September 20 2023
"How can the state of the rental market influence our buying decisions as property investors? Learn more below."
When it comes time to buying an investment property there is so much to consider, from capital growth potential, yields, to comparable sales.
But novice investors might overlook the importance of the state of the rental market. When it comes to investing in a property market you need to take a step back and consider the perspective of a tenant.
It is true what the news reports keep telling us, that the rental markets across Australia are at crisis levels and if you are looking to secure a tenancy, it is becoming increasingly difficult and expensive.
If you are a landlord, this is an advantageous time to increase rent and you are likely to have negligible vacancy times between tenants.
For a property investor, a booming rental market means their property is more lucrative, with a higher rental yield and strong cash flow on their property. But keep in mind that the rental market fluctuates greatly and is highly dependent on rental supply.
So, if you have a house near a new development of high rise apartments, the supply of rental properties will greatly increase at the end of the development and might bring down the demand for your property and the asking rental price.
When you are looking at the rental trends in an area, there are a few important factors to consider.
Here is a collation of the top rental trends to look out for are, and what they mean for your investment property.
Rental vacancy rates
Look to invest into locations that have less than 3 per cent rental vacancy.
This statistic means that at any given time, the average number of rental properties that are vacant is 3 per cent.
Investing in these areas means it is likely your property will have tenants leasing your property as well as a lower vacancy period between tenancies.
In fact, many areas we buy properties in have an extremely low rental vacancy rate of less than 1 per cent.
When investing into these areas you are likely to get a higher weekly rental income as well as minimise the rental vacancy times, which is important because when your property is vacant, you aren’t receiving income from your investment.
Percentage of owners vs renters locally
When buying an investment property, we look at the percentage of property owners and renters within the area and the street.
I use the 70/30 rule with a minimum of 70 per cent being owner occupiers.
The higher percentage of owners indicates that it must be a desirable place to live, providing greater potential for capital growth because there should be strong demand for your property when it comes time to sell.
This also means you will be able to achieve a higher rental amount because you know people want to live here.
For example, mining towns and areas that have a high number of fly-in fly-out workers would typically have a high rental population percentage.
Rental yields
The rental yield for the property is the amount of weekly rent achievable compared to the property’s value. It allows you to compare properties of differing rental amounts and purchase amounts.
Ultimately, the yield tells us the cash flow of the property and the ‘gearing’ of the property, which is also dependent on what debt an investor has against the property.
To achieve a better gearing, the higher the rental yield would mean the better cash flow. It is important to understand that the yield on the property is only the cash flow and is not a measure of the potential capital growth of a property.
The yield is a measure of the short-term gains from the property.
Source: Australian Property Investor