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Do high rental yields always translate to high returns?

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Getting higher rental yields and achieving higher returns are the ultimate goals.

When it comes to property investing, getting higher rental yields and achieving higher returns are the ultimate goals. However, new research shows that the former does not necessarily result in the latter.

According to a report by RiskWise Property Research, which analysed five-year trends across Australia's housing market, higher rental yields do not automatically translate to high overall returns for investors.

In fact, while properties in cheaper areas were able to give investors a steady stream of income in the short term, they resulted in lower overall returns in the medium to longer term. Closely looking at it, it does not seem surprising as home values in cheaper markets take more time to appreciate.

RiskWise chief executive Doron Peleg told The New Daily that low-rent houses would be able to realize a 63.1% increase in net equity assuming a 20% deposit. On the other hand, high-return homes would be able to clock only a 29.5% increase.

This means that low-rent dwellings were able to improve their values by more than twice that of the high-rent ones.

"When you break down properties with high rental returns and low rental returns, you see purchasing the high rental returns is extremely affordable, whereas a low-rental-return dwelling costs roughly three times more, which generally means they are blue chip," he said.

This also means, as Peleg puts it, that while many properties can "pretty much pay for themselves," investors might be missing significant overall returns in the long run.

This table shows the lowest rental yield suburbs with the highest returns from 2013-2018.

Lowest rental yields with the highest return

Suburb

State

Median Rental Yield (2013)

Total Return (2018)

Malvern East

VIC

3.3%

124.2%

Kenthurst

NSW

3.3%

138.3%

North Strathfield

NSW

3.3%

123.3%

McKinnon

VIC

3.2%

122.2%

Longueville

NSW

3.1%

144.4%

Ashburton

VIC

2.9%

141.6%

Bringelly

NSW

2.6%

170.3%

Rossmore

NSW

2.5%

176.1%

Balwyn

VIC

2.3%

142.8%

Austral

NSW

2.1%

154.5%

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