The search for the best return

In the City of Belmont at least a common theme amongst investors lately has been the search for the best return. Negative gearing for tax advantage has become less important than seeking the best rental return.

This area of Perth provides around 15 to 20% better returns than many other locations with similar median prices. Being close to the CBD and being around the Perth median price many investors are eyeing the area as being good value.

While I do not disagree with the assertion that the area is good value, it is important for investors to understand a simple laws of economics that risk equals return.

One of the reasons that there is a higher rental return in the City of Belmont is that it is close to the airport and therefore linked in some ways to the mining boom via FIFO workers. The best rental returns in Australia by far are in the Pilbara. I spoke to a client this week who has just purchased a property in Karratha for $1.3M that is rented to a mining company for $4000  per week. Talk about positive gearing! This property makes around $100,000 for my client every year after costs. You would think my client would be over the moon and wanting to buy more and retire. The reality is more sober, he appears pretty stressed. He is fully aware that capital growth for his property is unlikely and that he hopes to offload it in a year or two before it drops in value.

It is valuable to understand why rental returns are better in some areas and properties than others. Where capital growth is expected to be high, rental returns are lower, and where capital growth is uncertain and the possibility of capital loss is present then rental returns are usually higher, sometimes much higher.

The mining boom will not last forever. The debate is around when it will end. Some say that it will last for 20 more years and then some, others have a more sober view pointing to the recent and possibly severe slowdown in China impacting WA mining within months. As no one knows the future the economic realities of today are based on probabilities determined by the market.

If the China bears are correct and we are just about to suffer a huge and shocking end to the mining boom, then the properties hit hardest will be those connected to it closest, flowing through to the rest of the market. I am sure if this happens, my client will be the hardest hit, probably losing everything. However if the economic bulls prevail and China recovers quickly and Europe resolves it’s issues then he will surely benefit the most with ridiculously high returns for quite some time (provided other issues don’t bring him unstuck like huge releases of new building land in the area).

Investing is about taking risk. Make sure you know what you are doing and don’t bite off more than you can chew.

If you want to invest in the City of Belmont in the suburbs of Rivervale, Belmont, Cloverdale, Redcliffe, Ascot or Kewdale then Ray White Urban Springs is perfectly positioned to help you find the best property for your needs and risk profile.