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Understanding yields when buying your long-term investment property

I recently had a client give me a brief for his next investment property.  One of the first things that I noticed is that is was identical to the brief he emailed me a year ago.

The problem lies in that the property market in this beach side suburb of Bondi had moved quite a fair bit over the past twelve months. Well not the whole market but rather just the cost of purchasing an identical apartment in the same location.

Example

At the time of purchase one year ago, the gross rental yield was 4.9%. If you take the most recent comparable sale in the building of a unit with the exact floor plan and the current rent that could be achieved, the gross yield is now 4.45%.

What the client had ignored was that the rental market had not increased at the same pace as the capital growth in that area. Rents had pretty much stayed the same, maybe increased a small amount. This is not always the case and as property values rate of growth changes in cycles so do the rental yields.

As an investor you also need to take into account that some areas have a greater seasonal fluctuation in rent depending on wether you are letting the property out in summer or winter.

When building your portfolio also take into consideration the amount of properties you have all in one location that can be affected by seasonal fluctuations in rent. If you do, then you may want to consider finding your next investment property in a location that will have a similar history and trend for capital growth, but where there is far less likelihood of have a significant drop in rent due to it being winter.

As part of your due diligence keep monitoring the current gross rental yields for the suburb that you like, If you know exactly what is happening then you can make a sound judgement when purchasing your next property.


By Saul Rudnick

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