Originally published by WHICH Investment Property?
Properties marketed as having ‘dual income opportunities’ may lure investors with the promise of short-term rental gain, but they could be losing sight of the end-game.
Have you ever been attracted to marketing material promises of property delivering high yield and strong capital growth? Exciting dual-key opportunities? Two incomes from one property?
Yield is extremely important in enabling an investor to hold an investment property and creative town planners and developers are introducing new options to enable yields to be higher than the average property generally provides.
While there are positive elements to this, there are also traps that can easily be overlooked, so it’s a good idea to come back to basics when evaluating high-yielding investment options.
It is essential to stay connected to the fundamental driver behind the reason you are investing.
Property is ultimately a growth asset. There are numerous ways to invest in property and your choice depends on your requirements and the state of the market at the time you buy.
By understanding the property cycle fundamentals, we understand why we cannot achieve a high yield and high capital growth within the same property. They work in a counter-cyclical manner.
As prices rise, the gap widens between the property price and the rent achieved, as rents don’t simply rise as the value of the property does. Once the growth cycle stabilises and investors begin to feel the pain of the gap between holding costs and income, then – subject to other market forces, including supply and demand – rents will start to increase over time.
Some property types are designed to deliver a high yield such as short-term furnished accommodation, holiday letting and the like. These work very well for people looking for the convenience of furnished, short-term stays and generally are not designed to cater for long-term living and therefore do not appeal to a secondary owner-occupier market.
Our historically low interest rates are buffering the gap between price and the rental yield, so the impact of the disparity is not being as keenly felt. As soon as interest rates begin to rise, landlords’ holding costs increase and consequently put upward pressure on asking rents.
Supply and demand play an important part here. In markets that have an oversupply of a particular product type, the result is likely to be reversed. When large numbers of investors, all with a similar product to offer the market, grapple for tenants immediately after settlement, they have very few competitive advantages. The simple option is to lower the rental price to attract a tenant.
“Dual income” properties can be dual-key, meaning one front door with two lettable areas inside. One of them is generally more like a studio apartment and the other a one- or two-bedroom apartment.
It can be a house with a granny flat or a duplex on one title, where the investor buys the entire dwelling and can tenant them independently.
More recently you will find two income opportunities that present from the street as a single home, but which have two separate dwellings within, one being a two-bed unit and the other a three-bed apartment with two bathrooms. While these can command a higher yield than an average five-bed home will, often 7 per cent to 9 per cent, it is vitally important that the fundamental guidelines of buying for the secondary market are not overlooked.
If the design is compromised in an attempt to fit two lettable areas under one roof and thereby loose the appeal to an eventual owner occupier, the overall outcome may never be achieved and the investor may well have been treading water rather than sitting on an appreciating asset. The 7 per cent to 9 per cent yield is never going to make you wealthy, it is the capital appreciation that will do that.
Consider attempting to fit 2 kitchens, 2 ensuites, 2 bathrooms, 5 bedrooms, two living rooms and 2 garages under one roof, and not have tiny pokey rooms. I have seen some plans that work nicely and equally some that are disastrous. You will also generally get one with a great aspect and one that is not so great.
Generally they are accompanied with a lot of marketing that focuses more on the financials than a balance of the property and the financial outcomes.
Be sure you understand the room configurations and flow, the bedroom and living room sizes, the available storage and general finishes, the orientation and if this is a match for the demographic in the area.
While living in a shoebox may work well for those wishing to live in the city, those who live further afield may well prefer more space. Make sure you understand how many of these are in the street or subdivision. It is desirable to have a sprinkling in among traditional owner-occupier homes.
Once again, it is important to not only look at the marketing hype and the promise of a high yielding return, ensure you also look closely at the more important component, the actual property, to assess if it is compatible with the use and location it is being constructed for and its ability to deliver a long-term capital growth outcome.