G’day all,
I am assessing my next steps, and I am a little confused about the relationship between positive cashflow property rental yields and interest rates….
Does lack of “property price increase potential” (ie Capital Growth) also mean a lack of “rental price increase potential” (ie yield) as well ?
For example, here in Melbourne (and also any other capital city around the country), as a gross generalisation, rents go up over time roughly in line with property prices. As the property value increases, so does the rent. Obviously this does not happen at exactly the same time, but as a generalisation, on average, rents do increase at roughly the same rate as property value over time.
In an area of very low capital growth, for example small to medium regional towns, where the property value hardly increases over time, does this mean that the rent is also not moving ?
The “Positive Cashflow” model presented here on this forum seems to involve regional towns as the best source of these properties. While there will be slight capital growth almost anywhere in Australia, doesn’t this mean that once interest rates rise above a certain level, then “Positive Cashflow” ceases to exist ?
Yes – I am aware of “adding value” by renovating/painting/providing solutions for tennants/etc, or fixing the interest rate on any borrowings will help.
Therefore, in a low capital growth area, are rents today pretty much the same as they were yesterday, and will be tomorrow ?
And therefore, after only a small rise in interest rates, doesn’t that wipe out the “positive” cashflow ?
Please be aware that I’m not trying to put a downer on the whole cashflow positive theory – I’m just trying to understand so that I can plan my next move….
Thanks in advance for your explanations….
BDM
Thats a good question BDM and I guess historically rents are lower in cheaper houses which would indicate that the rate of growth in rent for these properties is less than in the cities. Mainly due to supply and demand.
The other point to consider is that as interest rates rise less people can afford to be buyers and this could mean people rent longer and therefore vacancy rates decrease and rents increase. So it is still possible to get rent increases as interest rates rise.
Other factors such as population increase/decreases in an area would also alter the supply/demand ratio for rentals and could act independantly of house prices and interest rates.
Ben.
I suppose too.. if you add value to the property (install ceiling fans, shower heat lamps, paint, etc…) then you can agree with the tenant to up the rent to cover the changes. Then in the end your property will increase in value with a better CG.
[
]Regards,
Arty.[
]
“Why work to the age where you cant enjoy
what you have worked for !.” (Author: Me)bump [
]..arty falls to the ground.. (being bumped by BDM..)[xx(]
“Bump” ?? whot tha ? [?]
Regards,
Arty.[
]
“Why work to the age where you cant enjoy
what you have worked for !.” (Author: Me)BDM wrote:
‘For example, here in Melbourne (and also any other capital city around the country), as a gross generalisation, rents go up over time roughly in line with property prices.’
If that was correct, rents would be unaffordable to many and there’d still be cashflow positive properties in our major capital cities. Yet yields at the moment are historically low.
Here’s an example from the place I lived in between 1998 and 2003 (a 1br flat Melb SE suburbs):
1998: Value $80k approx. Rent: $115pw
2003: Value $154k. Rent $120pwRents in this area have starting to move up, and the typical rent for a similar place (which would now sell for $160-180k) would be about $130-140pw.
I would say that rents have been more in line to CPI and people’s ability to pay them (ie wages) than house prices.
Peter
Over the last 35 years rents have not moved inline with property prices, in fact the rental yield has continued to fall.
You will actually find that in regional areas people invest with the expectation of good rental returns.
In the major cities over the past 5 years the property prices have gone up while the rental has been stagnate or slowly climbing, in regional areas the rent has seen more significant growth.
I believe this is because investors expect to get higher rental returns out of regional properties and push for higher rents. In the city when your rental return is 3%-4%, the rental part of the investment is seen by many as a supplement; just too help hold the property in return for growth. In regional areas the rent is at lest a major part of the investment and to cash flow positive investors it IS the investment.
So based on my experience the current trend is for increasing rents in regional areas and stagnate rents in major cities and “premium” areas. Although this trend could change due to the flood of positive cash flow investors coming into the market now.
Slum Lord
G’day Arty2003,
Please accept this helping hand in standing you back up again, after I viciously bumped you to the ground….
I must confess – I just wanted my question back up near the top of the list. I actually used the word “bump” as a rough translation of “I can’t think of anything intelligent to say at the moment, and Arty2003 and Benson are obviously much more clever about this than I am…..”
Please do not be offended in any way ! I appologise for my clumsiness.
Thanks also to Peterp and Slum Lord for your comments.
Sorry about the whole “bump” thing. Let’s never speak of this again…
BDM [
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]
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