Cash flow analysis reveals surprising results about rental returns

By looking at the last five years of RiskWise’s top and bottom 100 rental return suburbs in Australia wide for houses and units, RiskWise CEO Doron Peleg said overall growth for high rental returns saw negative results in some cases.

“In theory I want to see 6 per cent rental returns, but if capital growth is -7 per cent what happens then?” Mr Peleg said.

“What it means is people who invested in very affordable suburbs that carried a high level of rental return, with the expectation to see strong overall growth, have achieved exactly the opposite result.

“Most people think they will see high overall return (that includes at least a reasonable capital growth), if they have high rental returns but our data clearly shows this is not the case.”

Assuming a 20 per cent deposit, RiskWise’s analysis showed low rent return houses saw net equity rise by 63.1 per cent, and high rent return houses only saw an equity rise of 29.5 per cent

“This means low-rent houses increased their equity by more than twice that of the high-rent ones,” Mr Peleg said.

A similar trend was noticed with units too, with low rent return units seeing equity rise by 34.1 per cent and high rent return units by 24.4 per cent.

“While this is not a fully statistically proven predictive model, there is a clear indication that, generally, any increase of 1 per cent of rental return has resulted in an overall return that is approximately 7.9 per cent lower than expected for houses and 3.4 per cent for units,” Mr Peleg said.