Buyer agents across the country have revealed where real estate investors can achieve good long-term returns without spending a fortune.
But as rising interest rates put pressure on investment returns, Propertyology managing director Simon Presley says it’s important to not only buy in the right location, but also balance cash flow with the need for capital growth. says.
Cash flow is only part of the equation, and rising interest rates will impact your bottom line.Photo: Getty
Indeed, despite rising rental prices, Mr Presley told realestate.com.au it is nearly impossible for new home property investors to generate positive cash flow from day one in an investment grade location. he said.
He said it would be “wrong” for investors to choose locations purely based on cash flow.
“The cash flow you want is in retirement, and that’s determined by the value of the property when you sell it, not the rent you paid when you bought it,” he said.
“The focus should be primarily on capital growth and what affects it.”
Propertyology’s Simon Presley says economically diverse regional locations can deliver better long-term returns.
He advises investors to select low-maintenance homes in locations with economic diversity and clear growth drivers.
He says this won’t necessarily be the capital.
“Over the past 20 years, the strongest real estate markets in terms of capital growth have been in 400 regional cities, about 100 of which have significant economic diversity.”
See our list of regional cities that offer a balance between cash flow and capital growth..
Interest rates put pressure on real estate profits
With both property prices and interest rates rising rapidly, new investors are almost guaranteed to lose money on their investment property unless they have a large deposit, according to Propertyology analysis, but in certain regions of Australia It is said that the rental yield will minimize the shortfall.
“Until mortgage interest rates drop to nearly 4%.” [from the current 6.5%-7.5%]”Purchasing a positive gear investment property does not exist in Australia,” Mr Presley said.
Lender interest rates offered to investors are typically higher than owner-occupier mortgage rates.
Sydney investors buying median-priced homes face cash shortfalls of tens of thousands of dollars a year.Photo: Getty
Propertyology calculated annual cash flows for investors in locations across Australia, assuming median suburban single-family home prices and median rents over a 48-week year. 10% cash deposit and 6.5% interest only mortgage. Annual costs include $3,000 in council fees, $3,000 in insurance premiums, and property management fees as a percentage of rent.
The final numbers paint an eye-opening picture, with investors facing shortfalls of between $25,000 and $50,000 on six of the eight capitals at current interest rates.
Even if interest rates were cut by 2 percentage points, investors in each capital would still feel short on cash.
Annual cash flow shortages across the capital
capital | Annual shortfall (6.5% interest rate) | Annual shortfall (4.5% interest rate) |
sydney | $52,000 | $30,000 |
melbourne | $38,000 | $22,000 |
brisbane | $27,000 | $14,000 |
adelaide | $25,000 | $13,000 |
perspective | $16,000 | $6,000 |
hobart | $25,000 | $12,000 |
darwin | $13,000 | $3,000 |
Canberra | $32,000 | $14,000 |
A Sydney investor can expect to pay $52,000 each year on a 6.5% mortgage, compared to $30,000 at a 4.5% mortgage rate. In Melbourne, the shortfall would be $38,000 for a 6.5% loan and $22,000 for a 4.5% loan.
Based on a 6.5% loan, investors can expect to lose $32,000 in Canberra, $27,000 in Brisbane, $25,000 in Adelaide and Hobart, $16,000 in Perth and $13,000 in Darwin.
And if investors are in the minority who choose principal and interest loans, the losses are even greater.
Pressley said the numbers make the image of a “greedy landlord” look ridiculous.
“People may be surprised to learn that the landlord of a modest three-bedroom house in Sydney could be shelling out as much as $50,000 of his own money each year.”
Pressley cautioned investors that while the law of negative gearing allows them to recoup some of their losses, they first need to absorb them.
“If an investor is short $20,000 each year, they will get about a third of that back when they file their tax return.”
Local areas have good cash flow
According to Propertyology data, some of the nation’s strongest cash flows, or better yet, the least losses, occur in regional cities.
Of the 12 suburbs listed, nearly half have a median home price of less than $400,000, and none have a median price of more than $700,000, according to PropTrack data.
regional location | Annual shortfall (6.5% interest rate) |
Parks New South Wales | $13,000 |
Glen Innes, New South Wales | $10,000 |
Mackay, Queensland | $12,000 |
warwick, queensland | $10,000 |
Vic Mildura | $14,000 |
Bairnsdale, Vic | $14,000 |
Goolwa, SA | $17,000 |
Mount Gambier, SA | $12,000 |
Devonport, Tass | $15,000 |
Glenorchy, Tas | $16,000 |
Albany, Washington | $14,000 |
Geraldton, Washington | $10,000 |
In New South Wales, investors in Parks can expect a cash flow shortfall of $13,000 a year and in Glen Innes, they can expect a cash flow shortfall of $10,000. In Queensland, investors in Mackay are expected to lose $12,000 and investors in Warwick are expected to lose $10,000.
In Victoria, homes in Mildura and Bairnsdale suffered losses of $14,000, while in South Australia, homes in Goolwa and Mt Gambier suffered losses of $17,000 and $12,000 respectively.
This two-bedroom home on a large block in downtown Bairnsdale just went on the market for $475,000. Photo: realestate.com.au/buy
Homes in Tasmania, Devonport and Glenorchy will see losses of $15,000 and $16,000 respectively, while in Western Australia, shortfalls are expected to be $10,000 in Geraldton and $14,000 in Albany.
Eleanor Cree, senior economist at PropTrack, said investing in regional cities often generates more cash flow than investing in metropolitan centres.
“Regional Australian towns often have higher gross rental yields than larger cities due to the often limited supply of rental properties, lower property prices and local economic factors. is.”
According to the 2021 census, the population of the Mackay region is 121,691. Photo: realestate.com.au
However, he added that while there may be positive gross returns in some areas, there may also be risks.
“Precarious situations can arise in some rural locations, particularly those concentrated in particular industries such as mining, which often have a limited tenant pool or Challenges around fluctuations in the local economy may increase the risk of vacancy.”
Pressley also cautioned investors against purchasing attached housing units such as apartments, townhouses and duplexes purely to increase cash flow.
“Housing has large mortgages and high interest costs, but it’s growing at a much higher rate in terms of property values,” he said.
Although the units may offer a better total yield, they may not provide the best return on investment over the long term.Photo: Getty/Brendon Thorne
Mr Cree said investors needed to consider other costs associated with property investing, such as strata fees, maintenance costs and council fees.
“These costs will not be the same in different areas or properties, so it’s important to consider all of these factors.”
Is it the right time for investors to jump in?
Despite the expense investors face, a recent realestate.com.au survey found that 78% of landlords consider property investing to be a good long-term investment, more than a good short-term investment (37%) .
One in two respondents also said that real estate investing is not as lucrative as it used to be, although lending activity shows investors are returning to the market.
“After falling to historic lows during the pandemic, investor activity has picked up and returned to investor lending, which now accounts for about a third of new lending,” Cree said.
“At the same time, PropTrack data shows rental property sales are slowing and while rental inventory is increasing as new investors enter the market, many markets remain incredibly tough. facing the situation.”
Pressley said he believes “it’s always a good time to invest in your future,” and it’s up to investors to do their research.
Cash flow is just the first consideration in terms of “what’s safe,” he said.
“The question is how much of the household budget can be spent on this property.
“Then we will look at capital growth potential in regions across Australia.”