Property Investing Tip #2

Don't Focus on Yields, Get to Know Market Rents

It is more important to understand market rent for a property than it is to focus on a market yield.

If you accept that a 7% yield is a strong return in today's market and fail to understand what market rent is for the property, your investment planning is fraught with danger.

For example; Lets assume a tenant is paying $90,000 a year and based on your investigations, investors are buying this property type at a 7% yield making the property worth approximately $1,285,000.

Further investigations may reveal market rent for this property to be $70,000 rather than the current $90,000. Upon a rent reversion (this may occur at a market review, end of lease, or through covenant risks) this may not just wipe $20,000 per annum from your cash flow, this may also take $285,000 away from your equity.

This concept can also work the opposite way for a savvy investor who understands market rent. An under rented asset can see far greater capital growth as rents are adjusted upward to bring them back in line with market rents.

Consider this property where current average net rents are only $330/ square meter.