Investors Ask: Buying with a limited budget

By Andrew Wilson

Q. I’m on a limited budget and am contemplating investing in a low-income area because the yields don’t look too bad and the entry price is good. Is this a risky strategy?

A. The risk-profile of your property investment depends on the focus of your overall investment strategy.

Lower-priced entry-level suburbs traditionally provide higher gross rental returns for investors. This reflects strong competition for lower-priced rental properties from prospective tenants due to general housing affordability pressures.

Affordability constraints in most capitals particularly Sydney and Melbourne are also being converted into consistent rental growth driven by increasing demand due to an overall shortage of properties. Quality of tenant and tenant turnover problems tend also to be minimised in a tight rental market with a wider choice of prospective tenants which can improve bottom line outcomes for investors.

Capital gain prospects for most capital city markets remain positive over the longer-term. Studies have shown underlying price growth in Australian house prices of around 10 per cent annually.  In the shorter-term however, suburban house prices change within the normal ebbs and flows of the housing cycle which reflects the individual performance and characteristics of local housing market fundamentals and economies.

For shorter-term capital growth prospects focus on lower-priced suburbs that are in reasonable proximity to the CBD with a good range of residential amenities and facilities.

Generally, areas with good access to transport, particularly rail transport are excellent property investment propositions due to increasing commuting constraints and associated growing demand from residents.

Of course you may have to pay more for properties in these areas but it’s a question of the balance between risk and return – an individual decision dependant on the nature and aims of your overall portfolio strategy.

Andrew Wilson, senior economist, Australian Property Monitors

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