hi everyone. I read two articles in Brisbane's Courier Mail yesterday about rental prices being too high and the probablility that they will not grow much in the next year. The reason they give is that wages haven't increased enough to sustain rent rises. For someone who is about to embark on the purchase of their first IP this prospect is a bit daunting given that I will already be hightly negatively geared. Any thoughts? Would this mean that it is better to buy close to the city where incomes are higher?
As an owner of a decent sized Rent roll in Brisbane i have to disagree.
Yes we have certainly seen a healthy rise in rents over the last couple of years however this is based on a supply and demand and at the moment demand certainly outstrips supply.
In saying this i thing it is very much a suburb to suburb situation with many areas appearing overpriced.
Richard Taylor | Australia's leading private lender
I could care less what a newspaper says about the property market.
They are usually only interested in over-dramatising anything that they can which will sell more papers.
As a general rule, rents have gone up, but in typical fashion, the papers will focus on a few suburbs, which are in very high demand, as the yard stick for the whole country.
I know a guy here who is your typical high-powered yuppie. He is a nice guy, a bit of a poser, but he wants to be the guy in the executive ads you see on tv and "live the life". Nothing wrong with that, but this type of person is always attracted to a certain area. Aus is no different.
He applied for an apartment to rent in San Francisco a few months ago. There were 37 applications for the same apartment. Did he need to live in this location? Absolutely not, but like the others he wants to live in the trendy spot, so the rental demand is through the roof.
Unfortunately, for anyone looking to buy in that same area, the buy-in price is so high, that even with higher rent demands, the current rent returns there are woeful, and the average person couldn't afford to buy a place there.In other areas, you can get a place to rent in 5 mins.
The best place to buy an IP is where you can get:
1. good rent returns
2. good cap growth prospects in the mid-long term.
3. good "add-value" factors
4. good tax benefits and depreciation.
5. good location.
6. affordable for you.This is the basis for a succesful IP.
Rents have tracked CPI inflation over the last almost 40 years according to ABS data. At times they rise faster until they are above the CPI trend then they rise slower until they return to trend.
There is a very simple logical reason for this. Rents have to be paid from wages, and wages generally rise with CPI (or a little above during periods of economic prosperity and a little below during slow economic periods). It doesn't make sense to expect, for example, 10% annual rent increases and 5% annual income growth. It might happen for a short time, but ultimately it is unsustainable.
Consider that some 50% of renters are currently paying around 30% of their disposable income in rent (more or less depending on which survey you read). Some of the sillier predictions of 40% increase in rents over 2 or 3 years seem ludicrous in this light. A 40% increase would translate to 30% in real terms and leave 50% of renters paying more than 40% of their net income in rent.
Quote:For someone who is about to embark on the purchase of their first IP this prospect is a bit daunting given that I will already be hightly negatively geared.Slow rental growth won't make you more negatively geared (unless you're mad enough to capitalise interest), so why does it trouble you? Are you concerned about the length of time until your investment starts showing a positive return? That's fair enough. A 4% gross yield will take 31 years to increase to 10% if rents grow in line with inflation and inflation remains at 3%pa (above the RBA's comfort zone). 5% will become 10% in 24 years. In contrast, 5% annual rent growth would result in 10% yield (on purchase price) in just 19 and 16 years respectively.
What rate of rental growth would you like to see to make this an attractive investment?
Cheers, F. [cowboy2]
L.A Aussie wrote:The best place to buy an IP is where you can get:
1. good rent returns
2. good cap growth prospects in the mid-long term.
3. good "add-value" factors
4. good tax benefits and depreciation.
5. good location.
6. affordable for you.This is the basis for a succesful IP.
that's great advice, but it's hard to find no.s 1-5 which also satisfy no.6!
As far as my concerns go, Im just saying that the affordablility of an IP with a rental yield of 3.5-4.5% (which is about where most of then sit in my research in Brisbane and surrounds) is going to be a bit of a stretch, especially initially, so factoring in a decent rent increase would take some of the heat off. The agents (taken with a grain of salt of course) regularly say that this place or that place is underrented and therefore upon settlment you could increase it by a substantial amount to make it more affordable, but it's difficult to know the reality of this. If you look up rents in any given area, they are all pretty low by comparison to the cost of the properties.
They are not that hard to find.
The problem is, a lot of people have an "own backyard' mentality.
The market has changed dramatically in the last few years. You have to look further a-field.
There are about another million places to look other than Brisbane, or is this site full of only banana benders?
sheesh!
HI L.A Aussie.
i have the same problem as others ie. i can mainly find ip's that provide only 4-5% rental yield.
This 'own backyard' mentality is an interesting concept. Can i ask then, if this mentality suggests a person buys only within their state? eg i live in NSW and therefore only buy in NSW>
would it be smart to stick to areas you know when you're just starting out though? I know the brisbane area and don't have time or money to travel around looking at other parts. And due to my lack of experience, wouldn't trust buying something simply by trusting someone else's judgement or doing my research on the internet. Later on maybe but i'd feel more comfortable with my own backyard for the moment. How do others feel about this?
Hi Perry,
There is an explanation for your statement:-
The agents regularly say that this place or that place is underrented and therefore upon settlment you could increase it by a substantial amount to make it more affordable,I see this occurence on a regular basis when selling Tenanted properties and it is one of those aspects that as a buyer you need to be aware of. Reading between the lines in your comments, your major concern seems to be the short fall on income over expenditure because you are borrowing the whole amount of the investment property. Believe me, this is the same for most investors. There next greatest fear is that the property is going to be vacant for a long period of time, hence there is often a reluctance on the Invvestors part to increase rents to the correct degree.
An example of this would be. An Investor purchases a property for $300,000 and over a period of five years the rents increase from $280 per week to say $350 per week, he then decides to sell the property for the current value of $400,000 and wonders why the investors are not interested (oh! and by the way, just prior to the investor listing the property he re-signs the Tenants on a twelve month lease)
Apart from having a good understanding on property values, you also need to have a good understanding on rental returns and the demand in the area that you are looking.
Jon
I'm not your financial planner, so take this with a few grains of salt. If you can stomach it, I'd advocate sticking to the areas you know (whether local or further afield), and by doing extensive research, go for the best capital growth area you can afford even if the current yield is sub 4%. You're right, you mostly can't have both capital growth and high yield at once, however with time you can achieve the high yield by chipping away on 2 fronts – you can count on CPI increases on rents in long run(if not more by value adding), and you can pay off the loan as you see fit. Both these will lead to higher yield over time, but you can't manufacture the location to be closer to the CBD, or change the image of the suburb on your own.
Those who overemphasis positive cashflow may head down the wrong path in the long term and miss out on a very strong capital growth story in the capital cities of Australia.
L.A Aussie wrote:The best place to buy an IP is where you can get:
1. good rent returns
2. good cap growth prospects in the mid-long term.
3. good "add-value" factors
4. good tax benefits and depreciation.
5. good location.
6. affordable for you.This is the basis for a succesful IP.
One thing I would add to marc's answer is to keep in mind the target demographic for each property, Think about the kind of person that would want to live in that particle house,..for example will it suit a large family,… a single person,… a young couple,… retired couple,…
Once you have an idea of the type of person likly to live there, check the availablilty of services that demographic needs and values are readily available in the area,….. also think about possible improvement to the property that might make the house a bit maore attractive to that demographic this will increase demand and possibly increase your return.
and secondly think about who will eventually by the house from you,…. and make it more attractive to the person who will buy it,… for example what attracts an investor is most likly different to what attracts a young family.
pirate wrote:HI L.A Aussie.i have the same problem as others ie. i can mainly find ip's that provide only 4-5% rental yield.
This 'own backyard' mentality is an interesting concept. Can i ask then, if this mentality suggests a person buys only within their state? eg i live in NSW and therefore only buy in NSW>
Yes, that's what it means.
For new investors, it is probably safer to buy in the area they know best; near where they live, but this is not necessarily a good area to invest.
With the use of internet, fax, email, phone you can research an area outside your own state quite easily.
It is better if you can visit the area, but things like demographics, rental yield, location, future developments which may affect cap growth etc, can all be done through the above.
The property will also need to have a building and pest inspection, and I have had 3 possible interstate purchases fall over because of bad building inspector's reports. You need to put clauses in the Contract of sale to cover these things.
I agree with Marc.
I live in Sydney, in the northern beaches and I rent. I can't aford to buy anything here.
So, to buy my first IP I did a bit of research and got the help of a trusted buyers agent. It is good to be able to inspect the property you want to buy, but it is not essential.Essential is to be able to sleep at night knowing that you can hold your investment for as long as you want to have it. If you will end up paying too much and stretch your finances just to be able to buy close to home, I don't think it is worth it.
Try to get out of your comfort zone and buy something you can aford in an area that is or has prospects of growing in the mid to long term.
I just found that trusting others has helped me to achieve a much better result than I would have if I'd tried to do it all alone.
Good luck!
MCGJ
If the selling agent tells you a place will rent for $X, don't accept their word. Check it yourself or get a property manager to give you an estimate. Take the neighbourhood into account.
hi MCGJ,
I also live in the northern beaches and realise property is too expensive here. Can you recommend a gd buyers agent that I can use as I will possibly need to buy something interstate. I think it would be a good idea to use an agent for purchasing my first investment property.thanks
Hi Chas83,
I bought a property through Dave Thomas. I can send you his contact details if you want to.
Cheers
MCGJGoodness me i'm going to have to do more study on the CPI, I thought it included a measure of household expenses. Now rents are suppose to be tracking above the CPI trend which includes a measure of household private rents. Um, really.
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