Australia’s decreasing yields

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Expert Advice with Todd Hunter. 05/07/2016

The downside to achieving great capital on a property portfolio is the decrease in rental yields to follow.
 
This occurs generally for three reasons:

  • supply of new housing that developers build in the way of H&L packages, units, townhouses and duplexes
  • an influx of investors buying up big to get a piece of the capital growth pie – this influx has been a lot bigger than normal lately, to the point that around a year ago, two thirds of all mortgages were written for investors. This is usually one third
  • the rents staying the same and not keeping pace with property price growth so therefore investors paying more for the property with the same rent per week

 
This occurrence continues until the market cools and starts to decrease in value. Then the majority of developers disappear and the excess rental stock is then soaked up by an increase in population. This can take a few years to occur. Once the supply verse demand ratios become normal again and we start to see a shortage of rental housing, the rents then start to increase.
 
When we graph this, the rental graph is somewhat similar to the growth graph but misaligned.
 
Now depending on where you are in your investment strategy, many investors are looking for yield. And I put myself in the same boat. The goal now is to generate an awesome income within both my SMSF and in my own personal investing.
 
Understandably Australia has many fantastic opportunities for property investing that see a combination of great capital growth and a reasonable yield. Over time your rent received per week increases to the point where you start to make an income. In the long term that positive cash flow can become substantial. Especially if you have a reasonable portfolio of properties. The downside is the large buy in, as purchase prices are considerably high.
 
But what if you have a portfolio already or simple do not care too much about growth and just want an income?
 
wHere do you find locations to invest in with a high yield, at a low purchase price that are relatively low risk. Well I found that opportunity on the other side of the world in the USA.
 
For many, investing overseas is way too risky. That’s because you feel you don’t know the market there. How do you fix that? Well, with a bit of education, your problem could be solved.
 
I have been researching the USA for over 5 years and have been investing there for 2.5 years now. Now with 7 in my portfolio, and an 8th on the way, I see this as a great way to generate an income substantial enough to replace your income.
 
Now being a bargain hunter I needed to find a location that I could pay cash for properties. I also wanted to get early in early on the property cycle, just like I do in Australia. So for this reason, my research led me to Detroit.
 
I can already hear the cringing from many of you. But didn’t Detroit go bankrupt? Isn’t the car industry in America dead?
 
Yes Detroit CBD declared bankruptcy but now almost has a commercial occupancy of 100%. And not with car manufacturer’s offices, but with many diverse businesses from all over the USA. In relation to the car industry, Ford & GMH both just had all time record years, to the point that Ford just announced a NET profit for the first three months of this year of 2.5 BILLION – yes a lazy 2.5 B’s in 3 months.
 
This type of news is sending property prices skyrocketing now. So much so that it made the top 20 growth locations for 2015. It just may top the list for 2016 & 2017. So yes, not only can you achieve yields of over 16% - yes 16% - but there will also be considerable capital growth to follow. And that’s wHy I will continue to buy more houses for myself. It’s a once in a lifetime opportunity.

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Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.


Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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