Property investment is a very popular way for people to get a foot in the door of the property market, as well as a way to build long term capital for the future. Yet with the highly priced Australian property market, many purchasers, particularly first home buyers, are currently being priced out of inner-city areas.
This is where investing in property in a regional area can be a very clever investment strategy. Many people choose to invest in property in an area in which they have no intention of living, allowing them the benefit of greater affordability and earning an income from rent, and then potentially renting a home themselves in a more appealing area. This is called “rentvesting”.
The savvy aspect of regional property investment comes to the fore when comparing the ratio of median house price against median rental tariffs. For an investor, the lower the ratio between median mortgage repayments and rental fees, the more profitable a property is. This simply means that rental return will cover a greater percentage of the mortgage repayment costs.
(A high ratio of purchase price to rental price favours the tenant – with a nicer home in an appealing area being more affordable to rent than to buy).
Currently in Australian capital cities, the buy to rent ratio is favourable to renters over investors; rental returns diminish as home values rise, and long term investment property profitability decreases. Rental yield is not currently appreciating in line with capital growth.
At July 2016, NSW is Australia’s least profitable state in which to own an investment property; house prices far outweigh any possible comparable rental return. This is closely followed by Victoria. The most profitable states for property investment at this time are NT, Tasmania, and Queensland. Those most profitable areas for property investment have low median house prices (below $500,000) and a high proportion of renters – which creates demand and pushes up rental prices.
These areas are also, for the most part, regional in nature. For example, in NT’s Zuccoli, the median house price is just $216,000, yet median rental income is $620. Conversely, some areas demonstrate rental affordability that far outweighs ownership affordability; these are areas such as Sydney’s top suburbs where homes cost in the millions yet some rental fees are well below $1000 per week.
If property investment is on your agenda, consider regional areas for great returns. Your investment property, unlike your residential property, should be chosen without emotion and for its profitability – and those rural areas driven by tourism, farming, and mining invariably perform best in the long term.
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