Priced Out Of The Sydney Market? Don't Despair

For the last 20+ years, I’ve been an advocate of investing in second hand, median-priced, blue-chip properties, in blue-chip inner-city suburbs around our main capital cities.

Much of this comes from my own experience as an investor and having hosted my own show on Sky News Business for over 10 years interviewing our countries best property experts. I learnt that no matter what is going on with our economy or wage affordability if there’s a limited supply of property in an area and plenty of demand, prices are likely to rise over the long-term.

Well, that’s all well and good, you may say, but what about the $750k - $1.5m price point for getting into a one- or two-bedroom unit in Sydney? How’s that going to work for a first home buyer or investor?

It’s not only the deposit you have to save up for, but it’s also being able to afford the difference between the rent and the mortgage (negative gearing), as often those inner-city properties will only get a 3 – 4% yield, less 1 – 1.5% of expenses. So even if mortgage rates are in the 3 – 4% range, you will still have to cashflow $1,000 a month out of your own pocket.

Most people can’t afford to buy in the suburb of their choice, the first time around and so sometimes you need to take a stepping-stone to get where you want to go. Sure, you can try and save your way to a deposit on a $1m property, but even if you’re lucky enough to save a couple of thousand dollars a month, if property is rising at even 5% a year, it could take you 5 or 6 years to save that much and by then the property could have risen another $300k.

For example:

Whilst I do think the blue-chip inner-city strategy is the final goal for those that want a pretty passive and less volatile wealth creation result, I think you can use those same thought processes to find a similar property further out from the city at a much more affordable price point of $400k - $600k.

So, what are some of the things you should be looking for in these secondary areas?

1) Net interstate migration / population – there’s got to be a positive demand in the area from people that want to live and work locally and therefore need homes to buy or rent. If there’s no demand, prices aren’t going to rise and may well fall.

2) The number of industries supporting the local area – if you buy in a one-industry town (mining/tourism, etc) and something happens to that industry, you’re going to be in trouble, and you might never recover financially. The more industries the better and the more diversified they are, will increase your chances of making a profit.

3) What is the average household income? No matter whether locals are buying or renting, you want a higher income as possible so that they have the ability to pay higher rents or purchase prices as property gets in shorter supply.

4) What is the unemployment rate? The more workers that are employed, the more people are in the market for buying and renting properties and at higher rates than previously.

5) Investment in infrastructure and other projects. If the government and private enterprise are investing in the local area, that brings jobs, wages, spending and a greater need for housing. You need to ensure that this is long-term as you don’t want to be investing in a short-term bubble.

6) Lifestyle / amenities / transportation. People want to live in a nice place, be surrounded by schools, parks, cafes, restaurants and other leisure facilities and need the roads and public transport to access them quickly and easily.

7) What other property is available? You need to understand what the local demand is for and how much supply is there of that particular property. Is the ultimate tenant or owner a young professional, a couple or a family? Do they like new or second hand? Unit, townhouse or house?

Regional areas can often have the reputation of being great for generating an income, but not so good at rising in value. Other hot spotters try and target something that is going to double overnight and that can often be a coin toss as to whether it’s going to happen or turn into a lemon.

It is possible to buy a $400k - $600k property that will give you a solid rental yield and a consistent growth, albeit slightly less than the blue-chip inner-city areas. However, you do need to do your research as there are so many areas you could get into and they are not all going to perform.

If this is a first-time purchase, the risks of getting it wrong can increase, as emotions kick in and you buy what you ‘like’ rather than what makes financial sense. You need to consider using a professional to help you, as they can often access research information and data that the public can’t and will assist you to concentrate on what the numbers say.

Creating wealth from property is a journey and there’s nothing wrong with starting off small and building it up, step by step. The key is to take some positive action and then adjust and repeat and before you know it, you’ll be investing in the best suburbs in Australia.