Thursday, June 09, 2016

Are rental yields too low for continued investing in Sydney property?

I’m wondering if we as investors shouldn’t be calling a temporary top to the Australian property market?

I should clarify my statement here, I think too many people are overpaying for investment properties and accepting WAY TOO MUCH RISK for the yields we are seeing.

At the end of the day investors like us are “bankers” for renters, eg. we as “the investor” are allowing people choosing to spend their money (or banked time as I prefer to call it referring to delayed gratification) either because their income doesn’t allow them to save enough for a deposit OR because their lifestyle choices exceed their income at the moment in order for them to purchase permanent shelter.

At the moment my Gross ROI on property is 3.78% pre-expense and Net ROI 2.82% post-expenses (but before mortgage repayments).

Basically I am “delaying gratification” and banking my time with the view that the return over the long run is going to be greater than inflation, and the person renting from me is banking that their lifestyle choices are better served ‘for now at least’ by renting.

The problem I see is this, investors aren’t being rewarded for the risks that we take that we aren’t going to get shafted between the banks and the tenants.

Basically “property prices” are too high compared to the rental income ROI you are getting per week.
There can be two reasons for this…..too many investors OR lack of other opportunities.
There is exactly the same correlation between this and the current situation with the German bund yield or the other countries that are currently ZIRP.

It probably wouldn’t hurt if we as investors started to “underbid” the market and forced prices to go down in both dollar amount but most importantly allowed wages time to go up….and for rents to catch up to purchase prices so that the yield on property rents were paying a higher return.

Of course the natural followup question is do I pay down my current debts with the excess cash OR do I invest it into other markets eg equities which with 17 & 21 p/e….suck equally as much but this is very much a first world problem to have.

Either way I’m interested in hearing what you think.

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