Getting the best return on your investment
Buying property is all about getting a return on your investment. How do we get the best return though? We all know that long term capital growth is vital but it's a good rental yield that is needed to cashflow them. General Manager and expert investor Lindy Lears answers the hot topical questions.
What makes a rental yield good?
Rental yields are a hot topic of conversation. The higher the yield the more profit an investor expects to make, although with high yield can come high risk and volatility in markets. Generally, I prefer low risk investing with rental yields within the 5%+ range for safe haven capital cities or large regional locations. For a $400,000 investment, a 5.2% yield would be a $400 a week rental amount.
If I pay more for a property will I get a higher yield?
Paying more for a premium property in the right location with the right tenant willing to pay a higher rent works very well if buying or building brand new properties within the median price range in growth suburbs. Also new properties that have potential for dual incomes such as duplexes, and dual key homes can give very strong yields. Look for areas that are thriving with new infrastructure, employment and services driving a demand and where vacancy rates are low.
However, investing in expensive properties well above the median may not necessarily deliver the same good result. So if you are thinking of investing in that city pad, beachside villa or country mansion and getting a high return; think again. Investors may only achieve a 3% yield and the holding costs for an investor in this situation can be crippling.
Is rental yield the single best indicator of a good property to buy?
A higher rental yield is very attractive to some investors. Just make sure when you're looking at that high yielding property, you consider your budget and borrowing capacity. Not only that but also consider the holding costs of the property on a week-to-week basis.
What may seem like a great property because of its high rental yield at first could turn out to be a drain. Some high rental yield properties may also have high holding costs that will eat into your budget and strain your cashflow. This is particularly relevant when tossing up between an old or a new property. It may surprise investors to know that a new property with a 5.2% rental yield can be cashflow positive whilst an older property with a 7% rental yield can be cashflow negative due to unexpected expenses, maintenance and repairs. The rental yield is not always the best sole indicator of the actual weekly cashflow or holding costs of the property.
What else should I look for in a rental property?
Selecting a suburb to invest in with growth potential, a good rental return and positive cashflow is the goal. I want my property to attract great tenants who can afford to pay a premium rent because that suburb is where they want to live, and meets all their lifestyle, family or employment needs. I want my property to grow in value over time by being well located, in low risk areas and have a positive cashflow so they pay for themselves and I don't have to worry about any holding costs. This way I do not have to chase high rental yields.
The key to getting the best return on your investment is to go into the purchase knowing what your target tenants want, what the yields are, what is the weekly cashflow estimation on the property and what is driving the demand that is going to grow the value of your property.