13 Mar Are you “Lookin’ for Yield in All the Wrong Places?”
March 13, 2018
Some Sydney property investors are looking further afield than Sydney’s inner ring suburbs in their search for well-priced investment properties, focusing instead on regional areas. These investors are looking for the combination of a reasonable entry purchase price and good rental yield. However, the significant increase in Sydney property prices over the past 10 years has seen rental yields shrink accordingly. But now, there seems to be a reversal in this trend, with the Sydney apartment market starting to soften, resulting in 4%+ rental yields for savvy investors who know where to look and what to look for.
As a buyer’s agent, it’s vital that my investment clients experience the benefits of capital growth while still being able to meet the mortgage repayments on their investment property. So, while rental yield is an important part of the investment property equation, it isn’t the most important factor. For a sound investment, you need the combination of both good rental yield and capital growth (this is outlined in our investment property strategy tips article).
From recent enquiries to our business and conversations with mortgage brokers who service clients all across Sydney, it seems that some investors are now looking to Gosford, Newcastle and other regional areas, rather than the inner and middle suburbs of Sydney. At first glance, their investment rationale seems sound – it costs less to buy a property in these areas compared to Sydney, and the rental returns are good (around 4%+). However, they may not have considered the potentially lower capital growth in regional areas vs Sydney. So it’s quite possible that these investors are “Lookin’ for yield in all the wrong places” (with apologies to Johnny Lee for messing with your lyrics!).
So, do I recommend investing in Sydney and settling for a low rental yield of only 2-3%? The short answer – No. Do I recommend spending a fortune on a house and barely being able to meet mortgage repayments, in the hope the investment property will experience the same capital growth we have seen for the last 10 years? Again, the answer is No.
Here are my top 4 tips for smart investors who understand the importance of good rental yield and capital growth when looking for an investment property:
- Stay in the Sydney property market – Property in Sydney remains highly sought after, due to the city’s winning combination of an amazing harbour, beautiful beaches, proximity to the CBD, and ongoing improvements in public transport, such as the new light rail and Metro projects. People want (or need) to live in Sydney, but there’s a limited amount of land, so the laws of supply and demand work strongly in your favour. If you buy smartly, I believe you’ll be able to achieve higher capital growth in Sydney than you would in regional areas.
- Buy an established 1-bedroom apartment – If you’re on a limited budget, I recommend buying a 1-bedroom apartment. The rental yields are higher than on a 2-bedroom apartment, which translates into lower mortgage repayments.
- Buy a house with renovation potential in an upcoming suburb – Your rental yield on a “fixer upper” will be less than with a 1-bedroom apartment, but you can greatly improve your rental return for minimal expenditure by building a self-contained flat in the back yard. Although you initially spend more on a house vs an apartment, the returns on a house are significantly higher due to the greater financial investment. For example, a 10% return on a $1,500,000 house gives you a $150,000 return, which outperforms the $75,000 from a 10% return on a $750,000 apartment.
- Location, location, location – At Premier Home Finders, we look for older properties on quiet streets and avoid main arteries or suburbs where there’s a glut of off-the-plan apartment developments. We look for areas that are being rezoned, redeveloped, or which are on the cusp of becoming revitalised. Believe it or not, these opportunities really do still exist in the Sydney property market, and with our unique insights, Premier Home Finders knows know where to look for them.
As you can see, Premier Home Finders has a clear strategy when it comes to property investment, which has already translated into sound and successful investment decisions for our many happy clients. To find out more about how we can help you achieve good rental yield and capital growth – or to find out more about our buying services – simply call +612 8011 3125 or email email@example.com today.
Principal, Premier Home Finders