Much of the recent discussion about investing for cap gain vs investing for yield misses one very salient point – future yields.
Property prices in the big cities have increased beyond people’s incomes. In 1986 the median income was probably $20k and the average house might have been $80k. Now the median income is somewhere near $40k and the average house is not $160k but well above this even in Perth and Brisbane (let alone Sydney and Melbourne). Thus in real terms prices have increased by 100%.
(Before you start believing this, I made up all the above stats, but they indicate the general trend)
How about rents? My guess is that they haven’t increased as much. After all everyone needs a place to live, and landlords lose if their properties are vacant.
Would I be fair to say that rents largely move relative to CPI and prices depend on buyer demand? The growing difference between the two has caused the fall in yields we’ve seen in the big cities.
Suppose Person A buys a neg geared place for $200k which returns $200pw in rent. Person B buys two pos geared places for $200k the pair, which return $400pw rent.
In 10 years time the $200k place is worth $400k while the two pos geared places are still worth $200k.
But what do people think will happen to rents long term? Do you think that the (now) $400k place will return $400pw, providing a growing (not static) income stream with a constant yield? If so, doesn’t this make negative gearing more attractive than if we had assumed that both rents would rise by the same amount?
An alternative approach, of selecting properties based on future rental income growth seems to suggest itself. Particularly where high demand (rather than CPI) is driving the rent increases (so they become more like property prices).
If we’re talking long-term sustainable income, surely this is more important than the size of the cashflow now? What do you all think about this as a variant of the current thinking, which seems to place too much emphasis on current rental income, when future rental income is as important?
Peter
Peter,
The research that ive done indicates that rental prices are linked closely to the demand for accomodation in an area. Rental prices increase sharply when there is a high demand for short to mediumterm housing , such as in mining towns where yields can be as high as 30 -40%. These high yields come at higher risks because factors such as new subdivsions or mine closures reduce the demand.
look for regional centres with good infra structures and good population growth (people wiil almost always rent in a place before they buy)
Also follow the lead of the big chians such as coles-myer and woolworths if they are investing in shopping centres in the area there is a good reason.
So to answer your question i guess yes the long term returns are more important than the immediate income , as long as it is positive . I still wouldnt go out and buy a negative (cash flow) property just because its predicted to do well in the future , id find one around the corner thats positive with the same prospects.
noone said theyre easy to find your asking for a lot when buying for cashflow, but you can find good properties with stable high incomes, that even have a good chance of capital gains!
hope these ramblings help!
regards,
Scott S“Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
-anonPeter, Why did the negative prop go up in value & the others not? or am i missing something. Andy
Andy, for this exercise, I assumed that the positive property was in a country (or mining) town with a fairly static population. Thus I didn’t want to assume any capital growth.
However there are some areas where there are cashflow positive properties with high growth potential. Margaret River (WA) in the mid 1980s was an example, and has achieved growth rates as good (if not better) than the big cities. Rents there are higher now, but the prices are even more so, so most properties are no longer positive there. As some have pointed out, some Qld regional coastal areas, might still have both high yields and growth potential. But I did not want to assume this.
Peter
Peter,
The points you make are good ones. I think its reasonably safe to say that rents will rise to some extent over the next say 5-10 years. I remember in the early nineties I was paying about $150 pw in North Melbourne for 3 bedrooms which I seriously doubt I could get now.When we bought our Newport Property eight years ago, We paid $120,000, the rent was 160 pw ( previous occupants were renters. ), now the property has been bank valued at $450,000, rent would be around 300 to 350 pw. Rents have copped a battering in Melbourne but I think they will get sucked up when the new dwelling building cools a bit ( that is if and when iterest rates rise a bit ).Many say with capital Gain type property you should never sell but I think at some stage selling part of a portfolio to reinvest in high yield property is fair, That way you could invest cash rather than debt which will make the returns really good. I think a cap gain portfolio needs to be converted into pos flow at some stage either by natural growth, debt reduction , selling or developement. What do you think ? By the way I personally like cap gain property that is close to neutral gearing without the reliance on large tax write offs.
MJK
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