High yields around, investors just need to know where to look

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Talk around Australia’s rental market in recent times has centred largely on falling rents and record low yields, but new research from University of Melbourne academics suggests a little bit of digging could see investors find properties that will deliver a healthy cash flow.

Rather than rely broad overview of the rental market in any one area, Dr Andy Krause and Dr Gideon Aschwanden, from the Melbourne School of Design in the Faculty of Architecture, Building and Planning, believe investors should be more specific in their search for property.

“What motivated the research was this idea of this post code’s good and this post code’s bad,” Dr Krause said.

“We said we’ll there’s a lot of variation within the postcodes between things like accessibility amenities and we thought there needs to be a different way of looking at things,” he said.

The research by Dr Krause and Dr Aschwanden consisted of analysing data on the Melbourne property market supplied by Domain Group.

Rather than rely on the traditional yield calculation method of comparing median dwelling prices to median rents, the pair decided used the data to map yields based off data that is more specific to each property.

“One part of our research also found that if you just look at the median rent compared to the median price in postcode and say that’s the yield, you’re actually greatly underestimating your yield,” Dr Krause said.

“The reason is that homes that sell are in a lot nicer condition than homes that rent. As part of our methodology, we went and mapped homes that were sold or rented and calculated yields off that. We found that when you do that your yields are actually much higher.

“Some of the information out in the market suggests you might be only getting yields of 3%, but that’s only if you look at median to median, if you look at homes that are sold and then subsequently rented then it’s often more around 4.3% or 4.5%.”

According to their analysis of the Melbourne market, rental yields in the city could vary by 4.5 times between and within suburbs.

The research claims Melbourne’s highest yield can be found in the areas of Carlton’s apartment market at 7%, while the lowest are found in the house of the city’s prestigious eastern suburbs at 1.5%.

By using their methodology to identify properties that deliver higher yields, Dr Krause believes investors will be able better mitigate any risk that comes with a property purchase.

“Yields are obviously half of the story for investors. The other half is the capital appreciation of the property.

“Bubbles are often times where people forget about yields and just look at appreciation. But if you’re a savvy investor playing the long term, then that monthly yield coming in is much less variable than the likelihood of continued capital appreciation.

“So in some ways it’s a bit a safeguard. Do we know if home prices are going to keep going up? No we don’t, especially with all the talk in the legislature and the government about that, but it’s a pretty good bet that you’re going to keep getting that rental income year after year, especially in the inner city.”

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