Strong yields and a good upside - August 2018
August 31, 2018 / Written by Rich Harvey
Everyone likes cash.
But in real estate, there’s often been a perception that cash flow from an investment property means it won’t deliver great capital growth.
In times gone by, some pundits have argued that it’s one or the other. You chase a good yield or seek value growth.
Cash or growth… cash or growth… a revolving door of consideration. Why can’t you can’t have your cake and eat it too?
I’ve got good news for those with a real estate sweet tooth – I believe you can. Step beyond your well-worn comfort zone and you will discover opportunities offering strong yield and excellent future-value upside.
What is a yield?
First, let’s get the basics out of the way.
Gross yield is a measure, expressed as a percentage, that describes how much income you’re earning each year per dollar of purchase price (or of property value).
Gross yield is calculated by multiplying your weekly rent by 52 and dividing that number by the purchase price. Multiple that figure by 100 to get its percentage.
Example Rent of $550pw x 52 = $28,600pa
Purchase price $500,000, gives gross yield of 5.72%
It is expressed as “gross” because it doesn’t take into account other factors such as vacancy rates, expenses and taxes.
Generally speaking, a yield upwards of five per cent can typically provide a cash flow neutral investment where your rental income is covering all your annual costs, including your mortgage repayments.
On paper, your break even on paper.
Any yield above five per cent is starting to put money in your account – a cash flow positive investment.
The higher the gross yield, the more leftover dough you’ll have each year.
thing above that gross figure is money in the bank.
This is, of course, a generalisation as a wide range of factors could mean that you’re not swimming in cash, but it’s a good broad indicator when you’re quickly assessing a deal.
Is a strong yield always good?
Markets are cyclical and so is the appeal of various investment strategies.
For example, there was a time when property investment seemed to be all about negative gearing.
For some, it remains a reasonable approach for minimising your tax burden through property that’s been purchased for its potential to increase in value over the long-term.
But in recent times, as markets skyrocketed, investors found high buy-in prices had them overextended from a lending perspective.
So, cash flow has become more appealing as it helps alleviate the investor’s loan-servicing demands.
As mentioned above though, strong yield is often considered a trade-off for good long-term capital growth potential. Some properties have a good yield because they’re cheap to buy, but a lack of growth drivers means the value could stay low for years.
In other cases, a high yield could be a sign of a temporarily inflated rental market. It might be that you’re looking in a regional area with an ebbing and flowing industrial workforce, where the number of people looking for rental properties rises and falls.
A strong yield is one of the things you must consider about an investment, but it’s not the only thing.
In fact, the golden find is a property with both cash flow and growth potential.
Click here to download our detailed report on “Powerful Positive Cashflow Strategies that work”.
How to have your cake and eat it too
If you like the idea of a strong yield with good potential for value upside, there are investments for you.
But here’s the hot tip – you must get out of your geographic comfort zone.
Seeking them out can be difficult. Assessing them for their capital growth potential can be even trickier. That’s why it’s always best to enlist a team of qualified, well-informed experts to guide you.
But to give you an idea of what I’m talking about, consider these examples.
Firstly, step beyond the biggest capitals of Sydney and Melbourne and look at some of our other large centres – both metro and regional.
Think about regions that haven’t been as pricey but have all the right ingredients for growth. Brisbane comes to mind immediately.
Look at middle and outer ring suburbs in locations where there’s big demand for housing. It’s here you’ll find larger allotments that provide options for ramping up cash flow. These holdings might have subdivision potential, or the space to build a duplex or triplex.
These projects can be tricky, but with expert help they’re very achievable. And the rental income and growth potential is significant.
Alternatively, some suburbs of Brisbane, Ipswich and Logan, as well as some cheaper outer Sydney suburbs and promising regional markets like Newcastle, could be ripe for a granny flat project.
You can find a decent house with a big backyard in which you could build a secondary dwelling unit. If you’re picturing the daggy old granny flats of the 1970s and 80s, fear not – things have changed dramatically and what you can get now is an impressive dwelling that would appeal to a new tenant.
That’s a whole additional income stream for a pretty modest outlay.
Another idea is to look at regional areas with good, strong and stable economies that could benefit from a future influx of residents. Think towns within reasonable commuter distance of a major city where some can no longer afford to buy. Perhaps ‘tree change’ locations for the huge chunk of the population preparing to retire in the next decade is the go.
Also, keep your eye on depressed capital city markets where prices have slumped but could see an upswing in the mid to long-term. I’m talking Perth and Darwin, although these are tricky markets and have their own unique considerations.
The point is to think outside the box – and your own backyard. Australia is filled with opportunities to enjoy stress-free cash flow investing with all the benefits of future growth. You just need to know where to look.
Want help finding the ideal positive cashflow property? Please contact my friendly team of Buyers Agents who would be glad to lend a hand. Tell us your property brief or call us on 1300 655 615 today.