Excellent yields in a really tight vacancy rate area – can you really achieve it? Nothing is impossible when you know what you’re doing.
Do you think there’s not enough time to dedicate to property investing?
This is the issue that our client, Ali, faced before she came to us. She’s a busy professional who managed to score an investment property with a 6.2% gross yield in a low vacancy rate area.
How did she do it?
It started with Ali’s realisation that she needed to take action right away. Otherwise, she’d never get more time to spend with her loved ones. It’s why she was resolute to change things regardless of the pandemic.
On our end, we showed Ali a fantastic property located in a promising neighbourhood that’s 30 minutes away by car from the CBD. Now, the area had median rents and prices but they were actually skyrocketing.
Also, I want to tease your imagination a little with some additional stats:
- Land value at 88%
- Exceptional growth potential
- A well-built, well-maintained property
- A $300,000 investment
- Public housing at 2%
Add in the high rental yield and it’s not surprising that Ali is planning to make more purchases this year.
I’m sure that you can replicate her success, particularly if you manage to find a low vacancy area.
What Are Vacancy Rates?
The vacancy rate is the percentage of properties available for rent in a given area.
Recently, the vacancy rate in Sydney was up as high as 13.8%.
Why?
There are a few key factors in vacancy rates.
For example, if there are 100 houses in an area and 5 are empty, this means you have a 5% vacancy rate.
To the untrained eye, 5% vacancy rates don’t seem like too much. But when you know the industry standard, it’s not hard to understand that this area might not be the best investment.
In Australia, the industry standard is 3% and this is considered the equilibrium between supply and demand. In any given area in the country, the standard metric to look for is 3%. This means there’s a balance between available houses and tenants who want to live there.
If the area’s vacancy rate is above 3%, it signals a supply issue. There’s more supply than demand, so it could be hard to get good yields in such an area. In other words, there are more homes than tenants and this could negatively affect the yields of that property.
This is what’s happening in Sydney.
However, it’s also important to know that vacancy rates aren’t fixed. This means you shouldn’t base your investment decision on vacancy rates alone.
In that regard, Bundaberg, Queensland, is a good example.
For quite some time, the vacancy rates there were 6-7%. But over the last two years, they dropped to below 2% and have stayed like that since.
For comparative analysis purposes, not too many people wanted to live in Bundaberg for a stretch. But things changed and it has now become a really tight market.
My point is that even though vacancy rates are important you shouldn’t base your decision on them alone.
The Tighter the Rate the Better… Right?
A 3% vacancy rate is actually not bad. It’s the equilibrium and I want you to remember that.
But with anything below 3%, you need to consider degrees of tightening.
This means you could face tighter competition from other investors or might need to pay more for the property. The silver lining is that you should be able to get higher rental prices and pick and choose your tenants.
3% is a pretty good market with balanced supply and demand, so you shouldn’t struggle to find tenants. Higher rates, meanwhile, will decrease your ability to be extreme in the vetting process. That is, you won’t be able to negotiate higher rental prices and pick and choose your tenants.
Now, let’s take the vacancy rate down a degree and assume that we’re dealing with a 2% area.
This is an extremely tight market, which means that there are fewer available properties than tenants. Or, it could be that there are more people coming into the area and the supply of properties is the same.
Whichever way you look at it, a lower vacancy rate allows you to be more discerning about who to take on as a tenant. You can afford to be choosy and gauge if someone is a good tenant for your property before you offer the lease.
The Psychology Factor
Some people just look at an area’s low vacancy rate and assume that it’s all clear to invest there. But as mentioned, you shouldn’t focus only on vacancy rates because there are other factors.
For example, the psychology factor is a much bigger part of the deal.
You’ve got to break down the psychology of the marketplace and understand the underlying reasons that cause lower frequency rates. That will help you figure out the potential capital growth because it can be such an esoteric future metric. And when we say esoteric, we mean future metric that’s hard to determine or make sense of.
But there are ways to project future outcomes, and this is where psychology comes in.
By looking at the vacancy rates for each asset type and performing comparative analysis, you can determine the psychological and demographical breakdown of the community.
For example, families with children will want to live in houses with backyards. And if the community has more families than individual households, it means there’s greater demand for homes that can accommodate families.
To that end, you also want to determine who these people are, how they spend their time, and what their interests are. In doing so, you’ll be learning a lot about the community, with which you can make some pretty accurate assumptions.
Of course, you’ll be putting all your findings together for a more complete picture.
You can sort of go down the rabbit hole of that area and figure out the types of people that are moving in and why.
Learn How to Use the Vacancy Rate
Although the vacancy rate is a vital metric, it’s only one of the metrics to account for. Whatever the rate is in an area, you should always get to the bottom of why it is where it is.
Also, an area’s vacancy rates aren’t going to be high or low forever. Can you afford to wait for the rates to improve? Probably not.
If you’re just starting on your wealth-building journey, aim to invest in an area with a 3% vacancy rate or lower. Set that against other parameters such as property type, demographics, growth potential, and so forth.
This is how you set the grounds for building a portfolio that will allow you to accumulate wealth effectively.
