Research naming the top capital city suburbs for rental properties, with Sydney, Melbourne and Canberra notably absent.
Our research proves there are plenty of suburbs within Australia’s capital cities where high rent returns make it easier on landlords to patiently wait for equity gains.
In some locations, even with a low 10 per cent deposit, the typical property is putting money back into the owner’s pocket each year.
However, the nation’s premier cities have a paucity of suburbs in which an investor can purchase a detached house and have it be cash flow positive with a deposit of 20 per cent or less.
Noting that cash flow is only one factor in what makes an investment property worthwhile, investors look for strong cash flow need to expand their horizons.
Even though it’s 80 kilometres from Sydney’s [CBD], the Central Coast (Wyong and Gosford) are technically part of greater Sydney, while Medlow Bath in the Blue Mountains has a median house price of $500,000.
Compare that to somewhere like Blacktown, 38 kilometres west of Sydney. That suburb has a median house price of $740,000 and a property there will cost $11,775 per year to maintain, even if you have a 20 per cent deposit.
The figures are even worse for Hornsby, where a median house price of $1.33 million will leave you $26,152 a year worse off.
That’s before investors account for the end of Sydney’s growth phase, Victoria is in a similar situation.
Victoria paints a similar picture with greater Melbourne’s best locations for cash flow investors within the municipality of Melton – 40 kilometres north-west of the CBD.
Here, the median house price is around $400,000 and will cost those with a 20 per cent deposit just $4,000 per year to hold.
Then there’s inner city Brunswick, which demands an average $23,805 a year to maintain the holding: A tough ask if you’re trying to be patient.
However, high cash flow and capital growth potential don’t necessarily go hand-in-hand.
Nevertheless, they can be found in every state.
So, which suburbs made the cut?
from CBD (in kilometres)
|Annual holding costs @ 80% LVR||Annual holding costs @ 80% LVR|
|Karama, NT||10.5||$392,000||$ 3,682||$ 1,722|
|Coopers Plains, Qld||15.0||$398,750||$ 3,632||$ 1,638|
|Risdon Vale, Tas||8.1||$222,500||$ 3,435||$ 2,322|
|Gagebrook, Tas||16.1||$170,000||$ 3,339||$ 2,489|
|Chigwell, Tas||10.7||$260,000||$ 3,033||$ 1,733|
|Muirhead, NT||12.0||$650,000||$ 2,915||($ 335)|
|Cedar Vale, Qld||45.7||$480,000||$ 2,797||$ 397|
|New Norfolk, Tas||24.8||$212,500||$ 2,737||$ 1,674|
|Bridgewater, Tas||17.2||$210,000||$ 2,617||$ 1,567|
|Malak, NT||10.1||$450,000||$ 2,460||$ 210|
|Davoren Park, SA||27.0||$188,750||$ 2,369||$ 1,425|
|Smithfield Plains, SA||28.2||$199,500||$ 2,219||$ 1,257|
|Elizabeth North, SA||26.1||$197,750||$ 2,089||$ 1,110|
|Elizabeth East, SA||22.7||$210,000||$ 1,958||$ 908|
|Russell Island, Qld||41.2||$190,000||$ 1,880||$ 930|
|Wagaman, NT||10.2||$490,000||$ 1,738||$ 712|
|Blackstone, Qld||28.0||$301,000||$ 1,612||$ 107|
|Gailes, Qld||19.4||$250,000||$ 1,456|
|Virginia, NT||22.7||$630,000||$ 1,409||$ 1,741|
|Hackham West, SA||23.7||$261,500||$ 1,216||($ 92)|
|Brookdale, WA||27.5||$258,000||$ 917||($ 373)|
|Hillman, WA||37.7||$278,000||$ 117||($ 1,273)|
|Dayton, WA||15.1||$432,500||$ 86||($ 2,077)|
|Gilmore, ACT||15.5||$545,000||($ 22)||($ 2,747)|
|Medina, WA||31.5||$238,000||($ 40)||($ 1,230)|
|Gowrie, ACT||14.9||$576,500||($ 404)||($ 3,287)|
|Richardson, ACT||16.6||$495,000||($ 438)||($ 2,913)|
|Armadale, WA||25.7||$250,000||($ 520)||($ 1,770)|
|Charnwood, ACT||12.2||$460,000||($ 575)||($ 2,875)|
|Calwell, ACT||18.0||$550,000||($ 881)||($ 3,631)|
|Millgrove, Vic||61.7||$365,000||($ 1,826)||($ 3,651)|
|Rockbank, Vic||27.9||$505,000||($ 2,375)||($ 4,900)|
|Kurunjang, Vic||36.9||$388,750||($ 2,996)||($ 4,939)|
|Lake Munmorah, NSW||82.1||$490,000||($ 3,093)||($ 5,543)|
|Watanobbi, NSW||68.8||$495,000||($ 3,293)||($ 5,768)|
|Mannering Park, NSW||85.2||$480,000||($ 3,681)||($ 6,081)|
|Kanwal, NSW||69.4||$495,000||($ 3,732)||($ 6,207)|
|San Remo, NSW||77.4||$465,000||($ 3,740)||($ 6,065)|
|Melton South, Vic||36.4||$398,000||($ 3,915)||($ 5,905)|
|Warburton, VIC||64.7||$423,500||($ 3,946)||($ 6,064)|
These calculations are based on median house values and median rents as at May 2018, with annual holding costs based on four weeks vacancy a year, 4.5 per cent loan interest and general provisions for property management fees, council rates, maintenance and insurance.
SMSF Lending/Young Investors
Despite a tough lending market, young investors are looking to tax-effective structures to get their foot on the ladder in the Australian property market.
Pitcher Partners managing director Michael Minter said while the SMSF lending space has faced much tighter lending controls this year, particularly following the Royal Commission, the idea of using super to buy property within a super fund remains appealing to SMSFs from generation X and Y.
While there are important risks to consider, Mr Minter said younger SMSF trustees are still attracted to holding property in super for some of the benefits associated with it including a lower tax rate on SMSF income, a lower capital gain tax rate and tax deductions such as insurance premiums.
Mr Minter said there are two main types of generation X and Y investors.
“The first is the business owner who currently paid rent, but would prefer to buy a property, and have the rent paid into their super fund. The second wants to build their super balance through strategic property investments by borrowing and gearing,” he said.
He warned that there are important considerations that need to be made before undertaking property investments in super or an SMSF, however.
Practitioners, for example, he said, need to review their client’s financial goals current financial situation and tax obligations.
“Compare their current super fund against running an SMSF. Investment carries risk and the client must decide what level of risk you are comfortable with,” he said.
He also noted that $200,000 is the preferable amount to start an SMSF.
“Before making any property investment, the client should establish a set of investment criteria that they are comfortable with, including whether it’s residential or commercial, local or elsewhere or big or a mix of smaller properties. But whichever approach you adopt, research the options and the market thoroughly,” he said.
After SMSF borrowing became allowable under Australian law in 2007. Second-tier and smaller, boutique lenders are now poised to capture the lion’s share of new business.
Competition in the market has also not been helped by the corporate regulator, ASIC, floating a ban on SMSF borrowing in an effort to minimise poor and conflicted superannuation advice.
Aren’t what they were 30 years ago, a prominent economist has said, flagging continued slowing for the next five years.
AMP Capital’s chief economist, Shane Oliver, has called on investors to have “realistic return expectations”, given the continuing slide in investment yields.
He also said investors should be aware that real returns won’t take as much of a hit, given that inflation is so low.
“While investment returns have been good, the medium-term (say five to 10-year) potential from major asset classes has been moving down,” Mr Oliver said.
“Investment returns have two components: yield (or income flow) and capital growth. Looking at both of these components points to lower average investment returns over the next five years compared to the last five years.”
Noting the high interest rates and rental yields of the 1980s, Mr Oliver said investments in that time provided high income and as such only modest capital growth was needed for growth assets to deliver strong returns.
“As it turns out, most assets had spectacular returns in the 1980s and 1990s and balanced growth superannuation fund returns averaged 14.1 per cent in nominal terms and 9.4 per cent in real terms between 1982 and 1999 (after taxes and fees),” he said.
However, returns have tracked downwards since then. Currently, a 1.5 per cent cash rate, 10-year bond yields of 2.5 per cent and gross residential property yields of 3 per cent point to lower return potential.
Coupled with slower growth in household debt, rising geopolitical tensions, ageing populations, technological innovation and the rapid growth in Asia’s middle class, capital growth potential from growth assets will likely be constrained. However, population growth will have the most significant effect.
AMP Capital predicts medium-term (five to 10-year) potential returns of 7.1 per cent for world equities, before fees and taxes. Australian equities are predicted to return 7.6 per cent and unlisted infrastructure will deliver 8.1 per cent.
“Low yields and constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns,” Mr Oliver said.
“In fact, the decline in the rolling 10-year average of super fund returns indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets with strong returns in between.”
“Much of this reflects very low inflation – real returns haven’t fallen as much,” he said, suggesting investors focus on assets with sustainable income flows.