Is property still a 'great' way to invest?

We have our finance in place and have been pounding the streets in the suburb that we are looking to buy in. Prices seem to be rocketing and a lot of people are just trying their luck with high prices for pretty poor houses.

What I am finding is that in our price range and preferred property type, (3 bed house, 600-700m2 block for around $300-$340k), would give a gross yield of around 5%.

We are looking at a buy & hold strategy, hoping to acquire enough properties over time, and eventually pay down the debt, so as to be able to live off the rental income.

The problem is, house prices seem to be forging ahead far quicker than the rental increases, so yield would only seem to get worse over time. Looking at how long it would take us to be able to get another IP after this one, it would seem that yields would be even lower then, and so on and so on, thereby making each subsequent property purchase more and more difficult to achieve and more costly in terms of holding due to lower yields.

For those of you that have been investing in property for along time, are gross yields cyclical? I mean, eventually is there some kind of correction and prices stagnate whilst rents increase and bring about better yields again - or have gross yields generally been in decline for along time?

What I am wondering is, with a relatively conservative approach to accumulating properties (as in only buying when we can put a 20% deposit down each time), will there still be the opportunities over the next 10 to 15 years to see as good a return as people have seen over the previous 10 to 15 years, or has property 'had it's day' as a golden goose?

We're still confident that we are doing the right thing by purchasing an IP and starting down this accumulation path, but at the same time trying to gauge how realistic our expectations should be with regard to potential income and the number of properties it would be possible to accumulate with declining yields and higher holding costs, if indeed that is the case.

Thanks.
 
we're seeing the end of that correction now.

rents have been rising thru the GFC while values have fallen.

now rents will still rise, but values will increase and rates increase, thereby reducing your yield.
 
We are looking at a buy & hold strategy, hoping to acquire enough properties over time, and eventually pay down the debt, so as to be able to live off the rental income....
Looking at how long it would take us to be able to get another IP after this one, it would seem that yields would be even lower then, and so on and so on, thereby making each subsequent property purchase more and more difficult to achieve

You are looking too far ahead. Buy the IP now and worry about #2 when you are in a position to buy again. It may take 2 years, or it may take 5. Even if you only ever buy one IP you will be making a huge difference to your future finances.

But you only climb a ladder one step at a time....
Marg
 
What I am finding is that in our price range and preferred property type, (3 bed house, 600-700m2 block for around $300-$340k), would give a gross yield of around 5%.....

The problem is, house prices seem to be forging ahead far quicker than the rental increases, so yield would only seem to get worse over time.

Gross yields now are at about their 'norms' at 5%. What happens in the cycle is that now in the boom part, prices rise and yields (as a %) fall. Then prices stagnate and rental yields go up from 3.x% back to 5% and 6%. Then you see the adverts promoting "why rent when you can buy for the same money?", then the price boom begins again and so on......same ole same ole.
 
Gross yields now are at about their 'norms' at 5%. What happens in the cycle is that now in the boom part, prices rise and yields (as a %) fall. Then prices stagnate and rental yields go up from 3.x% back to 5% and 6%. Then you see the adverts promoting "why rent when you can buy for the same money?", then the price boom begins again and so on......same ole same ole.

Would you say this trend has been going on since 1990? The reason I ask is I have vague childhood memories of Coogee apartments being around the $70k mark and rent being $300/week in the late 80's. Are the yields shrinking long term? Not disagreeing with you - just wanting to clear something in my head.
 
Someone with a chart will come along soon :D to prove me wrong, but I have been buying property since 1980 and I think (??) this has been pretty much the pattern that I have been observing since then.
 
Would you say this trend has been going on since 1990? The reason I ask is I have vague childhood memories of Coogee apartments being around the $70k mark and rent being $300/week in the late 80's. Are the yields shrinking long term? Not disagreeing with you - just wanting to clear something in my head.

Are the yields shrinking long term? I think long term, the yields are a reflection of the interest rate at the time. Yields for properties always seems to be around 2% lower than the long term interest rate eg. if interest rates are hovering around 10%, then yields in my area are probably about 8%.
 
Would you say this trend has been going on since 1990? The reason I ask is I have vague childhood memories of Coogee apartments being around the $70k mark and rent being $300/week in the late 80's. Are the yields shrinking long term? Not disagreeing with you - just wanting to clear something in my head.


As Toony said, yields do reflect interest rates a bit.

Remember that in the late 80's, with interest rates 14% to 17%, you could get 12% in a term deposit at the bank.

I too remember much higher rental yields in the 80's, and I think share dividend yields were higher too, but so they had to be, if you can get 12% in the bank.


See ya's.
 
I don't look at the yield on any of my properties compared to its current value.

I look at the yield on what I paid for it.

The reason is similar to how we view the returns on our bank savings.

People whack say; $10k in the Bank and the rate is say; 5%.

In 12 month's time, the rate is up to 8% on their $10k and guess what they say; "I'm getting 8% now".

They are still looking at the $10k and the return on it. Normal.

Yet, when an investor buys an IP for say $100k at 5% return - $5k per year, and in 7 years the property is worth $200k and the rent is up to $8k per year, they whine that the return is "only 4%".

To me, the return on my investment of $100k is now 8%.

Of course, we know that it is way higher, because I would have borrowed about 80% of that money in the first place, only used about 15% of my own money to buy it (or none if I use equity and borrowings), and claimed depreciation along the way, and the value of the property has gone up considerably. ;)
 
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I guess it's just a bit daunting when trying to envisage a portfolio of more than a couple of properties, and it taking years to get the first couple that although you 'know' that at some point you'll probably be able to afford another, it just seems unattainable when projecting current figures forward.

You're right marg4000, I really should just stop worrying about building the empire and just get going on securing this first one. We've a few more lined up to see on Saturday, but nothing that's grabbing me just yet.

This will be IP number 2 effectively, as we do have our old place in the UK which we rented out when we moved over here. It's too complicated to mess about drawing equity from that one to bring over, (not that there's any equity in it with the current crash over there), so we're planning on that house being kind of stand alone. Any profit each year will go back of it's own loan, so we're technically classing the IP we're looking for at the moment as the first IP.

Cheers all.
 
You are looking too far ahead. Buy the IP now and worry about #2 when you are in a position to buy again. It may take 2 years, or it may take 5. Even if you only ever buy one IP you will be making a huge difference to your future finances.

But you only climb a ladder one step at a time....
Marg

That is such good advice, Marg.

Hi Tony and Emma,

Try to focus on what you need and want to do now and the rest will flow as you become more comfortable with what you are trying to achieve.


Regards JO
 
In 12 month's time, the rate is up to 8% on their $10k and guess what they say; "I'm getting 8% now".

Actually, they're getting 8.4%.. as they would have $10.5k in the bank account then. And the $840 of interest they get on the 2nd year is $8.4% of the original $10k investment. That is, if you are using your method of measurement.
 
And what do people see as a 'comfortable' LVR (if the bank allows and assuming cash flow is not disastrously compromised by market circumstances)
 
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