The long-term view for city property is low-yield and high-growth, while for country property, it’s high-yield and low-growth. It is important for an investor to know that these two widely accepted assumptions are often on the contrary.
Experienced investors know how to get the best of both worlds (capital city and high-yield).
As an active investor I have always applied the rule to seek both capital growth and cash flow. From my experience, these are a few ways of getting the best of both worlds:
It’s important to only buy dual-income properties in areas without possible oversupply issues. Make sure the vacancy rate is tight so you have assurance on finding tenants. A good vacancy rate to stay under is 2.5 per cent.
Make sure the location is viable and understand commercial property market drivers.
Also make sure the tenant is in a high-demand industry and local demographics and how long it would take to find a new tenant if your current one leaves. If you get these all right, you will have a high-quality asset.
Lower purchase price will result in your loan being small, which will cost you less in interest. Rents will be still at the market rate resulting in a high than average yield (5.5 per cent to 6.5 per cent gross yields).
Distressed sales are far more common in residential properties, over 50 per cent of the distressed sales we buy for our clients are off-market deals. These “no-fills” style of sale results in a cheaper faster transaction.
Regional areas can be notoriously volatile due to less diversity of industries supporting the community. If you buy at the top of the cycle, there is a genuine chance the price could decline. An extreme example of this is a mining town.
A large project can bring a lot of new wealth to a market. For example, a few years back the Pacific Highway upgrade was under way near Port Macquarie. In the following 12 months from the job beginning, more and more engineers and construction works were arriving in the town. This tightened the rental market considerably. Then rents started to rise, then price-growth followed. Just be aware that vacancy rates can/will rise again once all the workers go back home.
For example, Hobart economy has come around full circle due to population growth, a shortage of properties, and a surge in investor confidence in the market. Any markets that have boomed considerably in recent times can lead to peak market conditions that have the risk of correcting.
Both country and capital city investing can be lucrative. However, timing cycles is one of the most important tasks you can undertake while investing. Buying at the wrong time can cost you hundreds of thousands in opportunity loss.
Higher yields are becoming increasingly important now that the banks have tightened their serviceability calculators. In the last six months, I have seen a surge in demand for higher yielding properties such as duplexes and commercial properties.
I believe people are finally starting to realise that the old power house cities for capital growth (Sydney and Melbourne) are not going to give you guaranteed growth. Cash flow is certainly king over the next decade in Australia.