Welcome to the Rentvesting Podcast, the ultimate property podcast that unpacks the facts about property. Today we’re talking about mega yields and how to get more out of your property.
In this episode we’re talking about:
- What is a yield?
- Why is it important?
- The difference between the gross yield and mega yield
- Some strategies on how to unlock that yield
- Defence Housing
- Student Accomodation
- Fully Furnished Property
We’re looking at practical ways on how to get more yield out of renovating, student accommodation, defence housing (DHA), granny flats and fully furnished properties. If you want more details to email us ([email protected] or [email protected].au) or send us a question on Facebook. We’d love to hear from you!
With property prices going up, capital growth has been in focus. However, over the long term, one thing you can guarantee is the rental yield rather than speculating on the capital growth.
What is yield?
Let’s start with a return. A return is made up of two things, the capital growth and the income that you get from an investment. That income you earn from any sort of investment is called a yield and is expressed as a percentage. It’s the dollar value of an income and you divide that by the value or price of the asset, which gives you a percent of how much yield is going on.
If you’re renting a $600k property at $500/week, you’ll make about $26,000 growth off that per year. Divide that figure by $600k and that’s a 4% yield, which is a gross yield.
Important note: Looking at gross yield can be a trap people get caught in. If it costs you a lot through the body corporate and management fees, the overall yield could be a lot lower than you think.
When the value goes up and the income stays the same, the real figure is actually going down. Over the years, with city property prices going up at a greater pace than rental income, the yield is going down. On a net yield perspective, yield could be very low. In some cases, it can even be 0.
If you’re earning $26,000 but paying $26,000 back into the property, then your net yield is 0.
Many people will say we’ve got a guaranteed gross yield at 5% but that doesn’t include body corporate etc. so be careful you don’t get caught out by this.
Interest rates have helped, but positive cash flow is the most important thing to look at when you’re looking for an investment. The yield is the thing you can forecast and control, if you try and reduce your expenses, then you can buck that yield up and increase the total return.
What are some practical strategies on high yield for residential property?
Renovations! Doing small cosmetic renovations like adding air conditioning, painting it or improving lighting. A $10,000 renovation could add $1,000 – $1,500 per year return to your property. It can also welcome higher quality tenants and a lower vacancy rate. Cosmetic renovations will get people more emotionally invested. You’d only want to go down this strategy if you’re looking at holding the property on a long-term scale.
Our tip: Go to a local real estate agent in the area and ask them to take a look and tell about what you should do to improve your property. This is a great way to make effective renovations and they’ll give you an estimate of how much extra income a week you’ll make.
This one is always in the property magazines. Basically, it’s where a property is being rented out to Australia force personnel. It’s controlled by the government and often they have very high yield but it can be built into the price of it. You could be paying 10-20% higher than the standard price of houses in the suburb to get that yield. The advantage is that you’re on longer term leases. It can be 3 – 12 years so you have security and you’re leasing it to the government which is a very strong tenant. There’s security here and the yields can be good, but you might pay higher for the property in the first place. If it’s a long-term investment, going back to the yield equation, if your percentage yield is good, it can be worth it from an income point of view. The one risk is if the army base shuts down, then that defence house may not have tenants anymore.
Student accommodation (ACOM)
Student accommodation is dedicated student properties near a university. For example in Melbourne, Carlton has student accommodation. They can get an 8-9% yield but the downside is that it’s dedicated student accommodation. So there will be adoptions to the accommodation like perhaps each room has its own bathroom. When reselling, it’s a really narrow, niche market, so it can be hard to sell.
It demands a higher income because the rooms are short term, as the tenants are usually just there for 4-6 months. They are usually a lot more hands-on; therefore, the management fees are a lot higher. So the gross yield might be great, but the property management fees could affect this.
This is where you’ll find more corporate clients who are looking at medium to long term contracts or workers who are commuting and looking to spend just five days a week in the property. With these, you get a higher yield of 8-9%, however, furniture comes at an extra expense.
The furniture gets tired pretty quickly so every 3-6 years you’ll need to replace it. Typically, this sort of thing caters well to white collar workers and inner city suburbs. The downside is the cost to set it up and the ongoing maintenance costs. Management fees are higher too because it’s more fiddly work. Emotionally, however, it’s a lot easier for the tenants. It’s like the Airbnb model, how there are cleaners and other things attached to it that cause it to be more specialised.
The granny flat
In Sydney, these are a great solution, because you can set one up at the back of your place with minimal council approval. Granny flats can significantly improve your rent income per annum. The going rate is about $80-$100k fully set up, but then if you can get another $20-$30k per year it’s not a bad return. These are a great strategy for extra yield. However, the regulations vary between states so just be careful.
- Renovations are great because they’re simple and easy to do but be wary that it might take you longer to get it a return back and you don’t want to overcapitalise.
- Defence housing: because you’re renting to the government you’ll get longer term tenancies but it might be hard when you’re looking to resell.
- Student accommodation means you can fit additional people in and it demands a higher rent, being fairly flexible. The downside is you need more deposit and it can be a limited market selling it because it’s fairly specialised to investors.
- Fully furnished comes back to the type of individual, some people want their own furniture while others won’t. If you’re going for a higher yield and it’s an inner city apartment, it works well.
- Granny flats are our favourite because it can be done in Sydney quite easily and is an easy way to add quick yield but the downside is there’s a lot of compliance and extra costs that the bank or lender might not be happy to sort out.
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