Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

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Cameron McEvoy

6 November 2012

Rental yield most important in down property markets

Rental yield most important in down property markets

Rental yield in the property industry is a very important thing. It can mean the difference between having a successful, thriving portfolio and holding property that is as fragile as a house of cards. The Oxford English Dictionary defines "yield" in many different ways. The direct (and most obviously relevant) to property investing, is this one:

Yield: noun; the income produced by a financial investment, usually shown as a percentage of cost.

Yield can also be defined as a submission to a greater influence:

Verb; the income to surrender or submit, as to superior power

A very different use for the word, but still appropriate in the property industry, in that, sometimes you must surrender to market conditions and reassess other ways to stay afloat during the harder times.

Yield is effectively the percentage return you get, month in, month out, when holding investment property. It is the day-to-day revenue coming in after your running expenses (mortgage, managing agency fees, repairs and maintenance, etc), are deducted. It should not be confused with capital growth. This is defined as the difference in market value of an asset from the time of acquiring it, to the time of selling it on. So in a utopian world, any investment property or portfolio of properties would achieve both; supply the owner a stream of revenue whilst holding it (yield); and then providing a lump sum of revenue in the form of return when selling it on later in life (capital growth).

The reality is this isn’t always readily achievable. Market conditions, along with a barrage of complex variables in the marketplace at any given time, can upset or confuse the degrees of yield and/or capital growth that a property can deliver. As many of you are well aware, we are facing particularly challenging times in Australia in the last couple of years, during which capital values in some markets have remained flat.

This has happened before and will happen again. Property goes through cycles, and this occurs on both micro and macro levels. This means there is a general nationwide cycle, full of peaks and troughs, grouped and classified by averaging out the record-ble figures on a national scale. But then there are micro cycles, in which specific states, cities and even individual suburbs can also go through their own peaks and toughs.

The variance of say, one particular suburb can produce seemingly contradictory and mixed messages about what stage of a cycle a market may actually be in. On average, a full property cycle, from upswing (increasing values) to peak (values at the highest possible range) to downswing (values cooling) to stagnant (values bottomed out) typically lasts around seven to 10 years.

 

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