While landlords have been beneficiaries of the fast-rising rents during recent years, bigger increases in expenses have established a ‘new normal’ for property investment cash flows.
Someone buying a standard house as an investment property with a 10 percent deposit today in Adelaide, Brisbane, Hobart or Canberra will have an annual shortfall between rental income and associated expenses of $15,000 to $20,000.
Sydney’s higher mortgages and lower rental yields than the rest of Australia mean that the same scenario produces a $35,000 annual cash flow shortfall. A $25,000 net loss is the new status quo for a basic house in Melbourne.
A huge influx of more rental supply is the *only* thing that will get people out of makeshift accommodation and back into proper homes, and to ease the pressure on rents.
The increased holding costs combined with an environment wherein all levels of government have been very unsupportive of property investors will further prolong the rental pain for tenants.
Financial modelling conducted by Propertyology confirms that only 6 of Australia’s 20 largest cities have an annual cash flow shortfall of less than $10,000 on a standard detached house purchased now.
With an annual shortfall of circa $5,000, the best cash flow from a current purchase in one of Australia’s Top 20 cities are found in Darwin, Townsville and Mackay.
Perth, Cairns and Toowoomba are next best with cash flow shortfalls of between $5,000 and $10,000 per annum.
Of the 140 Australian townships that have a population of 15,000 or more, only Port Hedland, Karratha, Broome and Kalgoorlie are cash flow positive if purchasing a detached house right now.
Queensland locations with an annual shortfall of less than $8,000 include Australia’s 29th largest city, Rockhampton, along with the Whitsundays.
Parkes and Casino in NSW, Mildura and Swan Hill in Victoria, Alice Springs in NT, Murray Bridge and Port Lincoln in SA, and Geraldton and Esperance in WA are also in the sub $8,000 category.
Generally speaking, Victoria has the lowest rental returns in Australia and Queensland has the best.
Unless one is using a large cash deposit, the ‘new normal’ for a property investor entering the market today is a cash flow shortfall of $10,000 to $15,000 per year.
But, with a big-picture view of one’s longer-term financial future, every Australian household really should be setting aside much more than that each year.
Property investors who already had skin in the game in relatively affordable locations 3 or more years ago are largely unaffected by recent interest rate rises.
Offsetting the rising interest rate expense are the best wage growth Australia has seen in a decade years plus sharp increases to rental incomes.
Investors with properties with significant annual shortfalls from their income-producing asset will attract bigger negative gearing benefits now compared to the last couple of years.
A back-of-the-beer-coaster guide is, for every $1 net loss $0-30 will be refunded when the annual tax return is assessed.
There is a growing school of thought that interest rates will level off during Q2 2023. One can’t rule out the possibility of interest rate cuts in H2 2023 or 2024.
But speculating about future interest rate movements has always been a mug’s game. What Propertyology can say with extreme confidence is that upward pressure on rents will hang around for some years yet (rental supply does not grow on trees).
Millions of existing Australian households are currently sitting on significant financial capacity to take advantage of some exciting property investment opportunities and set up their future.
Legacy of the recent national property boom, household equity has skyrocketed such that the median house price in 130 of Australia’s 150 largest townships has increased by 40 percent (or more) over the last 3-years.
When deciding where and what property to invest in, and when weighing up with to hold or sell an existing asset, striking the right balance between capital growth potential and the cash flow impact is imperative.
This short education piece helps to keep things in proper perspective.
There is a big body of evidence available now to suggest that conventional detached houses typically enjoy twice the rate of capital growth than apartments, townhouses, duplexes and houses with granny flats. Don’t compromise by putting cash flow ahead of asset selection.
That said, sinking too much investment capital into any one asset defies My Golden Rule of all good financial decisions.
CASE STUDY
Parramatta
The median rent for a standard house in this middle-ring Sydney municipality in 2019 was $570pw. An investor who purchased a house with a 90 percent LVR back then would have paid circa 3.25 percent interest on their loan and had an annual cash flow shortfall of approximately $11,500.
Over the 3-years subsequent to the purchase, the median house price of Parramatta increased 55 percent. Rental income increased mildly (from $570pw to $590pw). But the increase in loan interest rates during 2022 to (say) 5 percent means this investor’s annual cash flow shortfall is now approximately $27,000. Ouch.
Someone looking to enter the Parramatta property market today and purchasing a standard detached house with a 90 percent LVR can expect an annual cash flow loss of $48,200. Don’t do it.
Launceston
A wiser decision would have been to use one-third of the amount of investment capital required for the Parramatta property and instead purchase in a more affordable, major regional city which had a superior property market outlook to Sydney.
The median rent in beautiful Launceston in 2019 was $340pw and the cash flow back then, again assuming a 90% LVR, was a neutral position.
A smart property investor would have used the other two-thirds of their investment capital and repeated this process in two other (strategically chosen) locations across Australia – just like this investor.
In addition to Launceston’s spectacular capital growth of 73 percent over the 3-years ending 2022, the investor will now be in receipt of an extra $110pw rent (more than $5,000 extra annual income).
Interest rates rising to 5 percent means this investor’s annual cash flow is now a very manageable minus $1,000.
These numbers illustrate that, despite recent interest rate rises, property investors who put their skin in the game 3 or more years ago are not greatly affected.
Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.
