While some markets across Australia have actually shown price growth over the last year, the majority of them, and certainly the main capital cities of Sydney and Melbourne have seen a price correction. After five years of incredible growth, in some cases greater than 15% pa, as former Federal Treasurers have previously quoted, “it’s a correction we had to have”. For buyers, especially investors seeking not just capital growth but also solid rental yield, it’s become a market full of opportunity. So, exactly where can you now find positive cash flow investment properties?
Well let’s start with the basics, what do we mean by positive cash flow investment properties? In short, this means that the rent from the tenant of the property will more than cover the outgoings on the property as the landlord. Outgoings on the property will normally include the interest on the investment loan, other bank charges that may apply to the investment loan, property management fees, council rates and any maintenance required on the home. If the property is cash flow positive, you will find that each month your cash account will grow, rather than being eaten away by the running costs of the property month to month. In our view, it’s the only type of investment property you should be involved with.
While interest rates are in the 4-5% pa range (assuming you are geared between 80-90%), to have a truly positive cash flow investment the property needs to command a gross rental yield of 5-6% pa plus. The average gross rental yield on established properties across the Melbourne metro area, for example, was 2.8% for the December 2018 quarter, and Sydney showed a similar result. These properties will generally be negative cash flow investments (unless they hold little debt against them), hence the term “negative gearing”. Not only that, but your typical established property will not only have a low gross rental yield, but they will also attract much higher operating costs with higher council rates (in more established suburbs) and often hefty maintenance costs to fix older properties.
It’s the new properties that can be found in the outer suburbs of Melbourne, Sydney, Brisbane and Adelaide where you can find gross rental yields in the 5-6% plus range. Two key factors are driving this. One the entry price is much lower, so the upfront capital invested is relatively low and typically in the $400,000 to $600,000 price range (versus established properties commanding $700,000 to $1 million plus price tags). Secondly, the demand from tenants for 3-4 bedroom homes in these areas is strong on the back of our immigration numbers, and with most homes either brand new or less than 3 years old they naturally command a higher weekly rent.
Selecting the right investment property however is critical to not just getting a positive cash flow outcome, but also ensuring you optimise your after-tax position, and still expose yourself to solid capital growth through the cycle. At iBuildNew we like to start that journey with some education on property investment before evaluating your readiness for an investment property.
Need help getting started? iBuyNew will point you in the right direction! Whether you are looking for apartments, townhouses or house and land packages, working closely with an iBuyNew property consultant, who understands the market, will help you find something suitable that’s tailored to your needs and requirements. Get in touch with them on 1300 123 463.