Broadly speaking, there are two different approaches you can take to property investment. The first is to look for ‘capital growth properties’ – those based in locations that are expected to enjoy strong price growth in the decades ahead. The second is to look for ‘cashflow properties’ – those based in locations you believe are the highest yielding suburbs in Australia.
Suburb Help prefers the first approach, as we believe capital growth properties generally deliver a higher net return (i.e. capital growth plus rental yield) than cashflow properties over the long-term. However, capital growth properties tend to have lower yields than cashflow properties (and vice versa), so the obvious weakness of pursuing a capital growth strategy is that your cashflow will be worse. Potentially, it might mean investing in properties that are negatively geared rather than positively geared:
There’s a saying that capital growth gets you out of the game but cashflow keeps you in the game. That’s why some property investors like to alternate between chasing price growth and rental yield. If you were to follow this strategy, your first investment property might be a capital growth property, your second a cashflow property, your third a capital growth property, etc.
If you’ve decided you want to buy cashflow properties, Suburb Help can assist (see lists below). We’ve researched high-rental-yield suburbs in Australia in an attempt to find property markets that strike a balance between offering the best rental returns in Australia and being sustainable. We think it’s unwise to invest in, say, a remote mining town that offers very high yields now, but whose property market would probably collapse if the mine ever closed. So we’ve excluded any locations we believe are risky long-term propositions, even if they’re some of the highest yielding suburbs in Australia right now.
What is rental yield?
Gross rental yield is the annual income you earn from your investment property expressed as a percentage of the purchase price. For example, if you buy a $500,000 investment property that pays you $20,000 per year in rent, the yield would be 4% (as $20,000 is 4% of $500,000).
With net rental yield, you calculate annual income minus expenses and then look at that lower figure as a percentage of the purchase price. For example, if the property above included $14,000 per year in expenses (mortgage interest, property management fees, maintenance, insurance, council rates, land tax and any other expenses), the yield would be 1.2% (as $20,000 minus $14,000 is $6,000, and $6,000 is 1.2% of $500,000).
Many high-rental-yield suburbs in Australia are unit markets, which draws attention to the old question – is it better to invest in houses or units?
Suburb Help prefers houses, as history suggests houses, on average, enjoy greater long-term returns than units. However, units tend to have stronger rental yields than houses, and are also cheaper to buy.
If you are going to invest in units, it’s important to be aware of the potential risks, one of which is buying into a location that is likely to experience a big increase in supply over the years ahead. (That’s because an increase in the number of units in the suburb would lead to a decrease in demand for your unit, among both tenants and buyers.)
Australia’s population is growing – and all those extra people need to live somewhere. That’s why our capital cities are becoming denser. Councils are changing zoning rules so that, for example, developers can now build apartments in areas that previously allowed only houses; or they can now build high-rise towers in areas that previously allowed only low-rise.
So if you do buy a unit, be wary of investing in a suburb that could see an influx of new apartment blocks and high-rise towers in the years ahead.