Auckland's shoebox apartments continue to provide some of the best rental returns available in the residential property market.
With a floor area of just 18 square metres, they don't get much more shoeboxy than one that was auctioned by City Sales last week.
But never mind the size, look at the rent.
Located in the City Zone apartment complex just off the top of Queen St in Auckland's CBD, it was rented at $310 a week or $16,120 a year.
That would provide a gross rental yield of 8.2%, compared to yields of 3.6% to 5% for the Auckland suburbs monitored by the REINZ/interest.co.nz Rental Yield Indicator.
Those low returns on Auckland suburban properties have seen many investors head to the provinces in search of higher yields, but even then an Auckland shoebox is likely to provide a better return.
Of the 56 locations around the country monitored by the Indicator, only five, Holdens Bay/Owhata in Rotorua, Flaxmere in Hastings, Waitara/Inglewood in Taranaki, Whanganui and Invercargill had gross yields above 8.2% in the December quarter of last year.
But how do shoeboxes stack up from a cash flow perspective?
Pretty well actually.
After allowing for two weeks vacancy a year and the payment of rates, the body corporate levy and setting aside $1000 a year to cover maintenance and sundry expenses, net rental income would be $11,985* a year, giving a net rental yield of 6.1% (pre-tax).
That compares well with the gross dividend yields on listed property entities like Argosy (6.3%) and Goodman Property Trust (6.2%) and is better than than the gross dividend yields provided by Kiwi Property (5.4%) and Precinct Properties (5.3%) as at March 14.
However the 6.1% yield provided by the shoebox makes no allowance for the modern miracle of leverage at historically low interest rates.
If it was purchased with a 50% deposit and a $98,750 interest-only mortgage at 4.89% (investors may need to provide additional security to obtain a bank mortgage on this type of property), the annual interest payments would be $4836, reducing pre-tax income to $7149 a year.
Although that's only 3.6% of the purchase price, the investors would have earned 7.2% of the cash they put into the property.
And if they paid a deposit of just 30% and borrowed $138,250, the annual interest payments would be $6786, reducing net taxable income to $5199, which would mean the cash deposit of $59,250 would be earning 8.8% a year.
So not only does the rent cover the mortgage and other outgoings, once they've paid tax there's still cash left over for the investors to do what they like with.
They could spend it or let it accumulate to pay down debt or reinvest.
With banks offering less than 4% on term deposits, earning 8.8% on your money is not to be sniffed out.
The downside to shoebox apartments is that they occupy a small, specialist niche in the market and their prices can be more volatile in a downturn.
After the Global Financial Crisis prices of Auckland shoxboxes plummeted far more severely than mainstream Auckland residential properties.
But their subsequent recovery was also spectacular.
Investors who had the cash and courage to buy them at the bottom of the cycle around 2009 would have subsequently made spectacular returns.
*Some investors may allow more or less money to cover vacancy and maintenance. No allowance has been made for a property management fee because many investors self manage their properties. Property management fees are typically about 8% of rent.
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