How Sydney investors are battling weak yields

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As Sydney's rental yields remain on the weak side, investors are adding amenities to improve their potential returns, according to the latest study by Herron Todd White (HTW).

Citing figures from SQM Research, the HTW study said average yields for houses in Sydney fell from 3.7% in 2009 to 2.8% this year. During the same period, yields for units decreased from 4.9% to 3.7%.

In order to help boost returns, investors are taking advantage of granny flats. The report said properties with granny flats have increasingly been popular amongst larger multi-generational families and investors wanting higher-yielding properties. 

Also read: New Property Hotspots To Emerge In Sydney

The strategy of building granny flats has also become popular amongst mum-and-dad investors who would like some assistance in paying their mortgages or to provide some extra income for retirement.

"An example of this higher return is a brick three-bedroom, one-bathroom dwelling renting for $430 per week in Colyton with a detached modern two-bedroom, one-bathroom granny flat rented for $300 per week. This property recently sold for $660,000, reflecting a gross yield of 5.75%," HTW said.

However, due to this healthy appetite for higher-yielding properties, many buyers are willing to turn a blind eye to unapproved structures such as garages, storage areas, and primary dwellings illegally converted into self-contained flats.

"Unfortunately for them, valuers don't turn a blind eye to these modifications and appropriately risk rate and comment regarding these unapproved works," the report said.

Read more: A Clever Trick You Didn’t Know Could Triple Your Rents

Another emerging way to maximise potential yields, particularly in the high-rise segment, is to invest in dual-key units.

This trend, which is popular in Western Sydney, involves purchasing a property with a one or two-bedroom unit upstairs and a self-contained studio downstairs, each with a separate access.

"The dual key market experiences more limited growth compared to the broader market due to the unconventional floor plan limiting broad market appeal, the restrictive lending policies of some banks to this asset class and changing lending policies towards investment properties by financial institutions," HTW said.

Depending on the specific needs of each investor, it is also feasible to go after units within smaller-scale developments.

The report said going after entry-level Torrens-title properties such as terraces or free-standing dwellings allow investors to avoid paying high fees for shared facilities. This also opens up opportunities for renovations.

"Smaller-scale unit developments and Torrens title properties also tend to have stronger capital growth over a long term period," HTW said.

Check out YIP Talk’s latest episode where we teach investors how to spot a growing property market.

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