Cashflow and capital growth are two key goals that determine a successful investment.
And while these two factors are important, InvestorKit Founder and Head of Research Arjun Paliwal said there’s more to it than the eyes can see.
“It’s important to maintain a balance between cashflow and capital growth in investment properties, and analyse market pressure, demand, and supply to make informed investment decisions,” Mr Paliwal said.
“By understanding and monitoring risks related to high vacancy rates, high building approval rates, high inventory, and weak local economies, investors can make sound property investments.”
So what should beginner and seasoned investors be looking for in today’s market?
See Also: What makes a good investment property?
1. Consider purchasing in areas with low vacancy rates
Mr Paliwal said it’s simpler to keep an eye on situations where supply is limited rather than speculating about demand.
“A low vacancy rate is a useful way to gauge how much people want to rent and how many rental options are available,” he said.
“If the vacancy rate is below 2%, it means it's a good time for landlords because there are more people looking to rent and rents are likely to go up quickly.
“Investors are currently seeing near 1% and below 1% in many cities across Australia making things very attractive.”
2. Don’t purchase apartments, buy houses
While property investment newbies tend to go for an apartment as their budget can’t afford a house, Mr Paliwal says to ‘stay clear.’
“Investing in houses instead of apartments helps to avoid the risk of oversupply, which can negatively impact price growth,” he said.
“For example, the majority of those who purchased apartments in Sydney or Melbourne between 2015-2017 due to the last peak of the market, and over supply then, would have made little to no gains.”
On the latest episode of the Savings Tip Jar podcast, buyers agent Michelle May also advised against buying new apartment builds, particularly in Sydney, because the quality of construction and how the building settles isn't yet known.
3. Don’t buy investment properties based on your own taste
Remember, the investment property is not for you so avoid marking purchases based on your own personal preferences.
You want to cater for the tenants that will likely be living in the property, so analyse the market demand and potential for growth.
But don’t just rely solely on amenities like train stations and shopping centres to make a decision.
“While these amenities may initially contribute to an area's development, the effect is often temporary, and the growth rate eventually returns to normal,” Mr Paliwal said.
“It's essential to remember that people have diverse preferences and needs.
“By maintaining an open mind and considering various factors beyond immediate conveniences, you increase your chances of discovering investment opportunities with long-term growth potential.”
4. Stay clear of areas with a high building approval rate
Mr Paliwal’s next top tip is to avoid areas with high approval rates.
“A high number of new house building approvals indicates future supply to the sales market,” he said.
“Without increasing demand, a large number of new houses could lead to oversupply, resulting in weak price growth.”
5. Look at buying in areas that have a strong local economy
A strong local economy can positively affect the lifestyle of an area and its property market.
Mr Paliwal suggests analysing:
- Job ads
- Migration trends
- Infrastructure investments
- Industry composition
- Airport passenger movements
- Housing finance commitments
“Don’t be quick to assume that a large population size, large corporate offices, or it being a capital city mean that it has a strong local economy,” he said.
6. Be flexible and go borderless
While purchasing an investment property in your current home state may seem like the safer option, Mr Paliwal suggests breaking free from local boundaries.
“While it's tempting to focus solely on your own backyard, there are incredible opportunities waiting in booming regional areas or capital cities in other states,” he said.
“Don't fall into the trap of believing that success lies only in suburbs near CBDs, school catchment zones, waterfront towns, or capital cities.
“By broadening your scope, you open yourself up to a wider range of investment options that can yield greater returns in the long run.”
What does the current market look like for investors?
Combine rising property prices, low vacancy rates, increasing demand, escalating rents, and you have created a favourable environment for potential investors.
CoreLogic’s Quarterly Rental Review revealed national rent values rose 2.5% in the June quarter, while national vacancy rates sat at 1.2% - well below the pre-COVID decade average of 3.3%.
Across the individual capitals, Melbourne continues to lead the pace of quarterly rental growth, with dwelling rents rising 3.9% in the quarter, followed by Perth (3.4%) and Sydney (3.2%).
Migrants, students, and tourists are also set to return to Australia in droves this new financial year, with 315,000 arrivals expected, likely fuelling rental demand in inner city locations.
However, with inflation moving past its peak and the end of cash rate hikes near, an end to rising rents may be imminent.
CoreLogic Head of Research Eliza Owen said growth in rent values is expected to slow in 2024.
“As renting becomes less affordable, tenants may turn to re-forming share houses, which will reduce rental demand,” Ms Owen said.
“Construction cost increases are easing, and as the elevated pipeline of residential dwellings under construction are completed, renters who may have been waiting for new homes can exit the rental market.
“2024 may also see a lift in rental supply from government initiatives around social and community housing.”
While investors may not have the grounds to increase rents to the extent they have over the last few years, Ms Owen said investors are already returning to the housing market.
“This bounce-back is likely to be stronger in 2024 if interest rates decline and house prices rise,” she said.
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