Is it better to invest in metropolitan or regional areas?

When buying an investment property, one of the most important decisions you have to make is the location. However, the region with the highest predicted price potential is not always the best choice. Depending on your capital and cashflow, an appropriate location for your investment could be an inner city suburb, or even a regional township.

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

Even though metropolitan areas have generally lower rental yields, the potential for capital gains is stronger, especially for houses. This is because even though ‘cheap’ houses are harder to find in major capital cities, the potential for price growth remains strong, due to a high demand for housing in a growing population.According to projected figures by the Australian Bureau of Statistics, Sydney is expected to reach a population of 5.4 million, and Melbourne just over 5 million by the year 2026. There will also be a respective 25-30% increase on the 2007 population.

As the bulk of the nation’s populace live in metropolitan areas, vacancy rates are generally lower. According to Koulizos, city units tend to rent out quicker than houses; however houses have a slower turnover of tenants than units.

Regional If you are after lower prices and a stronger rental income, then a regional property may be your best option. “Yields are often higher in regional areas, and the sort of investor that it 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.

Of course, you need to choose the area carefully. There must be ample employment prospects in the area in order to create a demand for rental properties. Typically, regional properties take longer to rent out when they are vacant; however they are not usually vacant as often as their metropolitan counterparts. An area’s capital gain prospects depend on a number of 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 Cameron Kusher, Senior Research Analyst at RPData recently compiled a selection of ‘Top Investment Picks’. The selection lists 12 regional and 16 capital city locations which he considers to be the best for property investment. The selection criteria that has been used to compile the list is a useful guide for those wondering
what to consider when selecting a particular suburb. Kusher says: “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 amenities, are close to retail and dining amenities and that are likely to see ongoing strong rental demand because of the outstanding features of the suburb.”

The list’s picks include a range of houses and units which are 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”.