Lists of “hot suburbs” for property investors date quickly. An area that looks strong one year can look very different a few years later, once a wave of new apartments lands, a major employer leaves or lenders change how they treat the postcode. What does not date is the way experienced investors and their advisers assess a location.
Earlier versions of this article named destinations drawing attention at the time. An investment property has to be rented by someone, and the people who rent in an area are rarely the people who holiday there. The questions below are general information, not a recommendation of any suburb, property type or strategy.
Vacancy rates: is anyone looking to rent?
A vacancy rate measures the share of rental properties in an area that are empty and advertised for rent. Investors usually read a low, stable rate as a sign that tenant demand is keeping pace with supply. A rising rate can mean new supply is arriving faster than new residents, which tends to weigh on rents. Useful questions include:
- Is the figure for the suburb, the region or the whole city?
- Which way has it moved over several years, and how many new dwellings are approved or under construction nearby?
- Does the area rely on seasonal or short-stay demand that may not translate into year-round tenants?
Rental yield versus capital growth
Gross rental yield is the annual rent as a percentage of the purchase price. Net yield takes out holding costs such as council rates, insurance, body corporate fees, maintenance and property management. Capital growth is the change in the property’s value over time.
Areas rarely offer both at once. Higher-yield locations often have lower purchase prices and slower growth, while strong-growth locations often have yields that do not cover the repayments and holding costs. Which mix suits an investor depends on their cash flow, time frame and ability to carry the property through a vacancy, a question for a licensed financial adviser and accountant, not a lender or broker.
Yield also matters to the finance. Rent is part of how a lender assesses whether you can service the loan, but most lenders count only a portion of it, so the advertised yield is not the figure a lender uses. Our calculators let you test scenarios before you speak to anyone.
Infrastructure: funded, under way or just announced
Transport links, hospitals, universities and commercial precincts can change how attractive an area is. Investors tend to draw a sharp line between projects that are funded and under construction and projects that are still proposals, because announcements can be deferred, scaled back or cancelled. Ask who benefits, too: a new rail line may lift demand near its stations while leaving suburbs a few kilometres away unchanged.
The employment base
Tenants need jobs, and the mix of employers in an area shapes how stable rental demand is likely to be. Areas with a broad base across health, education, government, professional services, retail and trades tend to be less exposed to a single downturn than areas that depend on one industry or one large project. Mining towns are the clearest example: rents and prices can move sharply as a project ramps up and winds down. Ask, too, whether growth is coming from jobs or from retirees and holidaymakers, who rent differently.
How lenders look at postcodes and property types
Each lender has its own location and security policies, which can limit how much it will lend regardless of how good the numbers look.
- Postcode categories. Many lenders group postcodes by population, market depth and perceived risk. Regional or remote postcodes, or inner-city precincts with a lot of new supply, may attract a lower maximum loan to value ratio, which means a larger deposit.
- Property type. Small apartments, studios, serviced apartments, student accommodation, company title properties and large acreage are treated differently from a standard house or unit. Some lenders will not accept certain types; others add conditions.
- Rental income. Lenders usually count only part of the rent, and may count less, or none, for short-stay or holiday lettings with no long-term lease.
- Valuation. The lender’s valuer assesses the property independently of the contract price. Where sales history is thin or there is a lot of similar new stock, the valuation can come in below the price, and the shortfall falls to the buyer.
None of this puts an area off limits; it means the finance has to be checked against the specific property before you commit. Oakwood Finance Pty Ltd arranges credit as Credit Representative 561236 of Finsure Finance & Insurance Pty Ltd, Australian Credit Licence 384704. Lenders assess and approve each application against their own criteria. We can identify which lenders are likely to consider a given postcode and property type, and on what terms, before you sign. A refinancing review of existing loans is often part of that conversation, and for unusual securities our specialist lending team can help.
If you would like to talk through how lenders are likely to view an area or property you have in mind, book a consultation with Oakwood Finance. This article is general information only and does not take your objectives, financial situation or needs into account.