Survival of the fittest: it’s those who can adapt to a changing environment who survive. The same is true of property investment. You might think that’s a bit dramatic but our ability to adapt to a changing property market will not only ensure our investment journey is as smooth as possible, it’ll also help us live above the constant media noise that might otherwise lead us to doubt our investment decision.
Very little can cause a property investor as much angst as a changing rental market, particularly one in decline. In the current environment, we have three forces dampening the rental market:
1. Capital gains are exceeding rental appreciation
2. Rates are low, spurring renters to buy, decreasing the amount of potential tenants
3. Developers are capitalising, with approvals at all-time highs – increasing dwelling supply
Here’s the kicker: with interest rates close to all-time lows, our holding costs are lower now than at almost any point in the past decade. So, before you panic about lower yields or higher vacancy rates, it’s important to put things in perspective: sacrificing $20 or $30 in rent per week to attract a tenant is a far more favourable option than succumbing to a prolonged vacancy.
As an example, if the rent on your $450,000 property drops from $450 to $430 per week, your weekly holding costs after tax increase by only $11. That’s an annual difference of $572, less than what you’d spend on lunch each year and a difference that’s more than made up by the two week additional vacancy you might incur by not reducing your rent. Remember, when it comes to property investment, capital gains are what we seek; rent is purely the means by which we hold a property long enough to achieve those gains.
At Blue Wealth, one of the ways we educate investors is by stress testing various economic and personal scenarios; this includes situations of declining income, higher vacancies and lower rents. Investing in property is easy. Holding that property when a market shifts gears is harder, particularly if you don’t have the benefit of education and professional support.