We have a lot of very happy clients at the moment. Why wouldn’t they be? Property prices continue to rise – long past when some experts predicted they would start to fall. The rising prices have been great for our clients who have managed to get on the investment property ladder.
Some of their friends and family, though, are struggling to find properties where the numbers stack up. Rental yields have fallen to about 3.5% on average in Sydney and about 3.2% in Melbourne. This makes it much more difficult to find properties that will generate a healthy income.
If prices are rising, why is yield falling?
Rents aren’t keeping up with increased property prices. This is a common phenomenon: prices rise because of demand for property. Increased purchases (fueled, in part, by low interest rates) means fewer people are renting. Once buyer demand stabilizes, rents generally start to catch up.
We generally advise that people consider what yields and prices are likely to do over the long term, rather than immediate term: a good gross rental yield now doesn’t mean the investment will thrive over the long term, nor does a low yield now necessarily signal a poor investment.
Does that mean I have to accept a very low yield?
No, not necessarily. Yields vary from suburb to suburb, and even within suburbs. High yield suburbs are often places where few people are looking to buy. Similarly, in many areas apartments will gain better yields than, say, four bedroom family homes. This is because rents are relatively high, but again few people want to buy.
Of course, whether you are better off buying these to get the high yields depends strongly on your financial strategy. We generally advise looking at the overall, long-term potential performance of the property and its location. Is it in an area that’s ready to take off? Is there minor work that can be done to the property to increase yield and value?
We also advise considering yields in conjunction with capital gains. If you are looking at property investments funding your retirement, for example, it is best to find a property with strong rental income and potential price growth.
It’s worth remembering that, in general, if you choose a fundamentally good property in a good area, maintain it well and look after your tenants then yields will probably rise or stay steady.
We’re happy to talk you through your investment property options. We can even help you find the right property for you.