Real estate: Pam Walkley
If you choose carefully, a strong rental yield will keep the cash flowing in
Forget negative gearing! It’s still possible to buy houses that more than pay for themselves. Investing in properties with positive cash flow isn’t a new concept – experts such as Margaret Lomas have been talking about it for years.
But the excitement generated by huge price increases in Sydney and to a lesser degree in Melbourne has led many people to think property investment is only a capital-growth strategy. This is far from the truth, with many investors, including some retirees, living off the rental income.
And with record low interest rates it is now easier than ever to buy properties with positive cash flow. Score a sub-4% home loan and you will find many places with rental yields well above that.
But some of these will be in areas far from major centres and may lack the growth drivers, such as employment opportunities, that will sustain tenant demand.
“The important thing to understand is that cash flow might keep you in the market, because it means you’re not financially burdened to buy a property,” says Lomas. But for a property investment to really stack up you need to buy in areas with potential.
Growth drivers are characteristics that impact positively on both yield and value, says Lomas. They include:
Population growth not just associated with short-term employment opportunities.
A diverse demographic mix that includes young people and families.
Improved accessibility through transport infrastructure and upgrades.
A strong local council with a wellthought-out plan.
A recent PRD report on hotspots for the first half of 2017 pinpoints many areas with rental yields well above 4%, especially in Queensland. Leichhardt, a suburb of Ipswich, 43km south-west of Brisbane, scored the highest rental yield of 7.5%, according to PRD, with a median house price of $230,000 and a median rental of
$330 a week. The Ipswich area has a relatively high unemployment rate at 8.48% but it does have potential. It is predicted to be Queensland’s fastest-growing city over the next 25 years, with dwelling approvals surging by 34.7% in 2016.
The state’s draft South East Queensland Regional Plan forecasts that 327,000 more people will call Ipswich home by 2041 (up from 193,000) but there will be only 65,000 new jobs. It predicts a future city of commuters who work in Brisbane.
In suburban Brisbane, Ellen Grove, 20km from the CBD in the western corridor, has a median price of $288,000, median rental of $320 and yield of 5.8%. If a proposed rail station is built in the area it will boost its credentials as a commuter suburb.
In Tasmania, Goodwood is a commuter suburb 8km from Hobart’s CBD. Its median house price is $231,552, median rental $300 and rental yield 7%, according to PRD. It is part of Glenorchy City Council, which has an unemployment rate of 10.04% and a relatively high percentage of retirees. Balanced against this are Brooker Highway upgrades, which improve accessibility to Hobart.
Warragamba, 85km west of Sydney, has a median house price of $462,500, median rental of $420 and yield of 4.7%. It’s home to Warragamba Dam, one of the largest domestic water supply dams in the world.
In Victoria, Deer Park, a commuter suburb 17km west of Melbourne, has a median unit price of $350,000, providing investors with a 4.8% rental yield, according to PRD. Home to a maximum security prison, it has direct rail and road routes into Melbourne.