Vital to get cash return on rental
Some places barely cover the cost of owning them. Does that matter? Susan Edmunds reports.
If you want the highest possible rental return for your property investment money, your best buys are probably in small centres such as Grey District, Buller and Waimate, new data shows.
Statistics from property research firm Corelogic show that Grey District tops the table in terms of the amount of rent received from properties compared to their purchase price.
There, the average residential property value is $229,429 and the average rent is $283 a week. That gives investors a gross rental yield of 6.4 per cent. A gross yield is simply the amount of rent compared to purchase price, without any consideration of other expenses.
In Buller District, the average gross yield was 6.2 per cent on a purchase price of $206,965 and in Waimate, 6.1 per cent on a price of $277,363.
Porirua and Dunedin offered 4 per cent and Christchurch 3.6 per cent. Auckland only managed 2.2 per cent.
‘‘The long-term trends for yields has been down, as values have outpaced rents. However, there has been a small recovery in yields lately, which some investors will have no doubt been thankful for, given the rising costs of being a landlord,’’ said Corelogic property economist Kelvin Davidson.
‘‘For the rest of 2020, I suspect rental growth will tick along at 4 per cent to 5 per cent per annum, so it’s conceivable that yields will start to edge down again shortly, given the rebound in property values.’’
Hawke’s Bay investor Graeme Fowler said one of the biggest mistakes investors made was that they bought properties with a very low yield and had to put their own money in each month to help pay the mortgage, rates and insurance.
‘‘People who do this often can only buy one or two rental properties before they run out of cash flow to cover all of their outgoings.’’
But he said it wasn’t the only thing to think about. Investors should consider the population size of a city and the type of property it was.
‘‘You might get a very good yield but the property is in a small town of only a few thousand people, or it could be cheap because it’s in a bad neighbourhood,’’ he said.
‘‘So you want to have a good balance of location, a reasonable area where there are a lot of other tidy rental properties, a property that’s post-1960s because they’re generally lower maintenance, and then the cash flow from the rent to be able to pay your mortgage.
‘‘If you can buy a fairly low maintenance property in a city with approximately 100,000 population or more and in a reasonably safe, secure neighbourhood with a yield of 6 per cent or higher, then this should make it a great rental property.’’
Property coach Steve Goodey said buyers should also consider the extra costs that came with a purchase. Two different properties might have similar gross yield but one could have more expensive insurance, body corporate fees and maintenance costs, meaning the net yield was quite different.
‘‘But getting a cash return from a property is very important because you can’t have 50 properties that cost you $2000-a-year to own each and not go broke fairly quickly. You need the cash flow to borrow more money and to pay for one-off costs,’’ Goodey said.
Property coach
He pointed out that properties in those high-yielding areas tended to increase in value less quickly than those in bigger, lower-yielding centres, such as Auckland.
‘‘The problem is that nobody gets wealthy from making $50 a week per property. You need to also make capital gains to really get rich.
‘‘Making $50 a week on a property will make you $65,000 over 25 years whereas if you bought a three-bedroom in Mt Eden 25 years ago you could have bought it for $110,000 and today it would be worth around $1.5 million.
‘‘The $50 a week cash flow is needed to make it tick over as an investment but the $1.38m capital gain is why you invest.’’
‘‘Nobody gets wealthy from making $50 a week per property. You need to also make capital gains to really get rich.’’ Steve Goodey