What is a good rental return for Sydney's North

From: Always Learning


Given current market conditions what is a good rental return for a freestanding house on a good size block of land in Sydney's Upper North Shore (Lane Cove and above) ? Is 5.5 ~ 6.5% possible, with a little bit of imagitative renovating/capitalizing? Would anyone care to nominate any "area" or "market segment" in Sydney's North Shore which I could expect better than average rental returns?
 
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Reply: 1
From: Rolf Latham


Hi AL

I have two clients with freestanding houses in the Narabeen Area (yeah ok ist northern beaches not Pymble) maintaing 600 a week for props in the 550 to 620 mark, so round about the 5 % is not unusual. I have seen marginally higher than that into low 6s but youd be having to look really hard.


Ta

Rolf
 
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Reply: 1.1
From: Jeremy Laws


Commercial property in lower north shore is tarding on a 3-4% yield, and in some cases thats even too high.
 
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Reply: 1.1.1
From: Always Learning


3% Ouch! maybe in such cases the the term "commercial" property shouldn't be used; "speculative bubble" springs to mind!
 
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Sim

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Reply: 1.1.1.1
From: Sim' Hampel


I have seen many examples of stand-alone houses in Artartmon selling at less than 4% yields.

Examples include a property which sold for $700K, struggling to find someone to rent it for $600pw (rents dropped weekly for about 8 weeks until someone rented it).

Another property which sold for $850K took 12 weeks to rent, and last advert I saw was asking $650pw.

Funnily enough, I've seen property sell for over $1.25m in the area and rented for $1400pw - but these were done up really nicely and probably attracted the corporate rental market.

sim.gif
 
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Reply: 2
From: KJL .


Hi AL

I note from your profile that you're in Tokyo, so I don't know how on top of the Sydney market you are. We bought last year on the peninsula - on the northern beaches, but we also looked at the Pymble up to Turramurra / St Ives / Wahroonga areas as well - and have friends who are now doing likewise.

Despite the fact that everyone said the market was 'hot' then, if anything it's now even hotter. There are stories in the paper (and not just agents talking up the market)of people queueing down the street to see open houses, as well as other plenty more tales of a market gone crazy.

Buying our home that we're going to live in for several years is one thing, but you should exercise great care looking for an investment place in Syd's upper north, if that's what you're planning to do.

I have no concrete figures and no doubt there's people on this forum who can provide better info (eg re: affordability, stage of the cycle etc) but my feeling on the ground is that the market simply CANNOT keep on going up like it is, and that now might not be the best time to invest there.

Just two cents from someone who lives there, but feel free to shoot me down!

KJL
 
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Reply: 2.1
From: See Change


Having sold in pymble and bought in wahroonga ( PPOR ) late last year I would dispute the fact the market is hotter now than then.

From my observations the peak of the market occurred around sept and did briefly stall however is now strong again . Good houses in good areas which were previously selling within 2-3 days are now taking 2-3 weeks and mediocre properties which were selling with in 2-3 weeks are now on the market for considerably longer. I'm seeing numerous to let signs as I drive around.

From my observations the middle suburbs eg roseville - gordon / pymble have gone up more in the current cycle than turramurra / wahroonga and this was one of the reasons behind us buying in that area.

I also know of some properties that are renting to "executive rentals" that are returning higher rentals , however this is a small area and have heard that this area is shrinking ( though I have no info to confirm this).

see change

it's better to be guided by your dreams than your fears
 
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Reply: 2.1.1
From: Mark Pardi


Unfortunately with lots of experience and research on board in our office 3% and 4% is all to common in these areas

tremendous capital growth however over the past 2 years in certain parts of those suburbs
 
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Reply: 2.1.1.1
From: Always Learning


Thanks everyone. Indeed Sydney's North is a very interesting market.

<ol>

<li> Sydney's North I believe is one of the greatest places in the world to live (As a Melbournian it pains me to say that!). Long term holding of quality IP I believe will be rewarded with well above average returns and CG.

<li> Very common recurring theme by many successful IP investors is "Make the profit when you buy", "Don't overpay", "Don't buy in a market frenzy", "don't buy during a boom".

<li> When I hear the phrase "Great capital gains have been made over the last few years" I think "thus what is the chance of it continuing at such a level"

<li> Returns of 3~4% on the back of "great capital gains have been made in the last few years" to me indicate I could be part of the 80% of IP herd who buy wrong time (after the profit have been made).

</ol>

I know I shouldn't think of "reasons not to buy" but focus my energy on "ways to buy". Its just too easy to find a reason not to buy and then do nothing.
 
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Reply: 2.1.1.1.1
From: Waverly Bay


Hi Always Learning

I invest in the north shore - although primarily the lower northshore.

My observation with the sydney north shore is that the type of buyer running amok at opens is not your typical mug investor. They are "typically" either professionals on decent and stable $$ and/or have the blessing of dual incomes.

So don't expect a wicked canage when interest rates move up a few percentage notches. It will take a big jump in int rates to knock the stuffing out of your typical north shorie. Right SC and Sim? ;)

You indicate that "prices are hot " blah .. blah - but the last 5-10 years have seen a 7-10% p.a increases in most suburbs on the upper north shore (per residex). Small bickies when you compare it to say mosman houses which can get into the 15-20% plus (no exaggeration).

Back to you original question - i think the upper north shore is a GREAT place to live, but the sub performance yields (3-4%) has never made it appealling to me personally as a straight out IP market. H/ever, subdivisions and flat add ons could well be a profitable venture in this area.

As rolf said, northern beaches represent one of the last bastions of 5% yields (although sadly, getting rarer too !). There are some excellent suburbs outside of Dee Why and as far out as Newport.

Cheers

Waverly
 
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Reply: 2.1.1.1.1.1
From: Michael Croft


Here's something to contemplate and cut to pieces please.

I have noticed over the decades that the average to good IP in and average to good location in average to good condition returns about 1 - 2 % BELOW the prevailing interest rate. As this is hovering around 5.5% it is no wonder that returns in these areas are currently 3.5 - 4.5%.

Now there is a time lag with this so that as interest rates fall and for a brief period (window of opportunity) the yields (rents divided by purchase) will be neutral and sometimes go into positive territory. But invariably the yields settle back to 1 to 2% below the average borrowing rate of the day.

The reverse applies when interest rates turn up as they are about to do. The neg geared properties become increasingly so as the rental lag bites.

Michael Croft
 
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Reply: 2.1.1.1.1.1.1
From: Owen .


I like it Michael. I just did the numbers on my properties as at purchase time (over the last 3-4 years) and the difference between yield and the interest rates at the time was spread between 1.1% and 1.4%.

If I do the figures based on the current values, current rents and current interest rates then the figures are spread between 1.5% and 2.5%. This is because I locked a few loans in about 9 months ago and rents have dropped a bit while the values have rocketed. Less return compared to the rates I have on the loans. Capital growth has been between 18% and 29% across all my properties in the last 12 month though according to bank valuations.

As part of the selection criteria for good capital growth IP's I think your theory is a good one and you comments on the lag between rises and falls will hold true too.

Good stuff.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.1.1.1.1.1.1
From: Always Learning


I just love Mosman, indeed either Mosman or Balmoral rates as my #1 place to "live the good life", I lived in Mosman's Shadforth St for a couple of years, way way back when my wife and I were DINKS and a semi was only $500K. (not that we could have afforded a mosman semi back then)
<p>
My understanding is that "land value" of lower north shore has never suffered a fall in price.
<p>
To be honest, I don't think a "bust" in Sydney's North will result in blood in the streets like the Gold Coast crash many years ago, but a 2% rise in interest rate, I believe will reduce the frenzied competition a little and maybe open up more opportunities. So maybe rather than a "bust" the term "rationalization of the market" could be used.
<p>
 
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Reply: 2.1.1.1.1.1.1.1.1
From: See Change


Waverley

re your comment

"So don't expect a wicked carnage when interest rates move up a few percentage notches. It will take a big jump in int rates to knock the stuffing out of your typical north shorie. Right SC and Sim? ;)"

On the basis of my observations I actually disagree with this. I've lived on the north shore for most of my life since 69 and have seen several cycles come and go. We bought in late 93 and spent several months looking prior to our purchase in pymble. Although I didn't recognise it at the time I saw several bargains / distressed sales. There was the property in Pymble Ave for mid 600's. It had sold for over 1 mill in the previous boom and would now comfortably go over 2 mill. It was a NICE house.

In Gordon a house that sold for 550 in 89 went in the 300's in 93, now worth ? 800-1 mill.

When I read Jans book "story by story " the one that I could recognise most with was the lady who had an income of ? 200K but because of the mortgage / car payments / private school fees couldn't afford an investment property. There are MANY people like that up in the north shore.

If the economy turns down and people loose jobs there will be as many "bargains" to be bought on the North Shore as anywhere else in sydney.

see change

it's better to be guided by your dreams than your fears
 
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Sim

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Reply: 2.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


I don't know terribly many people who live on the north shore, let alone those who invest there, but I would have to agree with SC to a certain extent... I have seen a number of examples of people moving upmarket to a property on the north shore or northern beaches because they discovered the bank would lend them an extra $100K all of a sudden.

There are several distinct sub-markets in play on the north shore I think. I would agree that in general, the $1mil+ market would be dominated by old money, inheritences, 30 year+ owner occupiers and corporate rentals... which to me means that a sudden 2% increase in rates would probably not have terribly much impact on these people or this market.

However, there is a strong push from the DINKS and the "gotta live in a nice area" and the "gotta live by the beach" type people who will borrow that extra $100K they can afford when rates drop 1%, and who may run into difficulties when the rates rise again. Hmm... maybe they'd need to sell the beamer or the TT roadster to cover some of that servicability shortfall... actually, nah - they'd never sell the car ! It was probably leased anyway.

sim.gif
 
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Reply: 2.1.1.1.1.1.1.1.1.1.1
From: Gordon Austin


I have found that some of the elderly people who have lived in these types of areas for many years eventually have to leave their home because the rates alone become too expensive for them. This is especially so where the parcel of land is relatively large.

GA
 
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Sim

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Reply: 2.1.1.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


oooh, oooh, pick me ! pick me !

sim.gif
 
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Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1
From: See Change


Sim

re you comment that the mill dollar plus market being dominated by old money , from my observation this is not the case. The people I know who are buying these houses are either couples where one person is on a very high wage or has received a large redundancy pay out , or where both partners work and make on average > 200K each.

see change

it's better to be guided by your dreams than your fears
 
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Sim

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Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


SC, I was more referring to the properties that are NOT on the market and haven't been so for many years.

sim.gif
 
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Reply: 2.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Waverly Bay


SC - I notice that your observation of bargain deals of the "gory blood and guts" variety (ie 50% of purchase price) in the north shore seem to centre primarily around the heedy days of the late 80's when interest rates were in the high teens. I agree that should interest rates move to similiar levels today, we could well see a similiar carnage in the property markets that you observed in the late 80's - not just in the north shore of sydney, but presumably in most australian markets.

Perhaps it was not clear in my post, but my point was that I could not see the north shore of sydney collapsing if "interest rates moved up a few percentage notches" - ie in numerical terms to 7-8% rates. It was just under 18 months ago that interest rates were in this 7-8% band - and there was no carnage back then. Admittedly, household debt as a proportion of disposal income has increased in that 18 month period - so this time around, the 7-8% could well be painful for some. Still, carnage of the 89 order? Me thinks not on the north shore. Some on the northshore, like elsewhere - will feel the crunch and bail out under cheaply - but a wholesale emasse exit would be a rather extreme situation. Off the plan ghettos like Waterloo maybe different.

Opportunties to purchase good value properties will no doubt abound in an environment of higher interest rates (compared to the present) - but some on this forum would argue that such opportunities will abound irrespective of the market conditions and interest rates !

Cheers

Waverly
 
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