Top 5 tips for selecting the right suburb for your investment property
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At Premier Buyers, our philosophy revolves around 3 pillars of portfolio growth – Cashflow, Price Growth and Rental Growth. Priority for each pillar will vary slightly depending on individual circumstances. You need trifecta to build a successful portfolio. For example, a first-time investor may be more inclined towards cashflow to service rising interest rates. With no property price increase in the near to medium term, they must save another $100-150k for the next purchase. This saving would otherwise have come from their equity if the property also experienced price growth. A seasoned investor, on the other hand, with 10 properties in their portfolio may slightly over-index price growth if they already have healthy cashflow. You get the idea!
A fun fact - did you know only 14.9% of Australians own at least one investment property? Only 1.5% (it’s not a typo if you are wondering) own three or more investment properties. Is this a case of an Aussie DIY gone wrong? Maybe yes but the common denominator is a compromise of one, two or all three variables (i.e., cashflow, price growth, and/or rental growth). You must have nailed all three factors if you have an investment property and looking to add another to your portfolio.
‘Location, location, location’ has been a catchphrase when it comes to real estate investment. It can be quite overwhelming knowing there are over 15,000 suburbs across Australia to choose from. Getting this right is understanding the law of demand and supply in real estate. Here are Top 5 tips for choosing the right area for your next purchase.
1. Know your budget and cashflow
Median house prices across Australia range from $150,000 to almost $10 million in the current market. Understanding how much the bank is willing to lend you as well as the savings you have accumulated will immediately narrow down areas.
You need to go a step further and understand how much you can afford or are willing to contribute to the property on a monthly, quarterly, and annual basis. Buying a property is a long-term investment and you need to feel comfortable with what you are getting into.
Rental Yield is the single metric that will predominantly give you an idea of cashflow. You also need to take into consideration costs like property management fees, insurance, strata, council rates, loan repayment etc. You may see a ‘10% yield’ in an ad but they often fail to tell you $5k you need to contribute on strata/council rates or $8k in insurance premiums as it is in the flood zone. Whilst the property itself determines cashflow, the area also plays a huge role in what you may expect in cashflow.
2. Review historical and recent sales data
On a long-term average, Australian property prices have generally doubled every 10 years. When you monitor the results closely, most increases happen in relatively shorter cycles. If the prices have risen by more than 50% in the last three years, for example, you have missed the boat. That’s okay, there is another boat waiting for you!
3. Understand the equilibrium of demand and supply
The price is a by-product of supply and demand. If the area has plenty of development application approvals, it is a leading indicator of potential oversupply in the future resulting in prices to decline.
On the demand side, if the suburb is heavily skewed towards one industry of employment (e.g., mining), it could be another leading indicator of a possible decline in population in the area.
4. All things renters and rent
Renter proportion: Renters make up 31% of Australian households. If the suburb you are looking to purchase has ~30% of renters, then it is perfectly normal. If this proportion is 50%, for example, then the probability of lower-than-average price and rental growth is much greater. Just imagine a property on your street that is tenanted. You probably know this by looking at how ‘well’ it is kept. I will let you imagine most houses in that state on your street and suburb, and what they do to street appeal and the property price.
Rental Income: More renters also mean more landlords in the suburb and the science of probability says that there is a good chance that you may be competing with many other landlords to lease your property. This may result in lower-than-average rental growth.
5. Look beyond your backyard
Most investors enter the property journey by buying a place to live in. We inspect the property in person and familiarise ourselves with the area. We also throw many parameters like amenities, schools, travel time to work etc. in the mix before buying a perfect place to settle down.
We tend to copy and paste the same parameters in investing property and buying in an area we are most familiar with. You need to put an investor mindset and be comfortable venturing beyond our own backyard which will also help diversify your portfolio. This is not dissimilar to buying shares in a company from a totally different industry you work in. We do it by looking at potential dividends (we call it rental yield in property language) and capital growth.
We’re here to help
At Premier Buyers, we look at data indicators and overlay this with your requirements to shortlist areas for your next property purchase. Click here for a helpful guide to find the right property.
If you would like to understand more about our methodology to select an area, please feel free to request an obligation-free consultation. We are here to help achieve your property goals.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any individual objectives, financial situation or needs. Before acting on this information, Premier Buyers recommends that you consider whether it is appropriate for your circumstances and engage qualified professionals.