Weighing up capital gains and rental yield
When it comes to property investment, the big question is 'what is better – a good price, strong property growth, or high rental return?' But what if you could have all three?
Blogger: Harry Kalligeros, owner, Properties Invest
Property investing is growing as a popular Australian pastime with a huge growth of taxpayers owning an investment property in the last two decades. So what makes a good bricks-and-mortar investment? It's not about buying any old house or unit, that's for sure, and it's most certainly not about buying something you'd want to live in or even in an area that you necessarily find desirable.
There are two ways to measure your return on investment: Capital growth – the change in price over time and Rental yield – how much rent you're getting as a proportion of what you paid for the place.
People often talk about buying a property with high rental returns. However, most of the professionals who buy property on behalf of investors would advise going for capital growth primarily, and then aim for a decent yield. The argument is that just like money in the bank where the interest payments are left untouched, the house value rises having a compounding effect when the property market is going up. Rent payments on the other hand are generally used to help pay interest payments, rates and so forth, and they don't compound. A bit like if you had a bank account and kept withdrawing the interest payments, it might provide an income stream but you wouldn't get the benefits of growth on growth.
Generally people who favour high rental yields will be those investors who have less disposable income so that they can use the rent to pay the property's associated bills. They have to have a higher rent earning property because that's how they can afford to own it in the first place. People who have more spare cash are more likely to be able to go for a property that has higher price growth prospects but might attract lower rent. Depending on how you structure the purchase of the property for tax purposes you can set yourself up to take advantage of either scenario.
Historically houses tend to grow in price faster than apartments but apartments tend to attract higher rent; though this is not always the case. New apartments have greater tax benefits and tend to experience a greater level of growth over the initial years of investment than old or established apartments. Recently we have experienced a strong level of growth for apartments in high demand areas of Perth due to a shortfall of available apartments and the population expansion. Yet in Melbourne apartments have struggled due to an oversupply and a downturn in demand for residential apartments in that city.
With the abundance of property investing information on the web it is becoming more competitive for mum and dad investors to find that elusive bargain. That bargain is about getting a good combination of yield and growth and allowing property to do what it does through the passage of ownership: build your wealth.
About Harry Kalligeros
Harry is the Licensee and owner of Properties Invest Australia-wide, one of the fastest growing independently owned property investment specialist companies in Australia.
With over 21 years’ experience in the financial services industry coupled with 10 years in strategic property research, Harry has worked as a financial planner in large International Australian banks and boutique firms alike. He draws on his financial planning knowledge, passion and experience to help his clients grow their own wealth as they reduce their risk through personalised strategic property investing.
With our passion for property the Properties Invest Australia-wide team evolved out of the financial planning and accounting industries, out of a need for investors to have access to property investment research, analysis and professional strategists.