Suburbs with good investment prospects – but there's a catch … – realestate.com.au

Caroline Riches
Updated 11 Oct 2023, 4:47pm
First published 11 Oct 2023, 3:09pm
A national buyer's agent has revealed the locations where property investors can achieve good long-term returns without breaking the bank.
But as higher interest rates eat into investment returns, Propertyology managing director Simon Pressley says it's about balancing the need for cash flow – and capital growth – as well as purchasing in the right location.
In fact, despite soaring rental costs, Mr Pressley told realestate.com.au it's near-impossible for new residential property investors to generate positive cash flow from day one in investment-grade locations.
He said investors would be "wrong" to choose a location based purely on cash flow.
"The cash flow that you want is in retirement, and that will be determined not by the rent when you buy the property, but by the asset value when you sell," he said.
"Your primary focus should be on capital growth, so focus on the things that influence that."
Cash flow is only part of the equation, with higher interest rates eating into returns. Picture: Getty
He advises investors to handpick a low-maintenance house in a location with economic diversity and identifiable growth drivers.
This will not necessarily be a capital city, he said.
"Over the last 20 years, the best performing property markets in terms of capital growth have been among the 400 regional townships, and of those, around 100 have significant economic diversity."
Propertyology‘s Simon Pressley says regional locations with economic diversity can offer better long-term returns.
Jump to see the list of regional towns offering a balance of cash flow and capital growth.
With a sharp rise in both property prices and interest rates, analysis by Propertyology shows new investors are almost guaranteed to make a loss on their investment properties unless they have sizable deposits, though there are certain parts of Australia where rental yields will minimise the shortfall.
"Until such time as home loan interest rates reduce to nearer 4% [from the current 6.5%-7.5%], buying a positively geared investment property in Australia is non-existent," Mr Pressley said.
Lender interest rates offered to investors are typically higher than owner occupier mortgage rates.
Sydney investors purchasing a median priced house face an annual cash shortfall of tens of thousands of dollars. Picture: Getty
Propertyology has calculated annual investor cash flow in locations throughout Australia assuming the median price of a detached house in a suburb and median rent over 48 weeks of the year; a 10% cash deposit and an interest-only home loan at 6.5%; and annual expenses of $3,000 for council rates, $3,000 for insurance, and property management fees as a percentage of rent.
The final figures paint an eye-opening picture, with investors facing a shortfall of $25,000 to $50,000 in six out of eight capitals under current interest rates.
Even if interest rates reduced by 2 percentage points, investors in each capital city would still see a shortfall.
Annual cash flow shortage across the capital cities
Investors in Sydney can expect to fork out $52,000 each year on a 6.5% loan, compared to $30,000 if the home loan rate was 4.5%. In Melbourne the shortfall would be $38,000 on a 6.5% loan, up from $22,000 on a 4.5% loan.
Based on a 6.5% loan, investors can expect a loss of $32,000 in Canberra, $27,000 in Brisbane, $25,000 in Adelaide and Hobart, $16,000 in Perth and $13,000 in Darwin.
And if the investor is among the minority who opt for a principal and interest loan, the losses will be even higher.
Mr Pressley said the figures made the "greedy landlord" image seem laughable.
"People might be surprised to learn that the landlord of their basic three-bedroom house in Sydney may be forking out $50,000 of their own money each year."
Mr Pressley reminds investors that negative gearing laws enable them to claw back some of their losses, though they will still need to absorb them first.
"If the investor has a shortfall of $20,000 each year, they'll get about a third of that back when they lodge their tax return."
Some of the strongest cash flows around the country – or better said, the smallest losses – occur in regional towns, according to Propertyology data.
Of the 12 suburbs listed, PropTrack data shows almost half have a median house value of less than $400,000, and none have a median value of more than $700,000.
In NSW, investors in Parkes can expect an annual cash flow shortfall of $13,000, or $10,000 in Glen Innes. In Queensland, investors in Mackay can expect losses of $12,000, and $10,000 in Warwick.
In Victoria, houses in Mildura and Bairnsdale create a shortfall of $14,000, while in South Australia, houses in Goolwa and Mount Gambier generate losses of $17,000 and $12,000 respectively.
This two-bedroom home on a large block in the heart of Bairnsdale has just hit the market for $475,000. Picture: realestate.com.au/buy
In Tasmania, Devonport and Glenorchy houses create losses of $15,000 and $16,000 respectively, while in Western Australia, investors can expect shortfalls of $10,000 in Geraldton and $14,000 in Albany.
PropTrack's senior economist Eleanor Creagh said investments in regional towns often generate greater cash flow than those in larger urban centres.
"Towns in regional Australia often have higher gross rental yields compared to major cities partly due to often limited supply of rental properties, lower property prices and the unique economic drivers of different regions."
The Mackay region has a population of 121,691 according to the 2021 Census. Picture: realestate.com.au
But while some regions may have positive gross returns, they can also carry risks, she added.
"Some regional locations can experience volatile conditions, especially those leveraged to one industry like mining. Often the risk of vacancy can be higher with more limited tenant pools as well as challenges surrounding fluctuations in local economies."
Mr Pressley also warned investors against buying attached dwellings – such as apartments, townhouses or duplexes – purely for greater cash flow.
"While houses carry bigger mortgages and higher interest expenses, they grow at a much higher rate in terms of their asset value," he said.
While units can offer better gross yields, over the long term they may not provide the best return on investment. Picture: Getty/Brendon Thorne
Ms Creagh said investors should consider other expenses that come with property investments, like strata fees, maintenance and council rates.
"These expenses won’t be the same across different areas and properties, so it’s important to be across all these factors."
Despite the outlays facing investors, a recent realestate.com.au survey revealed 78% of landlords see property investment as good long-term investment, more than a good short-term investment (37%).
And while one in two respondents said investing in property isn't as lucrative as it used to be, lending activity indicates investors are returning to the market.
"Investor activity has picked up, and investor lending has returned to comprising around a third of new credit, after falling to historically low levels during the pandemic," Ms Creagh said.
"At the same time, according to PropTrack data, sales of rental properties have slowed and with new investors entering the market, rental stock is growing, though many markets still face incredibly challenging conditions."
Mr Pressley believes it's "always a good time to invest in your future", and said it's up to investors to do their research.
Cash flow is just the first thing to consider in terms of 'what's safe', he said.
"It's about how much of your household budget you can put towards this property.
"Then, it's about considering the capital growth potential in locations across Australia."
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