According to the latest report released by CoreLogic, dwelling values in the combined capital cities rose by 2.3% in May. While property vendors are keen to leverage the strong market conditions, record low-interest rates have prompted buyers to look for their dream home or investment property.

Whether you are a property owner who is looking for their next property or a new investor who is looking to step into the market, here are a few things to think about.

Knowing the real bottom line

Have you noticed that people have different views on expected returns? Real estate agents may advise you that properties in Melbourne generate ’double-digit returns’ per annum, however, it is important to conduct your own due diligence by doing research and working out the real return of a property investment. Have you included all foreseeable expenses in your calculation such as agent fees, rates, and maintenance costs? In some of our clients’ experience, unplanned expenses can quickly diminish returns and undo budgeted cash flows. Had these expenses been considered earlier, they may not have purchased the investment.

To help you understand it, I have put together a case study that shows the estimated net income return of a recently sold four-bedroom house in one of Melbourne’s popular Eastern Suburbs:

As you can see, this property generates a net income return of just over 2% per annum. Generally speaking, a low net income return on a residential property is reasonable as people expect the property to generate strong capital growth to compensate for low income. The next step is to estimate the capital growth. According to realestate.com, median house prices in this suburb have increased by 5% per annum over the past five years. Does a 7% annual total return meet your expectation and objectives?

Understand tenancy risks

It is worth keeping in mind that I have assumed a 100% occupancy rate for the purpose of this case study. While the 2020 shutdown of the property market continues its positive impact on the property value, the Covid-19 Pandemic arguably poses a negative impact on the rental space. As Australian borders remain closed to tourists and international students, tenancy rates could decrease further. Young workers, who are more likely to rent homes, are most impacted by the lockdowns, which has resulted in a decline in demand for rental properties or lower rents. If you are retirees who rely on the income from your investment property to meet your income needs, you may find it difficult to manage your cash flow.

How can Hewison Private Wealth help?

Residential is not the only way into the property market.  At Hewison Private Wealth, we specialise in sourcing high-quality commercial property assets that offer attractive income, with returns underpinned by long-term leases to corporate tenants in well-located areas. If you are thinking of exploring alternative investments to diversify your wealth, please reach out for a confidential discovery call HERE.