Goldbugs... what will you do with your gold? What's the point of holding gold?; Will you eventually convert it into real money, or just hoard it for ever?
As far as I can tell, the worst sin you can commit is to buy an IP at a yield which is below the long-term trend for the location in which you buy and the type of property which you buy. In this respect, local knowledge is important, because that long-term trend is different in every location. So for example in the suburbs I follow, you should *never* buy with a gross yield below 5%, and you should be aiming at 5.8% to 6% gross for a blue-chip renter. But those numbers would be lower in Sydney and Melbourne, higher in the Brisbane CBD, and higher again in Rockhampton or Toowoomba. This is not so much because of the extra rent, but because as the yield returns to trend, which they always seem to, yield going down pushes up the capital value and vice versa. 1% on yield is about 15-20% on capital value.
On the forum we often hear from people who are getting very cheap rent on good accommodation. As far as I can tell this is because there are quite a few people who upgrade and then keep their old house which is unsuitable as an IP on as an IP. The longer they keep this strategy the more they will lose. They should sell the old house and buy something that is a genuine investment proposition. (Unless there is some good reason for holding on like an impending rezoning or whatever.)
MIW,
This is very true, but generally at 1% yield on a property this is a crystal clear indication of a time to sell, expecting 15-20% appreciation is nuts, and pure speculation. Like you say, it is sure to revert to its long term trend, only way for the mean to return to average yields is for the price to drop or rental prices to increase.
The likelihood, usually there will be a mass influx of FTB's trying to get in on the action, banks will keep lending as there balance sheets are improving in that environment. So the reality is, the supply of properties will only increase to meet this demand...until pop, the show comes to an end. 1% yield is the most flashing red hot signal of this. Foreign investors will be the first to cash in a bail with their earnings. It's all about the high yield, with a low vacancy rate.
In a perfect scenario, what one should be doing, is buying at a high yield, as the price increases, review the price/rent/yield of the property annually, if the rent is not keeping pace with the price, it is best to sell and take the capital, use this to purchase a high yield (property/bond etc) elsewhere.
I'd like to come back to you on yield over the next few days, particularly EBITDA.
In a perfect scenario, what one should be doing, is buying at a high yield, as the price increases, review the price/rent/yield of the property annually, if the rent is not keeping pace with the price, it is best to sell and take the capital, use this to purchase a high yield (property/bond etc) elsewhere.
It's certainly what some people do do, although I have a feeling that with property you'll get whipsawed, which is very expensive given transaction costs, bringing forward of CGT, etc etc.
This is a bread-and-butter strategy for dividend growth investors though. Sell when the yield drops below x% and buy again when it rises above y%.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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