Part 1 - Rental yields and reading between the lines

November 22, 2017

 

There has been a mix of headlines regarding rental yields across Sydney and Melbourne in the last couple of months.

 

‘Startling study shows long-term tenants going to extremes to make ends meet’

 

‘Sydney, Melbourne rent costs a third of tenant’s income’

 

‘New data shows Sydney suburbs with fastest rising rents’

 

Over the last 10 years, whilst I have been investing, I have taught myself to always read between the lines and peel back the layers. The focus of today’s article is peeling back the layers as an investor and understanding the importance of rental yields within a market, and the role it plays with selecting a strong investment.

 

Firstly, What are rental yields? And what do they mean?

 

Rental yield is a measure of how much cash an investment property produces each year, expressed as a percentage of that asset’s value.

 

At Meridian Australia we always aim to secure a minimum gross rental yield of 4.8% when selecting an investment property. For an investment property worth $500,000, this would result in a weekly rental income return of $462 per week.

 

Achieving a strong gross rental yield will play an integral part in assisting an investor to hold their asset for the medium to long term. Due to the strong rental return and cash flow being achieved, a large portion of the ongoing expenses can be managed with limited stress.

 

Let’s begin peeling back the layers and have a look at where rental yields are positioned within the diversified East coast cities of Sydney, Melbourne and Brisbane;

 

Sydney – Units 3.8% Houses 2.8%

 

Melbourne – Units 3.9% Houses 2.7%

 

Brisbane – Units 5.1% Houses 4.7%

 

If we take the above current rental yields and apply them to a potential investment property in each market for a purchase price of $600,000, the below weekly rental income will be achieved;

 

 

As you can see from the above, when you the put the actual numbers around a potential investment property, in regards to the expected weekly rental income, and compare to the expected weekly loan repayments plus the other additional costs for holding an investment property (such as property management, rates, insurance and body corporate/strata) it becomes much clearer if the investment is actually manageable to hold.

 

While interest rates are currently at record lows and are expected to stay flat for the next few years; as an investor we should always factor in a buffer, and conduct projective cash flows to give us clear scope and realistic expectations of our ongoing costs; Let’s apply these actual numbers below to see what an investor may expect securing a property in Sydney or Brisbane today

 

Based on the above rental yields being achieved today (3.8% Sydney and 5.1% Brisbane), and the investment purchase price of $600,000, a total interest only loan of $540,000 (90%LVR) and repayments at a 5% interest rate, let’s compare the following two scenarios;

 

One investor secures a property in Sydney and the other investor secures in Brisbane today. Using the above numbers and factoring in all ongoing yearly costs associated to the property, each scenario would follow;

 

 

The ultimate consideration if we are looking to build a property portfolio is: How many investments can we hold if it’s costing us $215 per week, per property, and how much is the bank willing to lend us?

 



 

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