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It Pays To Be Smart

Yields over five per cent can be achieved in today’s market if you know what to buy and how to grow from it, writes Lucia Xiao

By: Lucia Xiao

31 May 2022

A lot of people are thinking that getting a five per cent or over return for rental properties in Auckland these days is too hard to achieve. Yes and no. Yes it does seem hard, but no, it’s actually not as hard as people think, you just have to be smart about it. Here’s an example of how you can do this:

Say you purchase a good property in a good suburb in and around central Auckland at one million dollars. We would highly suggest that you find a property with an already existing three-bedroom house on the site. This dwelling would already be giving you at least $200 for each bedroom, which gives you a total of $600 per week. So, for your initial annual rental income, you would already be receiving $31,200. Doesn’t an extra 30k on top of your salary sound nice? However, this is only a 3.12% rental yield so in short, it’s not yet enough of a return for your investment to feel worthwhile.

If you pick the right property, you would have picked the property which has room to develop and build extra homes on. The property we’re using for this example would have around 700sq m of land and this will comfortably fit a duplex style build, so that is essentially two new two to three-bedroom houses. With a single storey building project like this, it would cost you an extra $550,000 for overall construction cost, which brings your total cost of investment so far at $1.55 million. Remember that with the existing house on the site you’re still getting some return, so you’re not totally on the negative.

‘If you pick the right property, you would have picked one which has room to develop’

If you are still not convinced, just hang with us for a bit longer. We are sure that when you see the final numbers, you will want to start calling your mortgage adviser to get your finances sorted. Remember, property is definitely a long game so patience is key to getting that over five per cent yield.

Once the build is complete, you could rent out each new dwelling for a good $700 per week. So that’s easily another $1,400 per week, which brings your total weekly rental return for one property to $2,000. That’s an annual income of $104,000! The rental yield is $104,000/$1,550,000 = 6.71 per cent. I don’t know about you, but I would not complain about receiving a $100,000 passive income, and keep in mind that you’ll still have your normal salary.

If we’ve now got you hooked in, here’s the icing on the proverbial cake. Coming back to the purchase price of one million dollars, plus the $550,000 building cost for the additional dwellings, you would want to get the property re-evaluated. Back in 2020, that would have been valued at around the $2,200,000 mark
So really, it’s just easy maths, compare your $1.55 million investment to a now $2.2 million property. That’s a whopping $650,000 worth increase you now have in assets.

So, do you still think it’s that hard? For a visual representation, the table below is a great example of how this can be done with one good property.

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