Gross yields in Casino and Kyogle regional areas higher than expensive coastal properties: HTW residential

Given that residential rent levels in most regional centres and towns have improved over the past 12 months, common sense would indicate that the gross yields for residential property in the regional areas of Casino and Kyogle would be somewhat higher than the more expensive properties located on the coast, according to the latest Herron Todd White (HTW) residential report. 

The valuation firm took a look at the rental yields across the nation to dissect where to find the best returns in residential market.

"Quite simply, the price level of residential housing (dwellings or units) in a regional area is generally going to be at a significantly lower base compared to a similar house type in a coastal area which helps the conversion of the rental into a higher gross yield (before expenses and debt servicing)," the valuation firm said. 

For example, imagine a four-bedroom, two-bathroom, modern brick clad dwelling with a double garage in Casino on a 700 square metre site with a value of between $400,000 and $450,000 and a rental value of around $450 to $500 per week.

This translates to a gross yield of approximately 5.5% for a single dwelling (based on a 50 week rental period with an allowance of two weeks vacancy).

"Get yourself a functional teleportation machine and convert those said improvements into an energy pattern (a process called dematerialisation) and beam them onto a similar sized parcel of land about 50 kilometres to the east coast near say Ballina or East Ballina. 

"From there, expect the price level for similar improvements to have a market value of around $700,000 to $750,000," the valuation firm added. 

Rental levels are tipped to be around $600 to $650 per week, thereby, translating to a gross yield of closer to 4.25%.

The figures sound even more tempting when considering that the demand for rental accommodation in Casino and Kyogle is relatively strong for properties at the lower end of the market value range.

There is always a need for accommodation and it is generally at the base or lower level of the market value range where we can see a boost to the gross yield rate, the report noted. 

There are examples of residential dwellings in Casino and Kyogle where the market value of the detached dwellings on a standard house site under $225,000 can fetch market rental rates of around $275 to $300 per week. This translates to a gross yield of around six to 6.50%.

Similar gross yield rates can be achieved by two- bedroom, one-bathroom, attached units with a single carport or garage, particularly within close proximity of the CBD in Casino or Kyogle – a favourite for the older generation tenant needing to be close to town services.

"Well...doesn’t that sound like a property investor’s dream come true! Especially when term deposit rates at the bank are at an all-time low (think 1.5% to 2%) and fixed mortgage rates are hovering around the mid-3%.

"However, within these regional areas such as Casino and Kyogle, the trade-off for reasonable gross yield rates is that capital gain is not expected to be overly significant within a short term time frame," the valuation firm said. 

It really needs to be a long term vision of possibly 10-plus years to see some significant capital gain.

Otherwise, if the property offers some added opportunity such as subdivision of excess land to create an additional lot or a revamp of the internal layout of a house or unit to create an additional bedroom in order to improve the property’s appeal and market value, then some capital gain could be realised in a shorter time frame.

In such circumstances, by selling excess land as a separate lot or title, the net proceeds could be used to reduce the overall principal debt which in turn reduces the overall outgoings and ultimately produces a better net yield for the remaining house on a smaller lot.

"What’s a net yield? Ah yes, the gross yield is the gross rental divided by the purchase or sale price, whereas the net yield is the gross income less all outgoings such as rates, insurance, water, sewerage and property management divided by the purchase or sale price. 

"That is the true test of investment attractiveness. If the net yield is higher than other investment vehicles, then this would seem appealing," the valuation firm said. 

However, this does not consider the effect of debt servicing.

Allowing for an 80% lend, the debt servicing associated with a principal and interest loan whittles down the net yield pretty quickly.

It really only benefits the high net worth individual who needs no loan and has a lazy $500,000 or more to park in real estate while the share market has a few shivers and the bank term deposits are barely two per cent.

"The situation does become slightly more attractive where the gross and net yields for a block of flats or units are higher than a detached house or a single unit," the valuation firm stated. 

A good example is for a block of five units on one title in Casino which recently sold for $700,000 with a gross rental of $50,000 per annum. This translates to 7.14% gross which would be around 5.5% net yield after outgoings.

However, once again, that does not include the effect of debt servicing. So, for an investor relying on an 80% lend to purchase the property, there would be the high likelihood that there would be a shortfall to be met, i.e. the rent would not cover all outgoings and debt servicing.

The cashed up investor would be much better placed to take advantage of these opportunities.

"In summary, if you are hunting for yields, consider it from a long-term perspective and be prepared to cover some of the shortfall out of your own pocket if debt servicing is required," the valuation firm concluded.