Increasing rents

A quick newbie question, if I may.

I'm getting my head around property investment from reading this forum. I understand you can invest for yield, for capital growth, or hopefully a bit of both.

I understand the basic idea of the sorts of things that drive capital growth over time. I also have read that getting high yield and high amounts of capital growth sometimes isn't all that likely.

But what what drives increase in rent, over time? Is it simply a reflection of capital growth of the property? So, to get increase in the rent amounts, you need to get capital growth?

Say a property in a cheaper area that is currently "high yield," but in time might only experience minimal capital growth - would this property be likely to see increased rent over time, even if it didn't grow in equity all that much?

Supply and demand set the market, it's ever changing.

Cheers. Yes, I understand that much.

I guess my question would be - do you necessarily need to capital growth in order to get rental growth? Or are they not particularly linked?

Not necessarily related at all, JM. If you let the place to go to rack and ruin by not undertaking any maintenance, repainting, replacement of carpets etc then although the capital value of the land may have increased, the rent will not necessarily follow. The market is driven by what is desirable in the area, everything else rents for less eg: if there are lots of new 2/2/1 apartments going up, they will be asking the premium rents however if you have a 2/1/1 you will not achieve the same rent even if you have refurbished and kept the place in the best condition possible.

Not usually linked with Cap growth. Initially.

Its a supply/demand thing. Isolated.

However, PI can be a 2 pronged approach.

Each parameter has its own influences and drivers that bring returns.

All cyclical.

However, increasing rental return can be manufactured by renovating, dual occupancy etc. Usually when demand is strong (for rentals) is the best time to upgrade, therefore the return comes sooner and at a better rate.

Along with upgrading usually follows with additional cap growth/equity.

Its a good investment, controlled for risk and return.

I think Capital growth can be loosely related to rent. The better - more in demand properties - that achieve the growth generally have higher rents too.

Xenia IM said:

I think Capital growth can be loosely related to rental yield. The better - more in demand properties - that achieve the growth generally have higher rents too.

Click to expand...

Really. A lot would say that high CG area's have low yield.

When CG happens yield decreases.

Yeah not talking about percentage yield here obviously, but total rent value - what drives that up and down, and whether you need CG increasing to get increases in the rent.

Yield as a percentage and capital growth are obviously linked, as the yield is an expression of the total value

Ok - corrected

Primarily demand from tenants followed by increasing costs and rising interest rates which lead investors to look to minimize loses

Brady said:

Really. A lot would say that high CG area's have low yield.

When CG happens yield decreases.

Click to expand...

Absolutely.

I've found that good CG areas also have reasonably good rental growth. They're certainly negative geared at purchase, but over time the rents do increase at a steady rate.

I have found though that the rents don't increase as quickly as the property values overall.

hugh72 said:

Primarily demand from tenants followed by increasing costs and rising interest rates which lead investors to look to minimize loses

Click to expand...

Shouldn't this instead be, leading investors to maximise gains?
The reason for investing in the first place.

Ace in the Hole said:

Shouldn't this instead be, leading investors to maximise gains?
The reason for investing in the first place.

Click to expand...

Maybe, wasn't making a comment on NG but properties which are +ve at 5% interest rates can quickly become -ve at 9% without rent increases which is one of the driving factors for rents IMO

Rising and deflating rents are based on supply and demand; yes; but it's important to understand what drivers affect both supply and demand - beyond the dwelling quality itself. I.e. new employment centers opening in the area increase demand; as does new transport links, schools, etc. Gentrification is usually a longer-term one and extends beyond basic amenities I just mentioned. Gentrification is far more elusive than that. It is not just about 'more cafes opening', either (this is a myth). To be honest, growth (both rents and CG) that occur due to gentrification and general increase in appeal of an area is a bit of an X-factor. Basically, 'nice' people want to move into the area, en-masse. Once the area is full of 'nice' people it gets a good reputation and starts to gentrify. This can be a factor for rents to go up

Heya,

I'm not too certain on the CG/Yield properties rental price growth...

Just note that presumptions around rental increases on past behaviour are based well and truly on PAST supply and demand factors. The set of circumstances going forward are very different and i'd factor these circumstances into any assumptions you make about rental growth.

Over the last 2-3 years, Australia's housing market has 'boomed' mainly driven by INVESTORS making up ~50% of the market. Combine this with Australia's historically very static 70% owner occupier, 30% private rental market, and you have a large increase in supply of rental dwellings available. The 70/30 ratio has barely moved over the last 25 years, even during the 02-04 house price expansion.

On top of this, we're well and truly in a construction boom. New supply (200k+ in dwellings) is finally exceeding demand for new stock after over a decade of undersupply. This undersupply drove the very tight rental market in the noughties.

IMO when you combine the above two factors, its hard to see how its possible to have such a large increase in rents every year going forward. Just something to think about when spread sheeting your 10 year investment returns.

Cheers,
Redom

The mistake new investors can also make is assuming that rents ALWAYS increase over time. Ain't necessarily so as it ultimately comes down to the above factors already discussed ie: demand and supply, economic changes (including increased/decreased infrastructure/industry), monetary policy etc. There is no "one shoe fits all" scenario when it comes to property.

Good growth comes from being in an area under-going an injection of infrastructure or a gentrification program.

This information is pretty easy to find out about (what's happening, where etc) through the State Govt and their associated channels.

Generally, this means that the area becomes more desirable to live in - so rents start to increase - but not just in any old house. The house might be old and dated, but it's right next to a point of interest, within walking distance of a school, etc - so with a mild modernisation (cosmetic reno) you can really maximise your return.

Other times, only a new home will get premium rent. These areas, it pays to build an ancillary dwelling / granny flat to maximise yield as much as possible.

Each state and area have their own quirks. You have to be immersed in a State and then in market to truly see the bargains and the opportunity - otherwise you get "analysis paralysis".

The above advice is obviously general, but it's a rule of thumb that has served me well over the years.

Example ?? Hills District Sydney. New NW Metro rail being built to give trains every 4mins to City. Prices are going up up up and rents too. Developers moving into areas near stations and buying up land to build apartments too. Density has been ramped up under a revised LEP.

Mate of mine in an affected area went to build 3villas on his large resi lot and was knocked back. Council would only approve a block of apts in such close proximity to new station. All small builds are deferred from approval. Something to do with State Govt. Council only approving a block of 30+ !! So he sold to a developer for $450K more than it was worth a year earlier. And three neighbours.

Badgerys Creek precinct too will see changes in that area with airport construction

http://www.smh.com.au/nsw/nsw-seen-...-projects-says-mike-baird-20140202-31v07.html