The Basics of Property Investment 3 Part Series – Part 2
In this 3 Part series you will learn the basics of Property Investment…
HOW DO THEY WORK?
While not all property investments benefit from a component of both capital growth and yield, many strike a balance between the two. It’s this trade off that ultimately affects an investor’s strategy and outlook.
If you’re a cash flow driven, high income motivated investor, you’ll happily choose investments geared towards maximizing rent – for example a block of flats or purpose-built student accommodation. These investments often have good returns but their capital growth potential can be limited. There might be a hospital or university nearby to feed plenty of tenants towards your investment property, but there are probably hundreds of similar dwellings in the area to choose from. That’ll keep prices down.
Paul Reid has provided his take on some factors that drive yields.
For one, Reid considers employment generators or new infrastructure sure signs of yield growth. He also believes savvy investors learn to recognise what tenants want and avoid what they don’t.
“The cost of the property has a big impact on the yield,” he says.
“A lot of people make emotional decisions about the type of property they buy or build for investment and as a result they spend too much. We’ve found over the years that people generally pay rent for the bedrooms and you don’t get substantially more rent for a larger backyard or an extra lounge room.”
Like most aspects of any market, yield is supply and demand driven. These property investments are often purpose-built for tenants and located in an area of high rental demand. They also tend to be reasonably priced because buyers recognise the potential for strong capital growth is probably not great.
For example, many regional areas enjoy good rental returns for a low entry point but their growth prospects might be limited – particularly if they’re relying on a single industry base for local employment.
However, if you can cop the prospect of limiting your income stream in favour of a better promise of strong capital gains, perhaps a more traditional approach such as ‘the worst house in the best street’ might be to your liking.
Once again, this is supply and demand driven but it’s often the result of limited available supply due to a lack of development prospects. It’s also usually associated with a more dominantly owner-occupier market.
For example, high growth investments are common in inner-city suburbs with limited new dwellings and ready access to services. Property with an opportunity to improve value – say a renovation project or splitter block – is well viewed in these types of locations.
When it comes to key drivers of capital growth, Reid sees a direct correlation between developer activity and population growth.
“Developer activity is a long-term consideration as it influences the number of houses available for occupation, not just how many are changing hands this week,” he says.
He also thinks buyers should be wary of localities where there has been recent strong price growth, as developers will notice this and their activity – and subsequent supply – will increase. Unfortunately there’s sometimes a lag with this and an oversupply situation can occur.
If you missed Part 1 – You can read it here…. Part 3 is available HERE…
Any advice provided in this publication should be considered General Advice as it does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate for you and whether you should act upon it.