New estates outside of major metropolitan areas are attracting investors – yet there are a number of risks to consider before buying here.
Investing in homes in outer suburban estates is often an attractive proposition: properties tend to be cheaper than inner-city real estate and newer too, which, along with the low rents, appeals to tenants.
Investors are lured by the benefits of negative gearing as well as the prospect of capital growth, as the new estate flourishes and is further developed.
But there are also a number of potential pitfalls investors must weigh up before adding a new, outer suburban property to their portfolio.
Tenants are the lifeblood of any property investment. When investing in new land estates in outer suburbs, I recommend against being pioneers and purchasing the first, often cheapest, lots with the view to achieving maximum capital gain.
Good tenants are only going to be attracted to the area if essential amenities are already in place. These include schools, established transport links, shopping centres and lifestyle amenities such as cafes, restaurants and bars.
Waiting until these services and facilities are in place will mean the difference between a vacant property and regular rental income. This may mean the purchase is more expensive, but that will be dramatically offset with the security of a tenant and lower vacancy levels.
In WA, established estates in places like Ellenbrook and Baldivis rarely have rental vacancies because of the high level of amenities within the neighbourhood.
For example, a prime suburb with all the infrastructure is Woodvale. You can buy a new four-bedroom, two-bathroom house for $630,000 and get a rent of $620 per week with low vacancy – in the order of two weeks a year. This would realise a gross 4.9 per cent return per annum.
At the periphery you have Eglington. In this developing estate a four-bedroom, two-bathroom home on Perth’s fringe with little current amenities would cost about $450,000. With a weekly rent of around $390, but with a vacancy rate of six weeks a year. It would return a gross 3.9 per cent.
In the middle you have Ellenbrook, which is not as established as Woodvale but has great amenities. Here you can buy a new four-bedroom, two-bathroom house for $440,000 and get a rent of $430 per week with low vacancy – in the order of two weeks a year – for 4.9 per cent return.
The thing to also consider here is the likely capital gain is probably higher in Woodvale, followed by Ellenbrook and then Eglington.
A good investment consultant should understand what the client hopes to achieve from their investment. Very few investors should simply buy a property to maximise negative gearing or capital growth at the exclusion of other factors.
Most mum and dad investors need rental income to help with mortgage repayments. To reduce the initial purchase cost, I would suggest buying a smaller than average lot size, building your own home on a block rather than buying a finished home that will have the developer’s profits on the price or having finance approval in place to give you more bargaining power.
Investors with a minimal deposit, where mortgage insurance would be required, are advised to avoid outer suburban properties and encouraged into a savings regime before purchasing.
This category of investors can't afford extended periods without a tenant. Nevertheless, if they were considering investing in suburbs such as Ellenbrook or Baldivis, they should proceed at least to a feasibility stage and then analyse the risk.
Peter Gianoli joined ABN Group in 2011 to establish Investor Assist. Peter has more than 15 years of experience in the property industry working across some of the country’s premier development projects and throughout his career has overseen the sale and settlement of properties worth in excess of $1bn. Peter is also a highly sought after public speaker and has educated audiences throughout Australia and around the world on topics including property marketing and investment.