Risk Equals Return

Written on the 28th of July 2011 by Scott McGeever

Given the way the market is at present, many people are hesitant to take the leap and either buy a house or invest in property.  Who would blame them? Talk of higher interest rates, uncertain Government at Federal and state (Queensland) levels, not to mention affordability issues! Some of those who are buying investment properties are chasing higher returns (in a mining town) to guard against any sudden increases in interest rates so it allows them to hold onto the property. On the surface this may look like a sound strategy, but if you can only pinpoint a single industry that the town feeds off, this strategy has no fall back position.

Unfortunately with a higher return comes a higher risk. The higher returns are certainly being achieved in the mining towns.  With a lack of accommodation and a high demand for it, rents are being driven upwards. As the returns rise so do the property prices because investors are chasing a positive cash flow outcome (rent covers mortgage repayment) before tax.

We saw it during the GFC in 2008 when the economy ‘hit the skids’ that some of the mines were closed and/or downsized. Consequently, people lost jobs, rents fell and so did property prices as it became apparent that all that glitters is not gold!

Traditionally this is why low yielding (rental income) investments are lower risk and achieve a higher rate of capital grow. They are less accessible to investors who need to rely heavily on return to pay the mortgage and these sort of properties are in areas that owners buy in.  They are the people who drive growth through their needs and wants. So next time you invest, consider the risk over the return.

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