Where to find Australia’s best High Yield capital city suburbs
Last week I looked at three regional towns currently delivering strong rental yields with good prospects for future capital growth. This week’s blog highlights three capital city areas with promising investment profiles for strong rental return and capital growth prospects.
Units, over houses, are generally performing better across the board in capital cites.
Brisbane – City
· Yield: up to 7% (units)
· Vacancy Rate: 4.5%
· Growth (1yr/3yrs/5yrs): 0.11%/3.33%/1.09% (units)
Sources: RP Data, SQM Research
Why Invest: The Brisbane market has now entered its next growth phase after a period of decline. Investors have the opportunity to buy-in at very affordable prices, considerably less (up to 45%) than the Sydney and Brisbane medians for quality inner city units.
Brisbane has been undergoing transformation in recent years and along with fantastic weather now counts world-class culture, entertainment and dining options among its draw cards. It’s also investing heavily into infrastructure with $132 billion of projects planned between 2010 and 2014, with a significant focus on improving transport.
Queensland is also one of Australia’s most resources-rich states with a massive LNG export industry that’s only in its early phases of development, further strengthening the state’s industry with significant flow-on effects to Brisbane.
Top tip: Investor demand is most definitely on the rise in Brisbane – apartment sales in 2013 almost doubled that of 2012. Get in now and make the most of the current affordability and opportunity to maximise growth. Look for boutique apartments with unique features.
Risks: Apartment oversupply is an issue in Brisbane, as it is with many Australian capital cities. This could result in slow rental and capital growth, and high vacancy rates in the short to medium term until supply is absorbed.
Sydney – Western Suburbs (e.g. Whalan, Mt Druitt, Lethbridge Park)
· Yield: 6-7%
· Vacancy Rate: 0.7%
· Growth (1yr/3yrs/5yrs): 15%/35%/34% (Averages)
Sources: RP Data, SQM Research
Why invest: Sydney’s market has boomed in recent years prompting investors to look outside the usual inner city areas – which have reached unaffordable heights – to suburbs where they can secure decent sized blocks for renovation or development and where the low buy-in can facilitate good yields.
While not considered highly desirable locations to live in the past, suburbs such as Whalan, Mt Druitt and Lethbridge Park, which all fall within the local government area of Blacktown, have emerged as areas worth further investigation for these very reasons. Despite the LGA’s rapid population growth – a 25% increase over the last 10 years – median property prices range from just $270,000 for a unit to $410,000 for a house across Whalan, Mt Druitt and Lethbridge Park.
They might be 40km from Sydney’s CBD, but transport connections are excellent which is one of the area’s most desirable features. There are direct rail lines to central station and close access to major motorways. Vacancy rates are extremely low at 0.7% and the area is very popular with families.
Top Tip: These outer suburbs are ripe for renovation projects and larger blocks mean the addition of granny flats to increase income are also worth considering.
Risks: Sydney’s capital growth over recent years has been huge and is now slowing. A ‘crash’ is unlikely but investors should be aware that growth will more than likely to be slower than recent years and this is cash flow investment rather than a capital growth investment.
Perth – City of Bayswater
· Yield: Around 5-6% for units
· Vacancy Rate: 1.9%
· Average Annual Growth: 10% (houses and units)
Sources: RP Data, SQM Research
Why invest: It has been reported that slower growth, sales and rising vacancy rates suggest that Perth’s booming property market is softening and maybe reaching – or have already reached – its peak. However, this doesn’t mean good yields can’t be found in certain pockets within the city.
Bayswater council – which includes the suburbs of Bayswater, Maylands, Morley and others – has plenty of highlights. It’s just 7km from the CBD, the Swan river is on its door step, there are excellent bus and rail connections and a lively cultural and entertainment precinct in neighbouring suburb, Mount Lawley.
Top tip: Morley looks to be one of the most interesting of the suburbs within Bayswater due to its recent and future development. Despite not having its own train station, unlike some of the other Bayswater suburbs, it has superb bus infrastructure – the CBD is only around 15 minutes by bus. Major roads are also easily accessible and the light industrial area in Ashfield, under development, is within a couple of kilometres.
In 2011, the $60 million Coventry Square, Perth’s biggest markets complex, opened in Morley, creating a major tourist and entertainment destination.
A masterplan for the further development of the Morley city centre has also been approved. The plans include a new central park, improving public transport, upgrading streetscapes and public spaces, and making streets more pedestrian friendly.
Risks: The Bayswater area has experienced good capital growth in recent years and could slow based on the broader market indications for Perth.
Investing with low or no deposit – Vendor financing
The second part of this blog aims to provide investors with an understanding of another low deposit option available to them – vendor financing.
A big issue for most investors when first starting out is access to bank finance. Even with a decent deposit it can be difficult to meet the banks’ criteria. If you have a less-than-perfect credit history, are self-employed or new to the country, then you will find dealing with the banks even more challenging.
Many people are unfamiliar with vendor finance but it has in fact been used in Australia for over a century and while it is increasing in popularity, it still flies under the radar of most investors.
No bank finance needed
Put simply, vendor finance (also referred to as seller finance or owner finance) is when the seller of the property makes the financial arrangement direct with the buyer – no bank loan required!
Vendor financiers provide a more personal, tailored service focusing on the buyer’s capability to make regular payments, rather than their capacity to demonstrate a savings history, assets etc.
It is a popular service offered by developers who want to increase their pool of prospective buyers by offering more flexible finance options. Vendor financiers will often lend 90 to 100% of the purchase price (LMI will still be payable though if you borrow more than 80%) which makes properties offered under this scheme attractive low deposit options.
The way vendor finance works can be compared to a lease-to-own structure; you make your repayments to the seller and the property becomes legally yours when all payments have been made. You can rent it out, renovate etc but the title to the property will remain in the seller’s name until you have paid off the property and met any other contractual obligations.
A bridging strategy to the banks
For this reason, vendor finance is not generally considered a long term option and is typically used as a bridging strategy. It allows investors to get their foot in the door, secure a property and then look to refinance with a bank (thereby paying off the vendor finance and securing the title to the property) in two to three years when they have established a payment history.
Good property selection means many investors will have generated decent equity in the property over those initial years putting them in a much better position with the banks.
Another point to remember with vendor financing is that it is usually provided at a higher interest rate to bank finance. This is less of an issue in our current super low rate environment but remain an additional motive for refinancing.
Both the seller and the investor are protected against certain risks under a vendor finance arrangement. The vendor cannot sell the property or borrow against it without your knowledge, while the vendor reserves the right to take legal action and terminate the contract if you breach any of the contract conditions.