Picking a side of the property investing fence is often challenging even for seasoned investors.
Anna Porter, property economist and principal of Suburbanite, says there are two different ways to invest, being trying to achieve a higher growth or a higher revenue return.
“The fact of the matter is there’s not many properties out there that do both. A lot of people go to firms asking for a high growth property with no deposit down, no cash injection into the property and want to achieve a really high return rental. These properties don’t actually exist,” says Porter.
“If they did, everyone would be property-millionaires,”
“What tends to happen is, the property that has the higher growth profile, starts to attract a higher rental return but on the flip side of that the properties that have a higher revenue like more commercial assets, the growth is instead a lot softer.”
By way of example, Porter says you can buy car parking spaces around Sydney airport or Sydney CBD and they’ll return a very nice 8-9 percent yield typically, which comes down to about seven percent net because of a few on costs.
“That’s a good return especially in the low interest rate environment we are in, where most people are only paying four percent if its residential or maybe five or six percent commercially,” says Porter.
“It’s a low interest rate environment at the moment and that is one thing to remember the returns on a high revenue investment especially when dealing with commercial does have a correlation to the interest rate environment as well,”
“So that’s the scenario, if you’re looking at commercial car parking spaces you get a strong yielding return.”
When Porter analysed some car parking spaces around Sydney airport, she found the growth over the last five years has only been about four percent per annum, whereas when she analysed residential property around the same area, the growth per annum has been well up around eight to nine to ten per annum mark.
“This is quite a significant differential, you could even say that residential property is almost double the growth you see in commercial assets but then in residential you’re getting about half the returns,” Porter adds.
Investors have to decide which side of the fence they want to be on, more of an income generating strategy or a growth generating strategy?
“The idea you can have both is a bit of a myth and any investment advisor that tells you you’re going to get both, is probably lying to you,” Porter claims.
“What we see in this scenario is when you’re chasing a higher yielding strategy there are a couple of things you want to look for. Firstly, how it correlates to the interest rate environment,”
“You usually will see a higher revenue return in commercial investments. So, commercial, industrial, retail will attract a higher return. You will also find it in things like car parking spaces, sometimes in residential where you have a dual key (two tenancies under the one title).”
A caution must be issued here however as Porter is seeing quite a few councils cracking down on granny flats where there are essentially two tenants under the one roofline as this is not always an approved use.
“We’re seeing this in Logan City Council at the moment as this arrangement does not meet the fire rating and can put people’s lives in danger,” warns Porter.
“So, if you’re investing in a dual key property, make sure it is actually approved for two separate residential tenancies as opposed to just having ‘granny’ live in a separate quarter of the house,”
“Don’t forget, if you’re dabbling in this space for a higher return, it can quickly be undone by fines associated with council crackdowns.”
Particularly, serviced apartments or Airbnb type lettings also attract higher returns.
“Investors must be careful here however as these can need very high engagement. You can’t just set and forget these types of investments very easily,” says Porter.
“If you choose to push out the management of the Airbnb you can be paying up to 20 percent of the fee which might be worthwhile to offload the time investment as self-managing is very time consuming and there is a lot involved in self managing an Airbnb, it’s not just a property management scenario, it’s like running a small business,”
“With serviced apartments, you own the residential unit but then lease it back to a company like QUEST on a long-term lease and they manage the night stays and you just get a return annually.”
These are very low growth assets and if the overarching management agency gives back the keys and no longer takes care of the management then you don’t have the ability to let it out privately and have to wait for another agency to take over which can be a risk in itself.
Another area you can see high yielding strategies is in regional locations outside of major hubs and major cities.
“The risk here however is in the vacancy. These are often powered by single industries like mines, manufacturing or abattoirs, so if the industry shuts down or is having some down time then that can have a flow through effect to the rest of the town,” warns Porter.
Overall there’s a few things to be cautious of when chasing high revenue strategies.
“I’m not saying not to do it, but please do go in wide eyes open,” says Porter.
“My best advice is if you really want a high yielding strategy, it’s probably better to look at commercial, industrial or retail style properties because they are traditionally high yielding as that is the nature of the asset and they still do have a reasonable growth profile,”
“Once you start getting creative and trying to make residential high yielding by looking at Airbnb, serviced apartments and all these other options, it really increases the risk as residential is not traditionally a high yielding asset and you start to introduce risk factors that can really undo your investment positions quite quickly if you get it wrong and the risk really comes into play.”
Anna advises if you want to get a high yielding strategy in residential space to look for regional areas because they are higher yielding by nature.