Why rents are likely to increase

There’s always been the great debate between capital growth and rental yield. It’s often been argued that the higher the capital growth, the lower the yield, and the lower the capital growth, the higher the yield. But given the current economic climate, it’s difficult to know which one investors should be focusing on.

While capital cities haven’t delivered great gains of late, rents are likely to increase across the board, even for those who still prefer to buy in a capital city, according to Jane Slack-Smith of Investors Choice.

“Affordability is going to be the key driver,” she says.

“That will mean we’re going to see a move from capital growth being a fundamental of property investors’ purchasing criteria to seeing more of an importance on yield. We’ll see an increase in yield, mainly on the fact that people can’t afford to buy their own property. They’ll need to rent so there will be an increase in demand.”

Slack-Smith also believes it’s becoming more common for people to buy investment properties in cheaper areas, while they continue to rent in capital cities.

On the other hand, author and property millionaire Jan Somers says rental yields in capital cities are actually falling over time, but investors should do their research before they buy a property with a higher rental yield.

“In general, they won’t have a very good capital growth,” she says.

“When you have high yield it’s usually high maintenance and high turnover.”

Still confused?

Terry Ryder of hotspotting.com.au argues plenty of areas around Australia are increasing in value – the problem is that investors are looking in the wrong spots.

“The general media line is that prices are flat or falling, but they’re talking about capital cities,” he says.

“They’re ignoring the regions where prices are growing quite strongly.”

He lists Gladstone, the Surat Basin, Newcastle and Hunter Valley as the strong performers and says these areas will have both growth and increasing rental yield, as more people move into the areas. He also likes Bendigo and Ballarat in Victoria and Port Augusta and Whyalla in South Australia.

“People should always look for good returns,” he says.

“If you can get beyond the fixation of a capital city and buy in the right region, you’ll get strong capital growth over the medium to long term and the rent at least pays for the property.”

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