Returns come from capital growth and from rental income.
If you are looking for a safe place to put your money in order to achieve capital growth, then there is still no better place than to purchase a rental property. Many people have shied away from Australian property in the last few years because they have been worried about the global recession and the falling property values. However, from a long term perspective, there is no more stable asset class than to own real, physical properties. Historically, Australian property values have increased by about 9% per year. Of course, this occurs in fits and starts. Sometimes the prices of homes will stagnate for a bit, and sometimes they will rise sharply. Although home values have remained stagnant or even fallen in the past few years, this actually means that it is a great time to buy a home, particularly if you are interested in rental income.
Many people have lost money on their property purchases in the past few years, but this was typically because they didn’t take a rational approach to property investing. Instead, they got caught up in the housing bubble and purchased homes when they were grossly overpriced. The value of a rental property should be evaluated just like any other investment, such as a stock, bond, or even a savings account deposit. You should look at how much the investment will yield per year in relation to other available investments. For example, if a home will cost you $200,000, and you can expect to collect $10,000 per year in rental income – then this is an investment with a yield of 5%. If the stock market is currently yielding more, than it may be a good idea to invest your capital there instead.
When housing prices fall, as they have done in the past few years, then this means that the yield of the investment rises. This makes real estate an increasingly attractive option the more prices fall. For example, if the price of the $200,000 home were to drop to $160,000, then the yield on your investment would rise to more than 6%. This in turn will cause more demand among investors for real estate, which will cause the home price to rise again.
In addition to your rental income, the capital growth of the property can also contribute to your yield over the long term. For example, say that you purchase the $160,000 property and collect rents on it for 20 years at $10,000. After 20 years, you sell, and the price has risen to $240,000. You will have collected $200,000 in rents and and extra $80,000 in capital growth. This will have been a $280,000 profit over the course of 20 years, or $14,000 per year on your initial $160,000 investment. This translates to a yield of 8.75%. It is this combination that can make investing in Australian property so valuable.