As rental increases fall further behind rising house prices, more property investors are feeling the pinch when it comes to adequate cashflow to sustain their housing portfolios.
Thank goodness for our virtually all-forgiving, ongoing low interest rate environment, which has kept holding costs relatively affordable, even as yields decline.
According to the latest CoreLogic data, many investors are counting their blessings if they can manage a 1.5 per cent return on their rental property at present. National yields have dropped by 23 per cent in the past five years, with up to 30 per cent declines in some of the major capital cities.
Investors already staring down the barrel of rising retail rates on their mortgages are no doubt starting to lose a little sleep right about now, as out of pocket expenses continue to rise, whilst their income stagnates.
Data from the ABS Census shows that in five years to 2016, Australia’s median weekly rent rose from $285 to $335, or 17.5 per cent.
While most property experts will suggest you should be focusing on capital growth over short term yields anyway, the fact remains you still have to be able to hold onto your assets long enough to enjoy that value growth.
So what should investors keep in mind when it comes to consolidating their cashflow in these changing rental markets?
One goes up, while the other goes down
The supply/demand equation is what ultimately sets the benchmark when it comes to market values – both in terms of purchase price and rental achieved.
When there’s a lot of buyer activity pushing up property prices due to heightened demand, rental yields naturally fall because they show as a percentage of the property’s value.
Hence, when values rise by double digits in some neighbourhoods, but rents only increase in line with CPI adjustments of maybe 2 to 3 per cent maximum, we see a natural lag between the two.
Investors would do well to come to terms with this pattern of cyclical give and take growth between short and long term returns, accounting for such fluctuations in their financial forecasting and investment approach.
Keep on top of the markets
When conditions make it tougher to realise higher yields and a sustainable income from your property portfolio, it’s a good idea to ensure you’re achieving the best possible returns.
Establishing a fair market value for your rental property involves a similar process to deciding how much your house should sell for, or how much you should pay for an investment property. In other words, it takes a sound knowledge of the local real estate scene and considered analysis.
This is where an experienced property manager can be incredibly beneficial. Just as an independent buyer’s agent can guide you in terms of true market value, or a real estate agent provides the vendor with a list of comparable sales, a property manager will know their market intimately and set rental prices accordingly.
They also have access to statistical and market data that’s not freely available to the general public, including comparable properties.
Head over heart
Understanding your tenants and the market fundamentals in your area, will ensure the rental price on your property strikes that all important equilibrium; between what you need in order to sustain a sound cashflow position and what tenants are prepared to pay.
Given that you have a substantial vested interest in how much rent you want and/or need to achieve in order to make the mortgage repayments on your property, finding that balance can be challenging for investors. And if you ask more than prevailing market conditions suggest is reasonable, you risk alienating your ‘bread and butter’.
Remember, ‘top dollar’ is attained via a combination of two things – consistent tenancies and consistent returns. In other words, you’re better off having your property rented out for 52 weeks of the year at $500 per week and achieving $26,000 total rental income, than to risk 4 weeks vacancy chasing an extra $20 per week and only realising $24,960.
Don’t panic yourself into a corner whereby you cut off your nose to spite your face.
Due diligence
To undertake your own rental appraisal, start by identifying at least 3 to 5 comparable properties – dwellings of a similar size, with similar features in the same vicinity, and do a general stock take of what’s available as you check out the competition.
Seek advice
Ultimately though, the advice you receive from a property manager at the outset, along with ongoing guidance through annual rent reviews, will always hold more weight over empirical data, because they live and breathe your tenant market, not just the numbers.
A property manager can provide advice as to any cosmetic improvements you could make to your property in order to gain a higher rental price too. So although it might come at a small (tax deductible) cost, there’s no denying that consulting the experts could mean the difference between struggling to make your monthly interest repayments and maximising your rental income and investment cashflow.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).