BUY TO LET CLEVER INVESTMENT?

There’s something enormously satisfying about owning a property as an investment, and if you do your homework well and buy cleverly, this could be the smartest move you’ve made. Should you be considering rental yield, capital growth, or both? 

For most of us, the title ‘property investor’ tends to imply volume and special skills, but for so many people who love the bricks and mortar solidity and tangibility of property (over any other kind of investment), it could be a little bachelor apartment which puts you into the property investor category. But skills you do need, and they’re easy to acquire – it’s all about homework and a few sums. 
There are certain boxes you need to tick in order to give yourself and your property the best chance to work as an investment.

Capital growth or rental yield? That is the question. You might prefer to concentrate on one over the other. If you focus on rental yield first, then – as long as you aren’t under pressure financially to sell early or sell at a poor time in the market cycle - capital growth should follow.  Myles Wakefield, CEO of Wakefields Real Estate believes firmly that the conservative approach to Buy-to-Let investments is the sure way forward - you don’t want to subsidise your investment, so look at rental yield first...and last.  

Rental yield is the rate of return from an investment in terms of net rental yield.  The sums? To calculate the approximate net rental yield, and work out how viable an investment decision is, subtract annual expenses from the annual rental income, and divide this result by the total cost of the property. Multiply the result by 100 for the net rental yield percentage.

Investors who focus their attention on rental yield (and not capital growth) normally consider their investment as a top up of their existing income, or – particularly retirees - use this property investment to create an income.  Ideally, in this situation, you should be looking to pay off that bond as quickly as possible. If you achieve that, you could consider buying smaller properties at the less expensive end of the market – you may be able to build a portfolio of several properties over time.

Do your homework. Make certain of the rental that is achievable for the property. Scour different surburbs – look for up and coming ones – investigate proximity to tertiary/schools, access to transport links and of course, find out what rentals are being achieved in that apartment block and whether there is a steady demand (is the block always full?). The type of properties often worth looking at are older properties in areas due to undergo significant change and upgrade, or larger properties, perhaps not so central, but with a strong demand from tenants.

If it’s a sectional title complex or block, check out the body corporate rules, and read up on the recent AGM meetings to find out about the block’s finances and whether any special levies are on the cards.  

The rental you charge needs to cover all your expenses, from your home loan and levy, to estimated maintenance costs. You don’t want to subsidise this apartment, and you do want to be able to have an annual increase of say 10 percent. 

If your focus is on capital growth - the amount by which proceeds from the sale of a capital asset exceed the original cost – you’ll also be looking at ways to boost that capital appreciation by upgrades/renovations to the property. Typical properties which suit this end-goal, are those priced under current market value but in a popular location, those with potential for development or refurbishment and will sell well, as well as newer properties in commutable distance of a vibrant business area. 

Generally, investors focussing on capital growth, are those funding their retirement, supporting children or looking at better ways to beat poor returns on savings. These investors consider their investment over the medium to long term - a minimum of five and preferably 10 to 15 years, and - if necessary - are likely to put down a larger deposit to ensure bond repayments are covered by rental income.

As a general rule, both capital growth and rental yield are important, and consideration should be given to both. Understanding what both can achieve enables investors to plan how long they wish to hold on to their investment before selling it.