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Massive Rate Cuts make Rental Yields Irresistible

Posted by Paul Wilson

A succession of massive rate cuts has dramatically changed the yield outlook for Australian Property Investors.

Traditionally, our investment property market has had a negative yield, that is, the rent received doesn’t cover the interest payments on the property. This, in most years, is more than compensated for by tax advantages and capital growth. But, with 3% (and counting) in rate cuts, that whole paradigm may, at least temporarily, be changing; you see property can be a profitable investment even without capital gain!

Yes, that’s right! With rate cuts like these, many investors are at risk of accidentally making money this financial year, and even paying tax on it! Just last week I had a client call me concerned that if rates keep dropping he’ll have to start paying tax again after years of paying virtually none! (Withholding Tax Variation). His portfolio has always been heavily negatively geared, but 3% in rate cuts on a million dollars in loans is $30,000 in his pocket, and a major change to the performance of his portfolio! He was, of course, only half serious, about the tax issue. We all know that paying tax is usually an indicator of a really good problem!

So, if the economists are right and we’ve got another 1 – 1.75% in cuts to come next year, then an awful lot of property will become cash flow positive. And that might be a very good thing if Australians come through the hangover of this financial crisis with a more conservative approach to investment, growth, and returns.

With rates dropping in Term Deposits and High Interest Savings Accounts, we can expect to see money beginning to flow back into property as cautious investors go looking for better overall returns. I know that We Find Houses can find lots of property which show rent returns that are much higher current mortgage rates, making these investments highly attractive indeed.

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