For the first time in over five years, the average Auckland rental property has a gross yield that is more than most mortgage interest rates.
And that is an opportunity for buyers considering investing in rental property, or expanding their portfolio, says Kiri Barfoot, director of Barfoot & Thompson.
The company’s quarterly rental data showed that the yield - the return on investment - for a typical Auckland rental was 3.27 percent, comfortably above recent fixed mortgage rates of 3 per cent.
“Mortgage rates dipped to historic new lows,” says Barfoot. “This means we are seeing a balancing, even a shift, between the cost of borrowing and the potential gross gain on a rental property.”
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Barfoot & Thompson director Kiri Barfoot says with a growing pool of tenants and low interest rates, now is the time to invest in rental property. Photo / Supplied
Barfoot says that in January 2015, when the company began their monitor, yields reached 3.52 percent, but had dipped since then, bottoming at 2.85 percent in January 2017.
Barfoot and Thompson's Auckland yield index compares the average annual revenue from a three-bedroom rental in Auckland to the average price of a three-bedroom house sold by the company over the past six months. At an average sale price of $938,688 and rental of $584 per week ($30,368 per year), yield is calculated at 3.27 per cent.
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“With investors, there is always a bit of a churn, people coming and going. But with the price of money so cheap, why wouldn’t you invest in property? People still want to live in Auckland, overseas people coming home will want to rent," Barfoot says.
“The pool of tenants will keep growing as house prices will go up. Good properties are always in demand. We’ve had the regulation changes to tax advantages and healthy homes, so investors are coming into this with eyes wide open.”
Competition in the market
Barfoot adds that investors can leverage their funds to buy property which is then more likely to make capital gains than money just left in the bank.
She says that while rent freeze during the Covid-19 lockdown period meant rents did not go up, they’ve not decreased either.
But, as with any investment, performance varies. She reports that in some parts of Auckland – mainly central city and Ponsonby – property managers are getting a flood of enquiries from landlords wanting to convert short-term Airbnb or hotel pool rentals into long term renters, as tourist revenue has all but disappeared.
In some parts of the city, newly rented properties have had modest rent growth.
“In the city apartments, landlords do need a competitive rent. Where there is more supply, some are giving incentives like a week’s free rent. But in the rest of Auckland, rents are not going down.
“The key is finding an individual property with numbers that stack up, and that is less exposed to current vacancy pressures.”
Part of the picture
Sharon Cullwick, executive officer of New Zealand Property Investors' Federation, says that would-be investors need to understand that gross yields are only part of the picture - there’s insurance, rates, maintenance and other operating costs.
“Look at your net yields, that cover all your costs,” she says. If you have paid $300,000 for a property, then you should be getting $600 a week in rent, she gives as an example.
She says investors should compare rental returns to what they'd earn if they simply put their money in the bank.
Yields do vary around the country and by property. Barfoot & Thompson’s figures show that South Auckland suburbs such as Conifer Grove, Clendon Park, Otahuhu or Manurewa have yields as high as 4.87 per cent; 12 Auckland suburbs earned more than 4 per cent. Cullwick says in some parts of Hawke's Bay investors are achieving 5 to 6 per cent yields “but you still have to be very careful where you are buying”.
REINZ CEO Bindi Norwell says investors are waiting with bated breath in some parts of the country. Photo / Supplied
Bindi Norwell, chief executive of the Real Estate Institute of New Zealand, says in the organisation's latest report on rental yields: “All regions across the country saw a good lift in capital gains for investors a result of strong median prices increases; with all but three regions (Auckland, Canterbury and Nelson) seeing double-digit increases."
Norwell adds: “The next few months are likely to be an interesting time for investors. On one hand we’ve got some of the lowest lending rates we’ve ever had, the LVRs have technically been temporarily removed and lending to investors is up 25.7 percent year-on-year.
"But on the flip side, the country is facing significant levels of rising unemployment and investors are waiting with bated breath to find out whether the 90-day notice will be removed as part of the Residential Tenancies Act changes."
