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The property investment puzzle solved

The property investment puzzle solved

In the current air of uncertainty, we know that some localities should be avoided, while most others will still deliver rental income and price growth over time. The best results, however, will only be secured by investors who know which suburbs will deliver the strongest cash flow or highest imminent growth.

The issue for investors is that the housing market is like a huge jigsaw puzzle, with more than ten million properties spread over 15,000 suburbs. Although it may seem impossible, with so many properties and suburbs to choose from, success can be achieved by sorting all the suburbs in Australia into groups with similar risks, opportunities and potential.

I have done this for you by creating four groups of suburbs called Cash Cows, Shooting Stars, Sleepers and Long Shots. To estimate the likely performance of any suburb, all you need to know is which group it belongs to.

CASH COWS, SHOOTING STARS, SLEEPERS AND LONG SHOTS

Each group contains all those suburbs which have certain characteristics in common, such as their locations, buy price ranges and types of properties, types of renters and potential buyers.

This not only makes them easy to find, but also reveals the likely results you will receive from each of them as an investor.

This knowledge gives you a much better chance of buying in an area with the best potential to meet your goals. So, what are the opportunities and risks of the suburbs in each of the groups?

SLEEPERS OFFER LOW RISK, BUT AVERAGE PERFORMANCE

Most of our 15,000 suburbs are located in established areas of our capital cities and regional towns. They are the sleepers, where property pices and rents move in tune with the overall ebb and flow of the market. Because there are so many sleepers, they actually “make the market” and it is their rent, price and yield performance that generates the city and regional median house and unit data we read about.

This means that if you invest in a typical property in an established city suburb, you can expect to obtain average performance over time – no better, and no worse.

CASH COWS OFFER HIGH RENTAL YIELD WITH SECURITY

Cash cow suburbs are the holy grail of investors who look for positive cash flow because they provide high rental yield driven by genuine rent demand. Due to recent pandemic induced lockdowns and border closures, however, some of these locations can be highly risky, especially if they rely on rent demand from migrant arrivals, overseas tourists or international students.

You will still find them in areas with large numbers of permanent renters, such as the older, well established but ungentrified ex Housing Commission precincts and also rural towns which have pools of permanent renters whose local ties are too strong to encourage them to leave.

Holiday destinations can provide high rental yields, but the demand is often seasonal, peaking during the summer holiday season, or during the winter months in tropical locations and alpine resort towns. .

Some cash flow locations experience a temporary rise in rental demand when mines are constructed or further developed and during transport infrastructure projects including the building or expansion of railway lines, ports or highways. These rental booms are most common in remote and regional areas where the workers must rent in nearby towns until the project is complete, when the renters leave and the high cash flow often ends.

LONG SHOTS PROMISE HIGH RETURNS BUT WITH HIGH RISKS

The hope of buying in a town or suburb just before it bursts into spectacular growth is something that appeals to us all. It would be like winning the property lottery and indeed the similarity is striking, because only very few people who invest in long shots ever hit the jackpot.

Most of these investments are based on pure speculation about an imminent housing boom, rather than actual evidence. They start with attention grabbing news headlines or trending social media posts about a huge new mining venture, port expansion, railway line or other intrastructure project that has everyone buzzing with excitement, and the fear of missing out. 

Because so many of these big ticket projects are delayed, altered, abandoned or don’t even start, the initial boom often ends along with the enthusiasm of speculators who rushed in to buy properties. Their disappointment turns to panic as property prices crash and no one wants to buy. Long shots are strictly for those who can bear the risk of recurring losses in the hope of an occasional huge payoff.

SHOOTING STARS PROVIDE BOTH HIGH RENT AND PRICE GROWTH

Waiting quietly amongst the sleepers, cash cows and long shots are the shooting stars, those suburbs with the potential for buyer or renter demand to rise dramatically, generating high price and rent growth in the process.

Sleeper suburbs can turn into shooting stars with a sudden rise in first home buyers, upgraders, relocators or downsizing retirees. Cash cows boom if a dramatic lift in rental demand sends sends rental yields upwards and investors start competing to buy properties.

Long shots transform into shooting stars when work on a new mine or infrastructure project actually begins and rental demand from construction workers sends rents shooting upwards. Prices often also rise as investors rush in to buy properties.

On completion, some projects such as highway duplications and new railways can cause a second and more sustained boom in buyer demand and prices as nearby areas become safer, easier and quicker to access.

The secret to success is to locate areas where a sudden rise in buyer or renter demand is imminent, and then buying the right type of property just before the growth kicks in.