If you had $1 million to spend on property investment in Australia today, where would you invest it?
What location would you buy in, and why?
And what about if you only have $500,000 to invest? Where is the best place to buy an investment for this budget?
And by the way… is real estate still a good investment in Australia, considering the spectacular pandemic-induced boom we've experienced in the past couple of years and the slowdown that we're now expecting?
These questions were recently asked of me by a journalist, and I can understand why - they are common questions investors are asking today and they make great headlines for articles.
Note: Everyone would like to know how to find the best property investment locations or Australia's best-growth suburbs.
You know... that special location that will outperform the averages and the right property in that location will be the stepping stone to a substantial property empire.
But I’m afraid my response disappointed the journalist because I didn’t answer his questions.
Now I wasn’t surprised by the request – I have found that most property investors start their journey by trying to choose a top location (because they think that's the best place to buy an investment property) or find a property that will make a great investment.
However, when you look at the results that most investors achieve by asking these types of questions, it makes little sense to think about property investment from this angle.
Note: Statistics show that around 50% of all property investors sell up in the first five years, and of those that stay in the market, 92% never get past their first or second investment property.
So if you want to outperform the average investor and develop financial freedom through property investing, don’t start by selecting a location, or looking for that ideal property.
Here’s how to do it instead.
You see…property investing is a process, not an event.
Things have to be done in the right order – and selecting the property comes right at the end of the process.
The property you will eventually buy will be the result of a sequence of questions you will need to ask and answer and a series of decisions you’ll need to make before you even start looking at locations.
Long before we talk about a property or the right location with our clients at Metropole, we look at factors including their age, their timeframes, and the desired end results in other words, what do they really want the properties to do – are they looking for cash flow, capital growth, or a combination of both.
And that’s because what makes a great investment property for me, is not likely to be the same as what would suit your investment needs.
So it all starts with helping our clients formulate a Strategic Property Plan which takes into account their surplus cash flow position, their risk profile (for example would they consider undertaking renovations or small development), whether they currently own a home or are wanting to buy a new home or upgrade their existing home in the future, if they are going to earn more income in the future, or if they’re going to decrease their family income because they’re having a baby, how many other investment properties they own, where they are located and how they are performing plus 35 other considerations.
So my first recommendation to anyone asking where to invest is to sit with an independent property strategist to formulate their plan.
It’s just too difficult to do on your own and I’ve found most investors tend to be too emotionally involved to see their situation objectively.
The benefits of formulating such a plan include:
It will help you define your financial goals.
- You’ll discover whether your goals are realistic, especially for your time frame.
- You’ll find out what you’ve done right and what you’ve done wrong along your financial journey so far and what you can do about it.
- You’ll be able to measure your progress towards your goals and whether your property portfolio is working for you, or if you’re working for it.
- Your plan will help you identify risks you hadn’t thought of.
Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
By following a documented plan, the real benefit is that you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor, without making any more costly mistakes along the way.
When you invest in property there are really only three major levers you can pull:
- Your budget – and that is usually determined by the banks.
- Location and you can’t afford to compromise on that.
- The right property in that location.
And unless you have an unlimited budget, and that applies to very few of us, investors usually need to compromise on at least one of the above.
But the question some potential investors are asking, considering all the mixed messages in the media is:
Note: Sure there are some headwinds ahead.
There are still many economic challenges ahead,
Yet I see the current market offering a window of opportunity for property investors with a long-term focus.
You see…we are at the beginning of a new property cycle, something that doesn’t happen very often.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early 2023.
But if the market hand you an opportunity like this why not take advantage of it.
Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.
Moving forward, demand is going to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.
At the same time the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but because builders and developers will only commence new projects if they are financially viable and currently new projects will need to come on line at considerably higher prices than the current market price,
Of course in due course consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.
At that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
And strategic investors will take advantage of the opportunities our property markets offer over the next couple of years maximising their upsides while protecting their downsides.
We are also going to be experiencing a prolonged period of strong rental growth - the rental crisis will only worsen further, with no end in sight.
Now I'm not suggesting taking advantage of tenants, what I'm suggesting is to recognise there is currently a problem (lack of rental accommodation) and provide a solution.
And rather than trying to hunt down a bargain , focus on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices… Plus they’ll hold their value far better in the long term.
While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.
Note: Now that the markets have entered the next phase of the property cycle there is a flight to quality properties and an increased emphasis on livability.
To many, liveability will mean a combination of:
- Proximity – to things like parks, shops, amenities, and good schools
- Mobility – access to good public transport (even though this may be less important moving forward) or a good road system
- Access to jobs
This is very difficult to answer because it all depends upon you – what do you want out of your property investment?
It’s impossible to say this location is perfect for everyone.
If you have been following my blogs, podcast, or videos you’d know that I believe residential real estate is a high-growth, relatively low-yield investment and that’s why I would only be looking for locations that are likely to outperform the averages with regard to capital growth the long term.
But I do recognize that most investors need sufficient cash flow to service their debt, so yield is an important factor to be taken into account when choosing a location.
When selecting a location, I would initially start by eliminating locations.
For example, I would not be investing in regional Australia or in the smaller capital cities.
There’s no doubt that some better-performing regional locations or certain suburbs in our small capital city will outperform the poorer-performing suburbs of our three big capital cities.
But when I suggest you should only consider investing in Australia’s big three capital cities, I’m also saying that it’s important to be very selective in choosing suburbs in these cities – investment-grade suburbs that are likely to outperform.
Rather than looking in the rear vision mirror at what has already happened, I look for leading indicators of what’s likely to happen in the future.
So I look for locations where there is going to be strong economic growth which will lead to wage growth and eventually population growth.
But more than that I look for an affluent demographic who will be able to and prepared to, pay more to buy or rent in these suburbs.
The fact is, I don’t like to fight the big trends.
Tips: Don't fight with the gorilla!
Other important drivers of capital growth include supply and demand, infrastructure, livability, and amenity.
Over the years I’ve noticed that experienced investors find it easier to choose a location – they’re not as emotionally attached to locations, as they’ve learned from their mistakes.
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2024
- Also read:Boom to bust: What makes property prices rise and fall
- Also read:This week’s Australian Property Market Update – Latest Data, State by State November 28th, 2023
- Also read:The Boom and Bust of our Property Cycles: A Journey Through the Investor’s Mind
On the other hand, many beginning investors want to invest close to where they live, in suburbs they’re familiar with, or where they’d like to holiday or eventually retire.
Obviously, these are emotional reasons to choose a location, rather than basing decisions on data.
So the first question to ask yourself is:
"How far are you willing to invest from home?"
Clearly the further you are prepared to consider the better your potential returns because you’ll have the whole of Australia open to you but if you’re only prepared to invest in your own backyard, your choices will be much more limited.
While there are around 3,800 statistically reliable suburbs nationally, in my mind, very few of these make investment-grade suburbs; ones that will deliver wealth-producing rates of capital growth.
I recommend looking for an area that has a long, proven history of strong capital growth and is likely to continue to outperform the averages.
Now that’s very different from a “hot spot” or the next big thing many beginning investors chase.
And as you dig into the data you’ll find that not all land is created equal.
Some suburbs will be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.
And you’ll find top performance has a lot to do with the demographics in the area.
These suburbs tend to be those where a large number of owner-occupiers desire to live because of lifestyle choices or the offer.
I look for suburbs where wages (and therefore disposable income) are increasing above average.
These will either be:
1. Discretionary locations
These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.
In general, these locations are the established inner-ring suburbs of our capital cities or suburbs close to water.
Over the long term, this segment of the market outperforms the other sectors.
Of course, not everyone can afford to buy at this end of the market, so strategic investors often look to invest in…
2. Aspirational locations
These are the upper-middle-class areas and gentrifying locations of our big cities.
These are the suburbs where many affluent millennials are aspiring to move as they enter the family formation stage of their lives.
When this wealthier demographic moves into a suburb and this translates to being an area where locals are able to and prepared to pay a premium price to live there, putting a financial floor under your investment property.
As you wander through these suburbs you’ll see a changing neighbourhood with new developments and infrastructure improving the quality of services for the residents as well as driving economic and job growth.
On the other hand, I would avoid investing in the more affordable locations as this end of the property market underperforms over the long term with regard to capital growth and rental growth because many of the owners are young families who have stretched themselves to their financial limits and are often only a week or two weeks away from broke.
If Covid-19 taught us anything, it was the importance of living in the right type of property in the right neighbourhood.
In our new “Covid Normal” world, people will pay a premium for the ability to work, live and play within a 20-minute drive, bike ride or walk from home.
They will look for things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs all within 20 minutes reach.
Residents of these neighbourhoods have now come to appreciate the ability to be out and about on the street socialising, supporting local businesses, being involved with local schools, and enjoying local parks.
But it’s not only the location that’s important.
While I believe that 80% of your property's performance is related to its location, the other 20% or so is related to buying the right property in that location.
Even in the best suburbs, there are some properties I would avoid – they just don’t make good investments and others I would be keen to have in my portfolio.
In general, there are 3 types of property:
- A-Grade homes and “investment grade” properties are the type of assets you want to own, and the type of properties were great tenants want to live, not because they need to, but because they want to and are prepared to pay extra to live there.
These are not just houses but also family-friendly apartments in great neighbourhoods.
- B-grade properties still have a lot going for them, and during hot property markets like we are currently experiencing they still perform well, but their second location within their suburb or the less-than-perfect attributes of these properties mean they will slump more in downtimes when buyers and tenants are more choosey.
- C-grade properties – these are to be avoided unless they’re in a great neighbourhood and your intention is to demolish the property and replace it with something more appropriate for the location.
Here are some of the factors to look for when selecting an investment-grade property:
- I’m a big believer in buying property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which generally attract a premium price tag.
- I also look for properties with a high Land to Asset ratio - but remember apartments have an attributable land value underneath them.
- I love properties with a twist. Your investment must have something unique, special, different, or scarce – some ‘X-factor’ that makes it stand out from its neighbours – in order to land on my shortlist.
And for those who can afford it, I’d recommend buying a property where they can manufacture capital growth through renovations or redevelopment.
Rather than asking where I should invest or what sort of property I should buy, the questions you should be asking are:
- What do I want to achieve from my property portfolio?
- What do I need to do to get those results? And…
- Who do I need on my team to help me achieve the financial freedom I want with minimal risk?
As I said above, if you want to outperform the average investor and develop financial freedom through property investing, you shouldn’t start by looking for the best place to buy an investment property, or looking for an ideal property.
What have deemed the best places to buy an investment property in Australia, or the best places to invest in Australia don’t necessarily make the best investment decision?
Because remember, not all properties will make investment-grade properties, and even within so-called ‘investment suburbs’ there will still be certain locations that must be avoided and other neighbourhoods which will outperform.
At Metropole, we know that every client has unique circumstances, goals and aspirations and there is never a blanket approach to investing:
And because of this I do not believe in hotspots or investing in an area just because it is expected to be the “Next Best Thing”.
“Hot-spots” tend to be “not-spots” and I’m a long-term investor, meaning I take calculated risks, I do not gamble.
So instead, I’ve put together a list that will serve as a useful guide for any investor looking for long term growth.
Here are the top 5 suburbs in Sydney, Melbourne and Brisbane which could be considered good investment suburbs for some investors.
That’s because they each fit my criteria:
- Being within 15km of the CBD
- Exceeding the Australian median weekly household income of $1,164.60, suggesting they all have an above-average household and disposable income.
- Having a DSR Score (Demand Supply Ratio) of Good or Above Average
- Having a population in excess of 6,500
- Being ‘Very Walkable’ with a Walk Score of 70+
I’ll remind you that these aren’t suburbs where every investor should invest for fail-safe long-term growth - because those types of lists make me cringe.
And they’re not the only suburbs to invest in.
Also, every client we see at Metropole see may be provided with a different recommendation based on their circumstances and personal goals because there is no such thing as a one-size-fits-all approach when it comes to the best investment property locations.
But these suburbs have been identified as strong and stable suburbs that have both shown consistent historical growth but also have the right demographics to suggest future long-term growth.
They are also all located within the inner-middle rings of Sydney so that we can avoid any hot-spotting or speculative investing, meaning they’re proven investment-grade suburbs.
The 5 best Sydney suburbs to invest in
Distance from CBD: 8km South East
Total population: 14,012
Median Household Income: $2,099 per week
Distance from CBD: 7km South East
Total population: 14,100
Median Household Income: $1,227 per week
Distance from CBD: 6km South East
Total population: 12,776
Median Household Income: $1,498 per week
Distance from CBD: 10km South East
Total population: 29,594
Median Household Income: $1,428 per week
- Neutral Bay
Distance from CBD: 1.5km North
Total population: 9384
Median Household Income: $2,073 per week
READ MORE: The Best Suburbs to Invest in Sydney
The 5 best Melbourne suburbs to invest in
Distance from CBD: 11km
Total population: 5,608
Median Household Income: $1,792 per week
Distance from CBD: 11km
Total population: 10,353
Median Household Income: $1,921 per week
Distance from CBD: 13km
Total population: 8,420
Median Household Income: $1,599 per week
- Bentleigh and East Bentleigh
Distance from CBD: 13km & 17km
Total population: 27,635
Median Household Income: $1,848 & $1,735 per week
Distance from CBD: 14km
Total population: 6,060
Median Household Income: $2,016 per week
READ MORE: The Best Suburbs to Invest in Melbourne
The 5 best Brisbane suburbs to invest in
- New Farm/Teneriffe
Distance from CBD: 3km
Total population: 12,534 & 5,341
Median Household Income: $1,802 & $2,461 per week
Distance from CBD: 9km
Total population: 5,787
Median Household Income: $1,976 per week
- Highgate Hill
Distance from CBD: 4km
Total population: 6,195
Median Household Income: $1,548 per week
Distance from CBD: 7km
Total population: 3,949
Median Household Income: $2,248 per week
Distance from CBD: 5km
Total population: 13,046
Median Household Income: $2,103 per week
READ MORE: The Best Suburbs to Invest in Brisbane
Note: As a property investor and similarly as a homeowner, it is important to note that location accounts for 80% of the property's performance and 20% come from the property itself.
Meaning, that with the correct location and property selection you can find an investment-grade asset that well and truly outperforms the averages in growth.