Investing in positively geared properties has been a popular topic in recent years, particularly with the strong performance of many regional locations during COVID.
However, before going down the positively geared route, it’s important to ask yourself some important questions about what you’re buying.
Typically, if someone is prepared to pay you more to live in a property than it costs to own it, there’s a reason for that. Here are some of the reasons why.
They can’t afford to buy it themselves.
In many lower socioeconomic areas, renters are typically not able to buy a house themselves. They might have a lack of income, poor credit or income that is not secure enough to get finance.
When this occurs they can’t purchase property and are forced to rent. This has the effect of keeping rents high, but it also means there is little upward pressure on property prices. If you’re going to build a large portfolio, you need to see capital growth as it is the thing that allows you to expand.
Don’t want to buy.
Another reason a location might have a lot of positively geared investments is becuase the areas are very short-term focused. A great example of this would be in mining towns. If these types of areas, workers come in for a period of time to do a job and then leave when they get the chance or when the job is done.
If the mine in the town shuts down or ends its lifecycle, then property values go with it. When times are good and commodity prices are high, mining towns look great with their double-digit yields. But things can turn quickly and not only can the yields drop quickly, but so too can the property values.
Growth can’t keep up.
The third factor to consider for higher-yielding locations is that the growth just can’t keep up. Again, we see this in regional areas quite a lot, where there is no significant local economy driving growth and that means there are not the jobs to support high prices.
During COVID, many regional areas surged in value as people began to flee the city and were able to work remotely. But now that the tide has started to turn and as people head back to the city, will these locations still be able to maintain these sky-high prices?
As I’ve said before, we buy assets based on the asset themselves. We want high-quality blue chip locations and we’re not focusing on the cash flow.
Blue chip properties will eventually produce cash flow as rental growth increases and your debt declines, and you can also manufacture increased yields through subdivision, development or renovations.
If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.