The mortgage brokers at our Rockingham office have noticed that investors are back in full force. We think this is a great sign that the economy and the housing market are becoming very healthy and are nearing full recovery from the aftereffects of the Global Financial Crisis.
Why Invest in Housing?
Real estate has been a solid investment for virtually all of Australia’s history. There is no recorded 10-year period in which housing prices haven’t risen and produced a profit for those who hold on to the properties. When an investor holds a property for 20 or 30 years, there is even more profit.
However, for most investors, there are two numbers that determine whether or not they can safely invest in real estate: interest and rental yield.
Interest vs Rental Yield
Ideally, a property can be rented for more than the sum of the interest on the loan and the expenses in managing and maintaining the property. Though this doesn’t happen often, there are some occasions where the rental yield is greater than the interest payment.
Here is an example from RP Data’s Property Update for December 2013. In Brisbane, the median rent for a unit is $409 per week, which works out to $21,268 per year. The value of the median property is $386,690. The rent is 5.50% of the property value, which makes the rental yield 5.50% p.a.
If a person takes out a 95% loan to buy this property, they are borrowing $367,355. Currently, they can obtain an interest only loan for three years at a fixed rate of 4.89%, costing them $17,963 for the year. The rental income would be $21,268 for a yearly profit of $3,305 per year.
It must be noted that there are other risks and expenses in owning an investment property, such as management, maintenance, repairs, insurance and taxes. We must also note that it is somewhat rare to find a property in which rental yield is greater than the interest on the loan.
Investing may work for you. If you would like to conduct a more thorough review of your investment options, please give us a call: (08) 9527 1800.