Checking out Sydney auction results today (out of habit as we’ve just bought our last IP so out of the market) and came across this result for $781,000 – http://www.domain.com.au/for-sale/10-18-noble-street-allawah-nsw-2218-2012077582
warning warning — Danger Will Robinson — warning warning
This is getting nuts in the St George area, this place will rent out for $550pw.
So you are only looking at 3.6% gross yield (and that’s self managed eg probably closer to 3.4%).
When you add in 5-6k in strata/council/water/insurance fees you are now looking at 2.8% and that’s BEFORE calculating interest rates at 4.5%………
Going to be some absolute bargains in 2017-18 :)
Hi Dean
You have touched on a critical point with investment property selection. For a property at this price (presuming there is a mortgage over it) to be covering its own costs, it would have to have a pretty extraordinary rent price tag. Folks that can afford such a weekly rent would likely think “I’d be better off buying my own home than rent”. Thus why the yields tent to get paltry as the property price gets right up there.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Jacqui,
That’s the beauty of compound interest….eg over time ALL investment properties should cover their costs eg initial sales price is “fixed in time” and rents keep going up…….
Hi Dean
In theory yes.
However imagine you take on an investment property that has a cashflow position that places you $150 out of pocket per week in the first year of ownership. Assume that the rent can generally be increased $10 per week in that area. That’d be a whopping 15 years before that property were covering its own costs, provided none of the bills went up in the meantime (eg council rates, insurance etc), which we know will not be the case. Bills go up.
Thus the importance of being crystal clear on available income to support mortgages, life circumstances, desired outcomes, timelines etc. Otherwise a property can be a serious ball and chain for an investor trying to hang on by the fingernails.
Most folks can afford to support a mortgage by a small amount each week, thereby allowing them to accrue some savings from the leftovers of wages to save for subsequent properties, or contribute towards debt reduction, thereby improving the cashflow of a property due to the debt reduction leading to less interest charged.
So often we see people that thought that “getting themselves some negative gearing, you know, for the tax savings” is what they need to do. And their only plan is to hedge their bets that the property will go up in value and make a killing for them. The lack of the presence of a plan B is scary. There always needs to be a plan B. Plan B could be “I will hold onto the property and its rental yield will provide a portion of my living expenses requirements”. Plan B could be “I will renovate the property to place it into a higher priced market”. But if there is no Plan B things can get messy if Plan A doesn’t work well.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Jacqui,
15 years for rental shortfall is way way too long.
Even with the current “muddling” rental increases in Sydney last year of only 3.5%pa your example of $150pw shortfall on a 600k property renting at $460pw the increase would be $16 pw this year.
I good years where rent is racing up, it should be closer to double that.
Eg you should have made up the shortfall in 7-10 years where the property at 80% IO mortgage is paying for itself completely due to rent rises.
The real issue is will investors OVERSPEND like they did in 2014/15 and the initial shortfall is way way too much.
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