Investors 'overrate' high rental yields

by Aidan Devine19 Apr 2013

Rental yields are a good indicator of a property’s potential, but that’s about the extent of it, according to property investor and Real Estate Riches author Dolf de Roos. 

He says that yields are “overrated”, and shouldn’t be seen as a guarantee of future growth by hopeful investors. 

“Yield is a very simplistic measure,” he says. “Are we talking gross or net returns? Pre-tax or after tax? If it’s for residential real estate you have to take off insurances, rates and maintenance costs to arrive at the net yield.” 

De Roos adds that more information is required about a property before an informed decision can be made about its prospects. 

“The yield is a snapshot of how a property is performing at that instant in time and as such it is of limited value,” he says. 

De Roos is also of the belief that returns on certain properties can often surprise investors, even if they promise high yield at the outset. 

“Sometimes you think, ‘boy this looks pretty good, it’s got a good return’, but when you do thorough analysis you realise that it’s quite a lousy deal,” he says. “The rents might have seemed high relative to the purchase price, but it had expenses and it had low capital growth.” 

Two of the most common mistakes investors make when scoping out  a deal are not spending enough time analysing the property and letting emotion get in the way. 

“They fall in love with the property rather than with the deal… They let their emotions get in the way. They say things like, ‘but it’s so cute, surely I’ll find a tenant for it?’ They have the wrong reasons for buying property.” 

Property investor John Moore says investors should never underestimate the importance of building issues. These include the history of the developer, architect and builder, as well as the state of the market as a whole. 

“Market reports, demographics, history of sales and rentals in the area, and migration and infrastructure information provide valuable information needed to assess the potential profitability of the investment,” Moore says. 

“Without addressing each one of these topics, investors are exposed to unknown risk and are only guessing at the opportunities available in a potential investment.”

 

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