Is it better to invest in metropolitan or regional areas?

One of the most important decisions you’ll make when buying an investment property is the location, but it’s not always about the postcode with the highest predicted price potential. A suitable investment location for you could be in an inner city suburb, or further afield in a regional township, depending on your capital and cashflow, as well as what type of investor you are.

“If you’re concerned about the tax that you’re paying, then you’re probably better off with a metropolitan property investment,” says Peter Koulizos, Property Lecturer at the University of South Australia and Author of The Property Professor’s Top Australian Suburbs. An investment property in the city is more likely to be negatively geared, meaning the rental income is less than the interest payable on the loan on the property (and other associated expenses). The loss incurred can be a tax advantage, and especially appealing for those on higher income tax brackets.

Despite the generally lower rental yields, the potential for capital gains in metropolitan areas is stronger, particularly for houses, according to Koulizos. While a ‘cheap’ house may be harder to come by in the major capital cities, Koulizos explains that the potential for price growth is fuelled by the strong demand for housing for a growing population. According to the Australian Bureau of Statistics projections, Sydney is expected to reach a population of approximately 5.4 million, and Melbourne just over 5 million, by the year 2026 – a 25 and 33 per cent increase respectively on the observed 2007 population.

With the majority of the population residing in metropolitan areas, vacancy rates are generally lower. Koulizos explains that city units tend to rent out quicker than houses, “However the turnover of tenants in units is more than it is in houses.”

Regional

A regional property investment may be better suited to those that are after lower prices, and stronger rental income. “Yields are often higher in regional areas, and the sort of investor that attracts, is a cashflow investor – one who is very sensitive to the negative cashflow that might exist if they bought a city property,” explains Koulizos. “With the yield a bit higher, you may even be positively geared.”

But choose the area carefully – there needs to be ample employment prospects in the area to create the demand for rental properties, otherwise your investment could be left untenanted. “[Regional properties] take longer to rent when they are vacant, but they are not as vacant as often,” says Koulizos, who explains that tenant turnover in regional areas is low due to lack of supply of rental properties.

The area’s capital gain prospects will be dependent on several factors, including employment opportunities, local industry and economy, proximity to amenities and whether or not the area is currently considered to be undervalued.

Picking a postcode

A selection of “Top Investment Picks” prepared by Cameron Kusher, Senior Research Analyst at RPData in September 2009, lists 12 regional and 16 capital city locations considered to be the best for investment properties. The selection criteria used provides useful insight into what to think about when selecting a suburb to invest in.

Kusher explains: “Our capital city picks are dominated by units as they tend to enjoy overall better yields than houses.” The list tends towards suburbs which are “close to the CBD or other working nodes, have quality transport amenity [sic], close to retail and dining amenity,” and that are “likely to see ongoing strong rental demand because of the outstanding features of the suburb.”

The list’s regional picks “include a variety of houses and units and all are currently recording strong gross rental yields.” The regional list tends towards “suburbs within major centres which are supported by reasonably strong economies” and away from “regions based on just one industry of employment”.