Disregarding the icky kitchen carpet and the diarrhoea coloured bathroom, my house is not rentable.
It’s a four bedroom house on a large block in a nice area of a regional city, however there is no way it comes near to meeting the 1% rental rule.
The 1% Rule
The 1% rule is a guide to assist an investor to make a quick assessment of a property. Consider it a starting point from which other investigations springboard such as integrity of the building, location etc.
Based on the 1% rule, the monthly rent must equal 1% of the value of the house.
This 1% per month comes to 12% per year.
The reasoning is that half of the 12% is put aside to cover the operating expenses of rates, insurance, repairs, maintenance and service fees.
This leaves the other half of 12% – i.e. 6% – as the ROI (return on investment). Add inflation of 3% and your rental investment should return 9% per year.
My House and the 1% Rule
According to our rates notice our property has a value of $240K.
Using the calculation of:
Property value x 1% ÷ 4 weeks = weekly rent
$240,000 x 1% ÷ 4 = $600 per week in rent
Not going to happen.
My Town and the 1% Rule
This got me wondering, is it just our house? Did we pay too much for it?
So I started looking at my town (regional city) of approximately 30,000 people in North East Victoria.
I looked up the average median price of a house, and the average median rent paid in my town.
|House||Property value||Rent paid p/w||1% Rule: rent p/w|
Hmm, something was not right.
Based on the 1% rule those houses had nowhere near the required rental return. If a 4 bedroom house needed $1062 p/w in rent to meet the 1% rule, yet only got $400 p/w then there is no way it is going to have a 9% ROI.
By now I had so many questions.
Was it just my town?
So I rang my daughter who was renting an older house in Hawthorn (suburb of Mebourne) for $800 p/w. This house was recently for sale and I wanted to confirm the price (she had no questions about why I was asking which was a surprise in itself!)
Here goes on the Hawthorn property:
$1,200,000 x 1 % ÷ 4 = $3,000 p/w
Again, not going to happen.
I started to think broader. It wasn’t just my house, or my town, or my city … was it all of Australia?
Are property prices in Australia grossly over-valued?
Still More Questions
Now I’m getting into research and I’m reading that rental yields in Australia are rubbish and that Australia has some of the most expensive housing in the world.
The Global Property Guide looks at rental yield all over the world. Surprise, surprise – Sydney’s rental yield is classified as VERY POOR at only 2.85%. That’s no where near the ideal return of 9%.
By now I’m starting to wonder: does the 1% rental rule ever work in Australia?
Apparently it does in very limited circumstances.
Think a large farmhouse in a rural area, or student accommodation in a city (don’t quote me on this).
I’m going to stick with index funds in the stock market.
And, there’s no tenants to manage, maintenance or repairs, rates or insurance bills.
What’s your preference? Real estate or shares? Please scroll down to leave a comment.
Disclaimer: This is in no way financial advice. I am not a financial advisor. Do your own research and seek professional advice as needed.