There are multiple factors (we counted 41) to consider when picking the best investment suburb. This cheat sheet summarises the most important parameters that majority of real estate professionals take into account when researching a property market.
See the information summarised in this cheat sheet as an info-graphic.TL;DR
The list was compiled based on Q&A conducted with 3 experienced buyers agents. Seasoned investors use it as a cheat-sheet for DYI market research to save on buyers agent fees and discover best possible suburbs for property investment no matter the market conditions.
Typical Price & Rent
Research typical house and unit price for the area.
- Property price needs to be below the typical price and affordable based on household disposable income to allow for capital growth.
- Review the area typical price charts to establish what the typical value is for the exact property that you are thinking of buying i.e. 2 bedroom apartment or 4 bedroom house. for the area.
- Check HtAG demand profile report report to understand what property types are most sought after by buyers and renters.
Rental Yield in best investment suburbs
Reseach average Gross and net yield of the best investment suburbs where the property is to be purchased.
- Asses yields in the location to be invested in. Yields from 6 to 7% indicate that the rents are too high in comparison with the value of the property indicating that the market is due for a capital boom as people move from renting (due to increased cost) into buying. When yields are approximately 3 to 4% it means that the property prices have hit a ceiling and that the value of property will slowly start dropping while rents will slowly increase thus increasing the yields.
- High yields are evident when markets are bottoming (prices of properties are too low signaling an increase) while low yields are evident in booming markets. The gap between rental and value growth indicates potential for capital growth.
- If yields in an area are high (above 5%) and there is a low vacancy and stock on market rate, this means that demand is high but will increase even further due to more people being attracted to the area due to the high returns. This is when new developments will occur to take advantage of the growth in the area and ultimately balance the supply and demand ratio.
- More new developments means more sales which puts pressure on capital growth (upwards) until the balance between supply and demand is restored.
Understand past and future capital growth prospects for the location you’re researching.
- Ten year past growth (best investment suburbs are typically 30% and above) of the area where you intend to buy. Refer to forecasts and market cycle reports on HtAG to gauge past and future growth rate.
- Look for long term total growth equal to and above 10%. That equates to the minimum of 3% in the 2 year period that we forecast for. Also look for long term capital growth minimum 3% above current inflation or CPI.
- All else being equal, target the highest capital growth that can be achieved as the difference it can make through compounded growth over years is enormous.
Supply and Demand Cheat Sheet
Get to know the area supply and demand and whether the 2 are in equilibrium. Low supply will drive prices up.
- Stock on market for the area where one intends to buy (needs to be below 1% – to be compared to total number of dwellings of the type to be invested in). The intention is for demand to outstrip supply.
- To determine supply it is also important to understand – in addition to number of existing dwellings – the local council policy on future development and its capacity. Look at the future building approvals in comparison to previous years which will provide an indication in regards to the future supply and stock on market. Too many approvals mean that the market will eventually be oversupplied.
- Vacancy rate for the area where one intends to buy (to be compared to total number of dwellings available for rental for the area – to be below 2%)
- Schedule of future property developments for the area which is also related to point 6 (department of state and infrastructure planning and local council websites demonstrating all scheduled building approvals. It can be downloaded from a council website or one can also call the relevant council directly to find this information out.
- Go to council websites and look at development applications logged and development applications approved. Determine the amount of property to be introduced in future which can impact the demand and supply ratio).
- Compare properties costs per m2 and through such compare affordability of competing properties.
- Days on market for typical properties (to be below 80 days)
- Property sale volumes in the area compared to the year before and past 5 year average. This includes total annual sales turnover for the city and the state.
- Comparable sales over the last 6 months in the area and any recent sales and current property listings for the area. Tip: Sales are included in our Forecast Graphs and Ranking Tables.
Determine who will be the most likely type of person living in it the investment property once it is rented out by researching demographics.
- Demographics in the area where one intends to purchase (i.e. portion of married couples, age of population, number of people in the family, motor vehicle usage, school and tertiary education). Through this determine type of most common dwelling and environmental foot print.
- Use HtAG search to find out the typical property price in best investment suburbs as well as the surrounding areas. This will help you determine affordability a well as the capability of households to meet market prices in area in question and surrounding areas. Do it for both units and houses to see which one is the best buy.
- For example if houses average 1.2 million and units average 500k, units are a potentially better buy as the demographics of the area better suite units (younger population 20-39; high working age population, higher disposable income, smaller space requirements and proximity to amenities – cosmopolitan lifestyle).
- Use the heat maps for capital growth to see which area has had the most capital growth and which one is on the verge of growing (If the area has high income earners but houses or units are affordable and have not seen much capital growth the area has potential for gentrification and rapid increase in prices).
- Population growth of the area where one intends to purchase (compare to region, state and nation average – the area intended to be higher than the average)
- Compare different census data including any changes in income, population and demographic characteristics. Income growth is particularly important and that information. Access from census for 2011 and 2016 difference. For more recent changes, access the ATO website.
- Use HtAG heatmaps to see the proximity of the potential property to vacant land, parks, trees and proximity to amenities.
Location Cheat Sheet
Understand where the property is positioned relative to amenities, social and transportation hubs.
- Location of schools, universities, transport, shopping centres, mayor highways and hospitals in the area one intends to buy. For example, being closer to a train station brings more return than being near to a bus station/interchange.
- Look for the combination between affordability and train links between the best investment suburbs to CBD. The top performers in most of our big cities are cheaper areas with commuter links to CBD.
- Look for properties in land locked areas (council websites to find out about building approvals and land releases) where land cannot be released for new development; stay away from CBD area where there is no restriction on heights which can dramatically increase supply; look for units that are high in demand and are not impacted by poor affordability.
- People have the tendency to seek properties which are close to the lifestyle hubs which will tend to favour units in the years to come due to it’s reduced affordability issue and trends favouring smaller spaces.
- Find out whether the best suburb to invest in is on a good or on a bad side of the town. Check the area’s sales heatmap on HtAG. More sales in one part of the town means that that part is more popular and has higher growth prospects. Cross check the data against the agents’ opinions in previous step to ensure there is no personal bias.
- Asses the airline traffic of the area. Increase in airline traffic suggest economic growth in the area and the opposite suggest recession (for regional towns specifically).
- Buy apartments that are positioned north east. The same goes for houses. Stay away from apartments which have poor light levels, are near the rubbish bins or car park and those without a balcony or courtyard.
- Diversification of economy and industry (more industries need to be present in the region where one intends to buy – region not to be heavily dependent on one industry. The rule of thumb is for an area to have at least five pillars of industry such as health care, service, farming, mining etc)
- Infrastructure investment into suburban and broader markets. Always compare with other areas and the area’s population. It is not the same to create 200 jobs in a 400,000 town as opposed to 200 jobs in 800,000 town.
- Unemployment rate in the area one intends to buy (compared to region, state and nations average). This also affects affordability of properties in the area.
- Average household income and property affordability in the area one intends to buy (compared to region, state and nations average – the more affordable it is to buy the property in the region based on household income, more it will support capital growth and rental yields.
- Also compare the raise of the income between different censuses and see whether there is a general increase in income of the area. Assess affordability by comparing average household income with the typical house price.
- The more household is capable of meeting repayments, the better the affordability. Asses the affordability and the average house or unit price of the area surrounding the area that you want to invest as buyers mostly respond to affordability over proximity).
- Asses movement of publicly listed companies in the area. Influx of listed companies improve the economic outlook of the area in questions and as such have a positive impact on demand. Check whether and where banks, supermarkets, restaurants chains (McDonald’s) and hardware stores (Bunnings) are opening new outlets.
- Compare credit or lending growth in certain areas compared with other areas as well as compared with past lending levels in the same area. More lending indicates more buying and stimulates price growth.
- Look at the consumer confidence. If you happen to know a good source for consumer confidence data, share it in the comments.
Cheat Sheet to find best investment suburbs
- Proportion of renters in the area one intends to buy (highest to be 40%). A lot of renters suggest that people prefer to live in the area however it does not stimulate capital growth. Owner occupies stimulate capital growth.
- Council policy and infrastructure which support property investment. Speak to the councils Economic Development Manager and town planer about the economic and infrastructure development of the area.
- Walk score and DSR score.
- Obtain information in regards to the level of foreign investment in the market. When foreign investors play heavily in the market, it can sometimes artificially inflate property prices beyond their true value leading to a potential bubble or market crash. If you happen to know a good source of this data, share it in the comments.
- Speak to agents in the area to determine which property type and size is in the highest demand. Speak to the agents about the current nature of the market and what they see happening in future in relation to supply and demand. Ask them for reasons in regards to their observations. Speak to agents about specific portions of the area and if there are any no go zones. Also ask them where the preferred locations are; perhaps where they would buy if they were buying.
- Assess whether the area you want to buy in has height restrictions (particularly referred to areas close to the CBD). If there is a height restriction than there is a better chance that the area will not experience an oversupply of the apartments which can have negative impacts on your apartment investment.
Property growth rate cycles
- Position of the area in the property cycle (needs to be at 7 o’clock). Asses the property clock characteristics and compare it to the market you want to invest in. Are yields and sales falling or rising and if so where is this positioned in the property cycle. Refer to the HtAG Growth Rate Cycle report for the area/suburb.
- Buy the biggest dollar value appreciating asset using the smallest amount of funds to acquire it just out of the bottom of the property cycle curve.