Many of the home loans we process at Smartline Rockingham are for investment properties. In the process of discussing our clients’ financial situations with them, we spend a lot of time listening to their goals for their investment properties.
Some people are focused on maximising rental income while some are focused on maximising capital growth. We believe capital growth should come first but that you should never ignore the prospects of rental growth.
Statistics on Rental Growth vs Capital Growth
Recently, CoreLogic RP Data published a report indicating that rental growth has not performed as well as capital growth over the last ten years. This is no surprise to many of us on “this side of the curtain.” It is also why so many investors are more focused on capital growth.
According to the report, rent has increased across the combined capital cities by 50.7% over the last ten years. This works out to an average of 4.2% per annum. Meanwhile, capital values have grown by 72% over the same period of time, for an increase of 5.6% per annum.
Rents for houses increased by 50.3% while rents for apartments increased by 53.7%. Among the capital cities, Sydney had the highest increase with 59.4% while Perth had the second-highest increase with 54.6%.
The Purpose of Rental Returns
When you first buy an investment property, the purpose of rent is to pay as many of the expenses of the property as possible. This includes the mortgage repayments, maintenance, major repairs, property management if any, advertising for tenants, taxes and other expenses.
At first, most properties don’t fully repay a mortgage from rents alone; you will have to contribute some money yourself, meaning the property is negatively geared. This is especially true if you are paying principal and interest. However, rents will cover a sizable portion of your repayments, even in the beginning, while you wait for capital gains to accrue over time.
Over time, though, your rents will increase. Eventually, you will not only enjoy capital gains but you will find that your rents have increased enough to pay for your property with a bit left over, including strata fees, insurance and council rates. This means your property is positively geared.
By this point in the game, you are making profits from rents, you are gaining equity due to your loan repayments and your home is rising in value. If you are a retiree, this is a “dream scenario”: You are receiving income monthly while you have the option of selling at any time if you need more money.
It’s a Long Term Strategy
It is extremely difficult to have a property that is positively geared right away. Many investors start out with interest only loans and don’t start paying principal until the property will be positively geared. This is OK but varies from person to person because everyone’s situation is different. Also, it’s dependent upon how good your mortgage broker and your credit are.
We can’t recommend one strategy for everyone because everyone’s finances are different. Consequently, advice is given only on an individual basis. However, we can find out how much capital you are qualified to borrow for investment properties.
Some people use interest only loans for most of their investments. Some use them at first and they refinance later. Some start paying on the principal right away. What’s important is that you have a long term strategy that will take you to retirement with the resources you need to live the lifestyle you want to live.
Talk to a Home Loans Broker at Smartline Rockingham
It all starts with your home loan. At Smartline Rockingham, we are trusted mortgage brokers in the Rockingham area. After we get some basic information from you, we can figure out which lenders are likely to be the most “friendly” to your economic profile. Then we can find out exactly what is available to you, talk to you about it and work together to figure out what is right for you.
To learn more, call us today: (08) 9527 1800.