The long-term cost of yield chasing
According to one expert, investors with tunnel vision for high rental yields are missing a trick to build wealth and boost their portfolio.
Speaking on a recent episode of The Smart Property Investment Show, Arjun Paliwal, director and head of research at InvestorKit, explained to host Phil Tarrant that chasing yields can prove costly in the long term.
“Naturally, what investors tend to do; they try and look for ways to chase up this cash flow loss or a slight gain to make it a bigger gain and end up just looking for some very high-yielding markets,” Mr Paliwal said.
Such a method is “not the way to go, in our opinion, only because yields forever change”.
Outlining how property investors often update their search criteria based on “certain yields they want to hit”, he advised that in doing this, investors drastically reduce “the number of markets that you can possibly look at to buy goes down, because there’s only so many locations that have a high yield”.
“Now imagine you’ve cancelled out a few locations just because you need to hit this bullet point. And these locations could have outperformed on capital growth, or they might actually end up with better rental yields four years later, or two years later because their rental pressure was higher,” he said.
In his eyes, it’s a misguided strategy, not least because rents rise over time and subsequently cause yields to increase, therefore meaning a property that was previously excluded from an investor’s mind due to a yield of, for example, 4.16 per cent has the potential to rise to 4.5 per cent to 5 per cent.
To rationalise this statement, Mr Paliwal cited how two years ago, comparing Wollongong and the Southern Highlands would have revealed that Wollongong’s rental yield was stronger than that of its inland counterpart, yet, fast forward to the present, and off the back of strong rental growth in Southern Highlands, its rental yield has overtaken Wollongong’s.
“The key thing is we really don’t want to go chasing a certain metric to try and make your search very condensed because you end up losing the number of cities that you could be looking at to get the best result,” Mr Paliwal said.
Instead of viewing yields as the primary metric to base your property evaluation on, he believes rental pressure is the most important factor to look at when buying a property due to its ability to cause yields to rise over time.
Mr Paliwal concluded: “When it comes to investing, we’ve got to look at the drivers of the location and the pressure of those rental markets that will see the yields rise.”
SOURCE: Smart Property Investment by Kyle Robbins 12/10/22
