Rents outpacing inflation and offering investor rewards
Capital growth is the coveted prize sought by most property investors but with rents consistently outpacing inflation it's also important to invest in multiple rent-producing properties to achieve a healthy income.
The end goal of property investment for most is to build future wealth and the way that most investors achieve that is through capital gains when it comes time to sell.
What often gets forgotten is that rents increase over time, too. In fact, rents have increased by at least 2 per cent above inflation for the past two decades.
But the rising rent environment means some investors are achieving such high rent returns that there is plenty of immediate profit left over once the costs of holding the property are taken into account. Rents are increasing at 4 per cent above inflation today.
According to SQM Research figures as at the end of August, the vacancy rate across Australia was 0.9 per cent, with the smaller capital cities like Brisbane, Adelaide and Perth even lower.
That low vacancy rate and growing demand has driven up rents across capital city markets by 10 per cent in the past 12 months and with little new product being built as a result of materials and trades shortages it is unlikely to ease anytime soon.
Compound growth
The current rental market is a product of there not being enough new housing built for more than a decade now.
Growing migration numbers and a return of overseas students is set to put further pressure on the Australian rental market, which could mean rents rise by as much as 10 per cent per annum for the foreseeable future.
While some believe the best approach for investing in property is negative gearing, in the current high-rent environment it’s easier to own positively geared investments with good cash flow that can help provide owners with significant income into their retirement.
That’s why it’s so important to invest in multiple rent-producing properties and not stop at one.
Just as property values increase over time, so do rents, which typically increase at a rate of 2 per cent above inflation, or more.
Applying a relatively modest rental growth rate of 4.5 per cent per annum, a property bought for $500,000 and renting for $450 per week in year one will, in 20 years’ time, rent for $1,039 per week.
Owning multiple properties allows this to be multiplied many times over and once costs, such as management fees, maintenance, insurances and all the expenses of holding the property, are deducted it can leave a healthy income behind.
For someone with four investment properties that could amount to a passive income of tens of thousands of dollars a year over time.
