With low interest rates likely to be sticking around for a while, there’s no time like the present to be thinking about investing in property.
Australian home prices have been climbing since the market boomed in 2013 – that’s great for capital growth but has meant lower rental yields for investors in some suburbs.
That’s why it’s crucial to choose the right suburb for your investment goals, says John Edwards, founder of residential research company Residex.
“You have to work out what you’re looking for as an investor,” he says.
“Are you looking for cash flow? Capital growth? Tax benefits?”
If you’re approaching retirement, you might be looking for cash flow, a property that’s positively geared (generates more income than you pay in expenses), he says.
Those some time off from retirement may be more focused on capital growth as well as rental return and minimising their tax bill, so a negatively geared property (when the expenses outweigh the income and can be claimed as a tax deduction) may be the way to go.
For capital growth, you should research the historical growth rate and rental market of the suburb, looking at the past 20 years, Mr Edwards says.
A suburb normally maintains its long-term growth rate, even if it temporarily fluctuates, usually because of its location, he says.
The key to finding good rental yields is to look at supply and demand.
“Ideally, the investor should be looking for suburbs that are going to have not necessarily capital growth but rental growth, and that comes back to this issue of making sure that you’re not in an oversupplied suburb or area,” he says.
Mr Edwards warns against focusing purely on capital growth.
“We’re in a market, currently, where, because of affordability, we’re unlikely to see large rates of capital growth again,” he says.
“What we’re likely to see is moderate rates of capital growth but increasing rental yields, so if people are just concentrating on capital growth, I think they might be disappointed.”
Here are six steps for choosing a suburb:
1. Avoid oversupplied areas
“In every major capital city, we’ve currently got an oversupply of units, usually around the inner city, like Southbank in Melbourne,” Mr Edwards says.
“You don’t want to be buying in those areas.”
To check for potential oversupply, Mr Edwards suggests checking whether new, big apartment blocks are being built in the area.
You can gauge vacancy rates by looking at how many lights are on in existing apartments, he says.
2. Follow the infrastructure
Go where the infrastructure is, says Matt Lahood, director of sales at McGrath Estate Agents.
“Suburbs where there is big infrastructure like hospitals and universities, they all attract people that work at those places, so there’s a lot of people wanting to live close by,” he says.
“You want to buy in an area where you know it’s popular, so that when the tenants give notice that they’re going to move out, you’ve got someone moving in pretty quickly.”
3. ‘Tis the season
Consider seasonal factors, beachside properties may be harder to rent in winter, Mr Lahood says.
4. Consider culture
“We live in a multicultural society and different groups of people are interested in living in different types of housing, so you need to think about who is living in the area,” Mr Edwards says.
5. Think convenience
Public transport is critical, Mr Lahood says. Also look for shopping centres, proximity to the CBD and neighbourhood safety.
Property experts like Residex, RP Data and Australian Property Monitors offer a range of reports on market trends. There’s also a helpful investment tool at www.realestate.com.au/invest.