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Where smart investors are searching for their next purchase
While some investors chase high-yield areas after the federal tax reforms, smart buyers are solidifying their future wealth and growing their portfolios by focusing on markets with hidden value.
As the market shifts, investors have been encouraged to focus on quality assets in desirable locations, with Melbourne premium units and some Sydney suburbs emerging as key opportunities.
In a recent episode of How I Met My Broker, Property Strats founder Steve Ash told hosts Hung Chuy and Liam Garman that investors shouldn’t take unnecessary risks, but focus on areas with solid fundamentals, long-term growth potential and reasonable cash flow.
According to Ash, Melbourne presented opportunities for investors who had been successful in the mid-sized capitals and already had good cash flow, while those just starting out could also obtain high yields.
“You can get in with decent yields, like 7 per cent, which are getting harder. You may need to compromise a little area there, but in places in Dandenong, you can get them,” he said.
Chuy agreed that Melbourne offered numerous benefits for investors, with the premium unit market presenting value for those looking to hold for a long time.
“I’ve probably seen the highest intrinsic value in that market than anywhere else in the country at the moment,” he said.
“You can buy it for a low amount, you can spread across maybe two assets, in theory, then your yields are hitting your high fives, sixes.”
On the other hand, Chuy said while Melbourne’s sub-$800,000 house market had strong value, the holding costs could sometimes set investors back by tens of thousands in annual negative cash flow.
“If you’re on a long-term play, then great, but you have to afford the cash flow,” he said.
“Obviously rates are going to be dropping at some point, but if it does go up further that’s going to be $45,000–$50,000 every year.
In Sydney, Ash said areas in the west, such as Lakemba and Punchbowl, had performed well over the last three to four years, also presenting opportunities for investors.
“You’ve got to be pretty picky with where you buy. There’s some really bad spots, but you just need to do the work, look at the good streets, those good areas,” he said.
Ash said well-selected properties in the major capitals provided both rental income and capital growth potential, with limited downside risk and significant upside if the market improved.
“When you look at the Sydney deals, you look at the Melbourne unit deals, you feel like a bit of a kid in a candy store when you’re trying to adopt this cash flow strategy,” he said.
According to Chuy, one of the best strategies was to buy in prime areas on the fringe of blue-chip suburbs poised for stronger growth, rather than taking a risk with markets too far out.
“That way you’re buying something that’s yielding well, something that’s also got the ability to be sold in any market without stress,” he said.
Chuy said this strategy can help investors avoid ending up with “leftover stock” properties that many people were trying to sell at the end of a cycle.
On the other hand, Chuy said he had seen increased interest in risk-prone, unconventional locations, with an investor recently buying in an Alice Springs mining town.
Chuy said while the yields were usually high, and the land often provided intrinsic value, mining towns were ultimately “boom and bust”.
“If the mine’s dry, the land’s worth nothing, the rental’s worth nothing. So it’s a bit of a weird one,” he said.
“But if you can maintain the rental for about seven, eight years, you can pretty much pay off the mortgage and be debt-free.”
Ash advised against taking risks for high-yields in areas like mining towns, which could be extremely volatile.
“Just keeping it simple … go in, find those areas that are in the right part of the cycle with decent cash flow, and then it’s all about how well you can buy the deal,” he said.
“Just stick to those principles, and you can’t go too far wrong.”
Listen to the full episode here
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