looking for good opportunities.
