Property investors are usually in it for either long term capital growth or short term rental return. The two strategies can be quite different, but it doesn’t necessarily mean that a property can only provide you with one or the other. Entry level properties in a number of markets can be good for both.
First, let’s look at the growth option. Investing for long term capital growth means you can benefit from multiple property cycles.
Historically, property doubles in value every decade or so, after going through growth cycles and trough phases. If you buy a property when it’s at its bottom value, you will experience an extra growth cycle than if you buy at the market peak.
A 30 year mortgage term should see the property double in value two or three times. Affordable property in suburbs on the fringe of a capital city, or a few kilometres away from a more established, popular suburb are often well suited to long term growth.
Once people are priced out of inner city or beachside suburbs, they begin looking for the next best thing. The outward spread of buyers then translates into gentrification of suburbs.
New cafes and restaurants pop up, new infrastructure is put in place and local houses are renovated or torn down and rebuilt in a modern style.
When this all happens, median values go up and if you happen to have invested in a property beforehand, you will benefit from equity growth.
But if long term gains aren’t your goal and you want to make some money without having to go into mortgage stress to do so, you might have more of an appetite for investing for rental return.
Investing in Suburbs where rents are higher than mortgage repayments can make your property positive cash flow, which means that after repayments and holding costs, you actually make a profit.
Then, you’re not tied down by debt and can plan more investments. In recent times, cashflow-chasing investors have flocked to mining towns, where the commodities boom and the accompanying influx of fly in, fly out workers saw rents and property values skyrocket in previously undesirable areas.
Towns in Queensland and Western Australia that were once regarded as the middle of nowhere saw houses go from being worth $100-200,000 to north of a million and rent to workers and corporates for more than $1000 a week.
Those who bought in at the right time and got out before the mining boom began to taper off ended up making a tidy profit. Those who came in late and left after prices went backwards would not have been as happy.
If you want a safer option, at the expense of a big profit, simply investing in affordable property in areas where there is strong rental demand can be enough to get your cashflow into the black.
A $250,000 mortgage on a property that brings in $350 a week in rent, can work out nicely, without having to expose yourself to too much risk.
Then, as you pay down the loan, you implement rent increases every six months to a year and the property becomes more and more profitable.
Properties like this are often primed for long term growth also, so can be beneficial for both types of investment strategy.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au. Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing. His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.