When an investment property comes across my desk, my first question is always, “What about the yield”?
It does not matter that the area is pegged for massive growth, if you cannot afford your repayments to keep the investment.
However, it is just as irrelevant to suggest that a huge yield will ensure investment success.
Over the past 11 years I have seen investors flick from growth to yield and back to growth again.
Why all the flip flop around?
Yield Vs Growth
It seems to me that most people lack an investment plan, and are following the mainstream when it comes to focusing on a specific aspect of the property market.
For example, prior to GFC, most people contacting us were chasing growth. Then GFC happened, and everyone contacting us thought there was no growth, or it would be years till there is, so they were chasing yield.
Come 2012 and the markets begin to breathe life once more. So our callers are focused on growth once more.
Let’s put it another way
2002 – 2008 – Property is on a run – investors chase growth
2008 – 2012 – GFC happens, property prices ‘stumble’ (crash) investors chase yield
2012 – 2018 – Markets stabilise, confidence returns and investors once again chase growth
2018 – 2020 – Markets will flat line – investors chase yield
2020 – 2027 – Markets on a run – investors chase growth
Yield Vs Growth – Too much chasing?
A lot of this misconception comes from the property spruikers selling property. Generally this has been negative geared property, so the only way to make a return work was to incorporate tax deductions into the equation.
As such, the focus on growth was needed to make deals look good, as they couldn’t stack up on their own merits financially (without the tax benefits).
Really, investors should not be chasing one or the other. Investors need to be buying property on purpose and with good reason. The total return of the property needs to be used to work out the performance of that property within your portfolio. (This is the return from the rent and the growth, actual and forecast).
If you are only chasing growth then you will most likely come unstuck as the factor of affordability comes into play.
If you only chase yield, you can afford to keep your portfolio but sometimes the pursuit of yield, leads you to areas that are not desirable for long term preservation of your asset wealth. Think mining towns.
Balance is what is needed. Generally balance does not and cannot come from just one property. Most of the time it will come from a structured portfolio where each property (or other asset) plays its specific role, to bring you the planned and intended outcome you want.
When buying property, buy with intent and purpose. Make sure each property meets the criteria you have set for it from the beginning, and review it annually.
Scott has been instrumental in bridging the gap between financial planning and traditional real estate transactions through his property advice model. By carefully considering his clients’ goals and planning for market changes via demographics and trends, Scott designs a future proof outcome not only specific to the client’s needs but dynamic in its execution with performance indicators and exit strategies built in.