Properties that pay the biggest rents might surprise you

Soaring house prices can lower investors’ rental yields, but there are other ways to generate good income from property.

You can own parts of Bunnings stores through BWP Trust. Picture: Supplied

Rental income is the lifeblood of real estate investing.

Capital gains can deliver wonderful windfalls — especially at times like now, when home values leap more than 4.5 per cent in a couple of months. But it’s usually the regular rents from tenants that keep property investments afloat.

Australia’s rental markets have varied dramatically in the past COVID-impacted year. Perth and Darwin have gone gangbusters, with CoreLogic figures showing house and unit rents jumped between 13 and 19 per cent. But unit rents in Melbourne have slumped 7.6 per cent and in Sydney, 3.6 per cent as inner-city apartments lost huge numbers of international visitors and students.

Adelaide, Brisbane, Hobart and Canberra have experienced solid growth in rents between 2 and 7 per cent across both houses and units.

A key number watched by property investors is rental yields, and it is here other options can deliver higher incomes than traditional bricks and mortar.

In many cases they also offer diversification and reduced risk.

Here’s a couple, and a quick look at the rental income available.

PROPERTY TRUSTS

Real estate investment trust (REIT) units can be bought and sold on the sharemarket and spread investors’ money across a wide range of assets including shops, offices, apartments, warehouses, factories and even giant Bunnings stores.

Investors earn income from the rents and are exposed to the unit price’s capital gains and losses, which can be more volatile than a regular property.

Real estate investment trusts (REITs) own properties of all shapes and sizes.

Some REITs, such as Westfield shopping mall owner Scentre Group, were hit hard during the pandemic and their unit prices remain below pre-pandemic levels.

Others, especially in areas such as logistics and warehousing, have done well and their rental yields are strong.

Dexus has been paying a yield of 5.1 per cent, while fellow REIT Stockland pays 4.7 per cent GPT pays 4.8 per cent, and Bunnings owner BWP Trust pays 4.4 per cent.

Capital city houses and units are paying similar or lower yields, before the investor must then add running costs such as loan interest, insurance, repairs, maintenance and agent fees.

Sydney’s gross rental yield is 2.7 per cent, according to CoreLogic, while Melbourne is 2.9 per cent, Hobart, 4.5 per cent, Perth, 4.4 per cent, and both Brisbane and Adelaide 4.3 per cent.

Remember that REITs can sometimes fall hard. Scentre’s unit price has almost halved in five years, and the sector as a whole got smashed during the GFC because of high debt levels.

FRACTIONAL INVESTING

People who don’t have cash to splash on one big property purchase can buy bits of houses and apartments through Australia’s new wave of fractional property investment companies.

Investors share in the costs, gains and losses of the underlying property, without having to manage it themselves or carry all the risk of owning a single expensive asset.

One fractional investing company, BrickX, lists some properties on its website with net yields above 6 per cent. But several other yields are 2.5 per cent or lower, so it pays to compare the options.

Traditional property investments will remain the top choice for many, but it’s wise to know the alternatives.