The Best Place To Invest With a Budget of Under $600,000
Are you looking to buy an investment property with a budget of $600,000 or less? If so, this for you.
Hi, it’s Niro here from Investment Rise and if you’re looking to buy an investment property and you’ve got a budget of $600,000 or less, it can feel really, really tough, right?
I mean, where do you go?
In Sydney you can often feel priced out.
I mean, sure, you could look at the unit market, but according to RealEstate.com.au. we currently have in Sydney the biggest vacancy rate in recorded history, primarily because of the oversupply in the unit market.
Now if you’re already looking at a budget of $600,000 or less, why would you then want to go and buy a property that you’re going to struggle to get rented? That’s a high risk move, right?
On the other side of things, Domain.com.au report that the price fall in rents over the last 12 months is again the biggest in recorded history. Now, before rents fell, rents didn’t come anywhere near covering the mortgage. So today you’re going to be even in a bigger pickle when it comes to cash flow, right?
Because often if you’re looking at those budgets of $600,000 or less, you want to ensure that you’re not out of pocket a great deal on a month to month basis. So with rents falling, with vacancy rates on the rise, buying a unit in Sydney right now could be a really high risk manoeuvre and could really hurt you from a cash flow and lifestyle perspective.
What about houses?
I mean, sure, you do have some options maybe in St. Mary’s and areas around there. But again, the vacancy rate in those areas is quite high. So you’re going to struggle to get your property rented and you’re certainly going to struggle to have the rent cover the mortgage.
Now, why am I spending so much time on the concept of the rent covering the mortgage? Because if you’re serious about building a property portfolio that you can maybe retire off over the coming few years, you need to get the cash flow profile right. You need to make sure that you’re not out of pocket a great deal on each property so that you can keep buying properties in the future. Okay?
So then if you’re looking at a budget of $600,000 or less, unfortunately, the Sydney market really isn’t a great option for you right now.
But then what about Melbourne?
Yes, Melbourne is far more affordable than Sydney so you’ve got more options. However, Melbourne right now has almost the worst rental return of all the capital cities in Australia. Now if you buy in a market that’s got a really bad rental yield and really bad rental return, what’s that going to mean for you?
That’s right. It means that you’re going to have to keep paying the shortfall every month. It means the rents are not going to cover the mortgage. And again, it’s going to hurt you from a cash flow perspective and also from a lifestyle perspective but it’s also going to hurt you from a borrowing capacity perspective. Here’s what I mean.
If you keep buying properties that are negatively cashflowed, you’re going to get to a situation where you’re going to hit a wall, where the banks will say you’ve got so much negative cash flow, you’re too risky for the banks to lend you any more money, almost regardless of your income.
So therefore, Melbourne probably isn’t the right option for you if you’re looking to invest with the goal of building a property portfolio.
Now, don’t get me wrong.
If you just want to buy one investment property and that’s it, then yes, there are some options in Melbourne that could be quite beneficial for you.
But if you’re serious about investing for the long term, serious about building a property portfolio that pays you an income, then you need to think more strategically. Remember, according to the ATO, less than 1% of all Australians end up building a property portfolio that can fund them in in retirement. 99% of Australians never get there.
So if you are serious about joining that top 1%, you need to do things a little bit differently. So if we take out Sydney and we take out Melbourne, what’s left?
Well, what about regional towns?
Because, yes, they are cheaper. Yes, many of them on paper seem to be “positive cash flow”. Maybe that’s the way you should go? However, here’s the other thing to consider. From a capital growth perspective, capital cities have almost always outperformed regional towns on a long term basis. Why? Because capital cities is where most of Australia lives.
So if you buy in a regional town, you could often end up buying in a town where the population is shrinking, which means, therefore, that although the property may look like it’s positively cashflowed, if the population is shrinking, that means the demand for property is shrinking as well, which means that it’s quite likely that you’re going to come to a time whereby because the demand has reduced, you end up in a situation where demand is less than supply.
Or you’re in an oversupplied market, which means that “positive cash flow property”, rents are going to drop. It probably won’t be positive cash flow. You’ll probably end up being negatively cash flowed. And because of the reduction in demand, you’re going to struggle to get your property rented again.
Plus, if the population is reducing, how are you going to get capital growth? And remember, when you buy a property, you’ve got to pay stamp duty. You’ve got to pay your legals, maybe some bank fees depending on your situation. If you then plan on selling, you’ve got to pay some real estate agents costs. So you really need to budget for at least a 5 to 8% increase in the property price before you even get your money back. And if you’re buying in a regional town where the population is shrinking, how are you going to get your money back? It’s a high risk investment.
So then, where else do you look at when you’ve got a budget of $600,000 or less?
Well, what about certain areas around Brisbane? Now, we know that the Brisbane market has been totally flat from 2010 until about 2017/18. So even when areas like Tasmania were growing and Adelaide were growing, the Brisbane market didn’t do anything.
But from about mid 2017, certainly early 2018, we saw that start to change. Prices started to increase. In fact, according to the Valuer General’s Office, which is the government department that tracks land prices, we know that certain areas in Brisbane have risen by 10% or more over the last 12 months.
We also know that the population growth in Brisbane right now is the strongest it’s been in over 10 years and that population movement is being driven primarily by people from Sydney and Melbourne moving up to Brisbane for the cheaper prices. But we’re also seeing that the Brisbane market is getting a larger share of overseas migration. No, it’s nothing compared to Sydney or Melbourne. However, the latest reports show that the Brisbane market is now getting 12% of overseas migration. So we’re now into double digits, which is significant.
We also hear from BIS Oxford Economics, one of the biggest research houses in Australia that they expect the Brisbane market to be the strongest performing market, in terms of capital growth over the coming few years. Plus, most importantly for someone like yourself, if you’ve got a budget of $600,000 or less, you can afford houses.
You can get houses for under $600,000 where the rent and the income from the property will cover your costs so that you’re not out of pocket on a month to month basis and in many of these areas, due to the rapid population growth, the vacancy rate is really, really tight, which means it’s very easy and very fast to get your property rented. It really lowers the risk.
So if you’re someone who’s got a budget of $600,000 or less, I strongly recommend that you look to certain areas around the Brisbane market for the fact that it’s going to very easy to get your property rented, where the rents are going to cover the mortgage, where property, good quality property is still going to be affordable for you. And you’ve also got great potential for capital growth going forwards.
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November 13, 2020
November 4, 2020