What are the good locations for rental investment?
When someone asks me where the good locations are for rental property investment, what they’re really asking me is two things:
- What will give me the most capital growth?
- What kind of property and in what suburb will attract a tenant who will pay good, consistent rent?
Put these together and you are trying to work out is ‘What is the best property, in the best location and the right time.
The timing of the market is the macro research that indicates a capital city or region set for strong capital growth. Finding the right suburb and the right property type comes down to the micro research. All property buying decisions should be backed by a solid foundation of current research.
Getting the timing of the market right is key to a good property investment strategy. Markets move at different times and at different rates as they are driven by various drivers at various times.
So, what is a property cycle? A property cycle is best imagined in the form of a clock. 12 is the peak of the market and 6 is the bottom. It stands to reason that 6 being the bottom of the market is the best time to invest in property. That’s kind of true but not quite, so let’s unpack it a bit more. Between 12 and 3 is the ‘Correction Phase’ of the market. Both the amount of property on the market and the over-inflated prices achieved in the ‘Growth Phase’ undergo a period of correction.
Between 3 and 6 the property market goes into decline. This is partly because often the property and share markets are counter-cyclical, so when the property market corrects, many investors put their funds into the stock market. Also, all markets thrive on confidence and after a few years of correction, confidence also declines.
Between 6 and 9 the market starts to recover and is predictably described as the ‘recovery phase’. This happens when investors are more confidently coming back into the property market. The oversupply of property, in particular, apartments has been ‘corrected’, and it’s more affordable. The areas that show the greatest signs of recovery are the ones that have announced infrastructure projects that promise new jobs. They are capital cities or significant regional areas that show strong population growth. New jobs drive population, and population drives demand. 6 is often described as the bottom of the market but also the opportunity marker. I often say that this is true, however, we don’t know that we’re at 6 until we’re at 7. If you research recent property markets that aren’t doing very well, such as Darwin and Perth, they’ve been stuck between 5 and 6 for years. Until they show strong signs of recovery with the property fundamentals to support future growth, they’re not markets to consider investing in. Until these markets have started to show clear signs of recovery, ie: the market being at 7 or 8, it’s difficult to feel confident in your investment.
No matter what number the market is in the Recovery Phase,( 6, 7 or 8), between 9 and 12 is the ‘growth phase’ and just like it sounds, this is when demand is growing and when you will make the most amount of money from your investment property, in the first cycle. Confidence is strong and there is much greater demand than supply, so prices sky-rocket. This is also described as a ‘seller’s market’.
All of this is only relevant for the first cycle, but it is critical. If you do not get this part right, then you will risk losing your property before you’re able to enjoy the growth. If you do get this part right, then after the first property cycle which endures 7-12 years, depending on the area, you will have the cash flow to support your investment. After this cycle, compound interest will be doing the heavy lifting for you, in terms of capital growth. When you leave your money in the market for long enough, magic happens and is the reason both Albert Einstein and Warren Buffet describe it as the 8th wonder of the world.
Locations to consider are capital cities and regional areas. Historically, most investors stick to the major capital cities, however regional areas are on the rise in many countries like Australia. As the major cities become overcrowded and expensive, many young people seek out opportunities in growing regions, like Geelong in Victoria and the Sunshine Coast in Queensland. These are regions with good tertiary education options, great public transport infrastructure and investment in health, renewable energy, and technology.
Many families are leaving The Big Smoke to provide a better lifestyle for their children.
Timing is the first part of the research and most important and is called the macro research. It is the Big Data that helps predict the timing of the market – Economy, Employment, Population, Demographics, Infrastructure and Lending Policy. Once the timing is understood, there are more numbers the successful property investor needs to understand – the micro research or ‘the right property, in the right place’.
Do you invest in a rental property that is close to the city or in the suburbs? What amenity needs to be considered for each option? If you’re investing in a house in the suburbs then it’s important to consider who your tenant is most likely to be and in this case, probably a family, so the property will need to be close to parks, schools, hospitals, shopping centres and train stations to employment hubs. It’s likely that the property itself will contain a lot of internal amenity, such as backyard, pool, maybe an indoor theatre, rumpus room or study.
If you invest in a rental property in the inner-city suburbs, it’s likely to be smaller and attract a young single tenant or young professional couple. The property itself will not have that much amenity so it needs to be close to cafes, bars, restaurants, small shops, gyms, parks and public transport.
Your tenant should pay for most of your investment through their rental income so trying to understand who your tenant will be, will help to frame the micro research required to pinpoint the right property in the right suburb.
When we make a property recommendation, we consider many data points to get the timing of the market right. More research than the average investor has time to do or access to. as well as due diligence on the builders/developers in the area. If you know there is a lot of research necessary to consistently identify ‘the right property, in the right place at the right time’ but you either don’t have the time, energy or know-how to undertake it, turn to the property experts who do – Calla Property. This is all we do, all day, every day and the service we provide our investors doesn’t cost the investor anything. So what are you waiting for? Contact us through https://callaproperty.com.au.
If you would like recommendations to any of these finance/property professionals, please reach out to me and I’ll introduce you to the right people to be in your Wealth Creation Team. Contact +612 8006 1517. We’re here to help.