High yields or capital growth? Investors can have their cake and eat it too
It’s extraordinary to think there are still advisors out there telling consumers that strong capital growth and high rental yields are mutually exclusive concepts. Even more extraordinary, people pay fees for this “advice”.
A recent article in The Australian allowed a property ‘advisor’ to pontificate at length about investors buying the “wrong” assets because they offered high rental yields.
The subtext was that high- yielding properties were inferior because if they had a high rental returns they couldn’t possibly provide good capital growth and that quality assets, by definition, provided low income returns. And that quality meant expensive.
This ‘advisor’ said that sensible investors would buy expensive properties that are heavily into negative cashflow territory, requiring the investor to put in $400 to $500 a month to cover the shortfall between income and cost.
“A good property invariably has a low rental yield,” said the ‘advisor’.
This definitely gets my vote for worst advice of the year so far. Where do they get their information? Do they do any research at all, or do they simply indulge their propensity for real estate snobbery? God help anyone silly enough to listen to them.
Exiting pixieland and entering the real world, those who know what to buy and where to buy it can readily achieve strong capital growth on property that pays its own way.
Real estate investors can have their cake and eat it too. This is why the nagging debate about the rights and wrongs of negative gearing always leaves me shaking my head. Negative gearing shouldn’t be an issue because switched-on investors don’t buy loss-making assets.
They buy properties that are cashflow positive, or at least cashflow neutral, in locations with the growth drivers to provide good capital growth. Australia abounds with such opportunities.
It’s achievable in capital cities and it’s achievable in substantial regional centres with well-rounded economies and low-risk property markets.
Every year the Hotspotting team conducts suburb by suburb research for all locations across Australia to discover which locations provide the best long-term growth. We’ve been doing this for the past five years. We construct tables for the top 20 and the bottom 20 in each city.
On most occasions – not all, but most – the results show that the cheaper areas of our capital cities provide the best long-term growth rates. That’s a very general statement and behind it there are all kinds of different situations. Real estate is full of aberrations.
But it’s rare for the so-called prime suburbs to deliver the best capital growth rates. In most instances, you are more likely to find the most expensive suburbs on the bottom 20 list than the top 20 list.
I’ve often read commentators claiming that the best – indeed, the only – place to invest in Australia is prime Sydney. Our research shows that the opposite is true. Sydney is the under-achiever of big city Australia. Despite the high price growth of the past 12-18 months, Sydney still has the worst capital growth rates in capital city Australia, except for struggling Canberra.
Sydney’s best suburbs for capital growth would make the bottom 20 lists in many other cities.
By far the best growth rates (the average annual rise over the past 10 years) have been achieved by Darwin and Perth. Darwin also has the highest rents among the capital cities – which means Darwin has delivered the best capital growth and the best rental returns among the capital cities. This contradicts the notion that you have to accept a low rental return to achieve good capital growth.
The cheaper areas of our capital cities also able to provide opportunities to buy properties with initial rental yields above 6%. The best of our regional cities can deliver 7% plus rental returns as well as strong capital growth prospects.
Cairns is a great example of this. You can find yields in the 7% to 8% range in a city that’s on a serious growth path.