“The long-term trends for yields has been down, as values have outpaced rents. However, there has been a small recovery in yields lately, which some investors will have no doubt been thankful for, given rising costs of being a landlord,” said Corelogic property economist Kelvin Davidson.
“For the rest of 2020, I’d suspect rental growth will tick along at 4 per cent to 5 per cent per annum so it’s conceivable that yields will start to edge down again shortly, given the rebound in property values.”
Hawke’s Bay investor Graeme Fowler said one of the biggest mistakes investors made was that they bought properties with a very low yield and had to put their own money in each month to help pay the mortgage, rates and insurance.
“People that do this often can only buy one or two rental properties before they run out of cash flow to cover all of their outgoings.”
But he said it wasn’t the only thing to think about. Investors should consider the population size of a particular city and the type of property it was, too.
“You might get a very good yield but the property is in a small town of only a few thousand people, or it could be cheap because it’s in a really bad neighbourhood,” he said.
“So you want to have a good balance of location, a reasonable area where there are a lot of other tidy rental properties, a property that’s post 1960s because they’re generally lower maintenance, and then the cash flow from the rent to be able to pay your mortgage. If you can buy a fairly low maintenance property in a city with approximately 100,000 population or more and in a reasonably safe secure neighbourhood with a yield of 6 per cent or higher, then this should make it a great rental property.”
Property coach Steve Goodey said buyers should also consider the extra costs that came with a purchase. Two different properties might have similar gross yield but one could have more expensive insurance, body corporate fees and maintenance costs, meaning the net yield was quite different.
“Having said that getting a cash return from a property is very important because you can’t have 50 properties that cost you $2000 per year to own each and not go broke fairly quickly. You need the cash flow to borrow more money and to pay for one-off costs.”
But he pointed out that properties in those high-yielding areas tended to increase in value less quickly than those in bigger, lower-yielding centres, such as Auckland.
“The problem is that nobody gets wealthy from making $50 per week per property, you need to also make capital gains to really get rich. Making $50 per week on a property will make you $65,000 over 25 years whereas if you bought a three-bedroom in Mt Eden 25 years ago you could have bought it for $110,000 and today it would be worth around $1.5 million.
“The $50 per week cash flow is needed to make it tick over as an investment but the $1.38m capital gain is why you invest.”
Hawke’s Bay investor Graeme Fowler