Purchasing regional properties for yield

[propernewb]

Hi All,

I am currently renting in Sydney but will soon have enough disposable income to afford an investment property. My intention is to generate enough cash flow so that renting/purchasing in Sydney would be feasible.

I have had a look at cheaper properties available in regional centers of NSW. Yields are usually 6-8% for a property that is usually $100-140K.
I imagine that it would be sensible to begin with such a property as I would be able to turn it positive much sooner than say a 700K (<5% yield) property in Western Sydney. Obviously I would be missing out on any potential capital gains.

So my question is, for my first investment property, would it be sensible to purchase properties in regional centres with a high yield, or should I purchase a property in Western Sydney and hope for some more 13% YoY gains?

Cheers.

 

[knightm]

The cash flow vs growth debate is as old as the hills. There are people who make money in regional property, and those that make money in the cities. Many also do both (my chosen path). Cash flow and growth don't need to be totally mutually exclusive. You do need to learn more about the locations you will consider and understand what the drivers may be fore them to perform better or worse than average, along with where they currently sit on the cycle.

The key for you if starting out is to educate yourself sufficiently to understand not which is "right" but which is right for you at this point in time. There is a vault of info here, so read some of the large popular threads, consider several good books and some time spent on your knowledge will be well spent.

There is a huge gap between a 100k regional and a 700k Sydney property. There are plenty of options in between with sensible yield/growth mixes. You really need to know a few things that will narrow the choices a bit.

Some useful questions may be:
1 What you can borrow
2 What you can afford to service
3 What your long term goals are
4 What you are prepared to sacrifice short term to reach those goals

 

[Waldo]

So my question is, for my first investment property, would it be sensible to purchase properties in regional centres with a high yield, or should I purchase a property in Western Sydney and hope for some more 13% YoY gains?

Cheers.

What are you trying to achieve with the property & how will it help you get to your goals?

With the additional cashflow help you pay rent / save for the next house deposit quicker? Are you hoping for an equity increase that you can pull out to fund the right house?

Don't buy an investment property for the sake of it - focus on how it will help you to take the next step. Hopefully that will help you determine exactly what characteristics you need from the property.

I'll leave the "can high yielding properties produce good capital growth" debate to someone else.

The other thing is obviously, if you're buying - can you afford to hold a property that isn't cash flow positive? No point in considering a 5% yield if you can't afford to hold it.

 

[propernewb]

Thanks for the responses so far guys!

Knightm and Waldo, thanks for your input. I understand that there is a learning curve associated with property investment and that this requires time. Unfortunately, I am time poor until the end of the year so I am using this forum as a place to learn.
My understanding of current affairs/economics leads me to believe that the boom phase for capital gains is probably over - I believe the best time to have bought (in Western Sydney) was some time after when Kevin Rudd increased the FHOG.

Nevertheless, my intention is to generate a passive income stream(s) so that I can eventually purchase a home in Sydney. I feel that regional properties are the best solution as they are relatively cheap; will require a smaller, more serviceable loan; offer a high yield; and, sometimes can be positively geared (depending on the length of the mortgage). In summary, it will take me less time to generate a passive income stream if I buy a regional property v. urban property.
Having said that, I am sure that these properties have their own disadvantages. Other threads have alluded to the economic factors that may affect tenancy in a regional town, and truth be told, I have yet to completely understand them. I have also not looked into other costs such as council fees and maintenance and how they may affect the equation.

 

[antistar]

Hi propernewb

Slightly different perspective for your consideration:

If your goal is to be able to afford a house in Sydney it might be best to keep saving up hard for a little longer. If you can manage to increase income either through your existing profession or a second job this will speed things up as well. I would concentrate on that for now if it were me.

Buying the first ip sounds exciting and can get you a pat on the back from friends / relatives but it can take you many steps backwards by:
- spending part of your savings on paying stamp duty
- spending part of your savings on paying lmi (if over 80% lvr)
- having the potential of stagnant / negative valuations on your regional property for years to come
- buying cheap property = ongoing and constant maintenance
- uncertain rental vacancy rates in regional areas
- rates, taxes, management fees.

If you are talking properties around $100-140k, even with a good yield you'd be grossing no more than $10k a year, by the time you take out your servicing costs, management, maintenance, fees and insurance you may be left with a few $k at most. Then you'll have to pay tax on that.
So in my opinion there is little point spending your savings on stamp duty and potentially lmi to clear $1-2k per year (if that). It will hardly help.
With some creative thinking you can find other ways to generate the same amount of extra $$ and keep growing your savings. I believe it will be a faster way of getting to your Sydney property.

 

[beachgurl]

For large regionals, generally the better the return, the lower the demographic. Expect a higher than usual arrears balance, police reports and minor damage, not to mention lease breaks when tenants break up and can't afford the rent on their own. The properties I have, yield between 10 and 11.5pc. Last year one barely turned a profit after factoring fibro and glass repairs from a suspected neighborhood dispute.

That said, the properties have done me well in getting my teeth into investing and in giving me positive returns. I'm thinking it might be time to soon offload at least one so I can focus more on other projects.

 

[knightm]

Nevertheless, my intention is to generate a passive income stream(s) so that I can eventually purchase a home in Sydney. I feel that regional properties are the best solution as they are relatively cheap; will require a smaller, more serviceable loan; offer a high yield; and, sometimes can be positively geared (depending on the length of the mortgage). In summary, it will take me less time to generate a passive income stream if I buy a regional property v. urban property.
Having said that, I am sure that these properties have their own disadvantages. Other threads have alluded to the economic factors that may affect tenancy in a regional town, and truth be told, I have yet to completely understand them. I have also not looked into other costs such as council fees and maintenance and how they may affect the equation.

So let me see if I understand the plan:
1 Save small cash deposits with your new disposable income
2 Purchase 1 or more regional properties (presumably with 10-20% deposit and 80-90% loan)
3 Ideally you have small cash-flow positive in year 1 (as others have said even with 9% yield after costs the actual cash in your pocket each yr will be very minimal
4 Repeat ? (i was unsure if you wanted many or just 1 or a few)
5 Wait for rents to rise and/or pay down the mortgage(s) with your income
6 Eventually use the cash flow from regional ip's with either smaller or no mortgages (because you paid them off) to fund purchase of or rent of a Sydney property

Is this right? (not trying to be rude, want to make sure I understand the steps in your mind if that is what you are saying) if you could offer a bit more detail others might be able to offer advice re each step and the plan overall.


If that is your plan it can work, but it is likely to be a slow way to achieve your goal. There are likely to be faster ways.

 

[WattleIdo]

Can I interupt here?

Apart from working harder/smarter, what would these other ways be knightm?I'm genuinely interested because I have to admit, my thinking is not dissimilar to OP's and the plan you've sumised.

But - one thing I have noticed is ... if you get a really good property at a pretty good price, it can really set you up. Two or three and you're away. No need to buy dozens of cheapies. It's just a matter of finding the right ones and taking a chance and staying within your own limits (the hard part).

In some cases, could buying in a regional be as rewarding as buying in western sydney pre-KRudd?

 

[propernewb]

So let me see if I understand the plan:
1 Save small cash deposits with your new disposable income
2 Purchase 1 or more regional properties (presumably with 10-20% deposit and 80-90% loan)
3 Ideally you have small cash-flow positive in year 1 (as others have said even with 9% yield after costs the actual cash in your pocket each yr will be very minimal
4 Repeat ? (i was unsure if you wanted many or just 1 or a few)
5 Wait for rents to rise and/or pay down the mortgage(s) with your income
6 Eventually use the cash flow from regional ip's with either smaller or no mortgages (because you paid them off) to fund purchase of or rent of a Sydney property

Is this right? (not trying to be rude, want to make sure I understand the steps in your mind if that is what you are saying) if you could offer a bit more detail others might be able to offer advice re each step and the plan overall.


If that is your plan it can work, but it is likely to be a slow way to achieve your goal. There are likely to be faster ways.

Knightm, yes this was pretty much my plan.

What are the other ways that you were referring to?

 

[knightm]

Knightm, yes this was pretty much my plan.

What are the other ways that you were referring to?

Ok well I am glad I understood it correctly. So again, the plan has merit, it just may not be the fastest way to get to a defined shorter term goal like building a large deposit for a ppor.

Below is roughly how I achieved my goal of building a good deposit for ppor.

Step 1 research areas overdue for some growth (this may include regionals and city locations depending on budget), with a number of drivers combining to make the likelihood of short to medium term rent and capital growth above average. (Infrastructure, pop growth, new employment, income growth, low vacancy rate, reducing stock on market and time on market etc. ) this is known as timing the market cycle.

Step 2 buy a cosmetic renovator in one of the above type areas

Step 3 buy well, renovate for improved rental and small equity gain, wait 6-12 months if market appears to justify, then refinance to access the equity, pull out a deposit and do it again,

Step 4 repeat a few times, (in the same area if you can but if the market has moved too much you will need to relocate to catch a "ripple" each time) and wait, these properties can be positive cash flow or slightly negative, but being slightly positive means you can afford more of them. If u get bored of cosmetic renos you can try a splitter or battle axe subdivision.

Step 5 pick one of the properties you have been sitting on for a couple of yrs that might have grown well and might look like its found a peak or a flat spot of the market sell it, take the cashe deposit, buy or build your house. If you need to sell more than one, do. ( spread across tax yrs if needed to reduce cgtax)

This plan is not better or worse but likely to be faster to generate a deposit of 50-300k depending on your ability to execute, repeat and of course the market. Cg tends to be a faster way to make bigger gains than cash flow. Cash flow is still very important and determines your ability to keep getting loans but unless you are well into double digits with big deals it would take longer to save a deposit in the 100's of k's via positive cash flow.

I see cash flow as the long term objective (living off rent) and it is a worthy goal but having chunks of capital growth to pay down debt would seem to be the fastest way to achieve this too. Faster than saving anyway. I am guessing you don't want to spend decades trying to save or cash flow your way to a house (most people want it in 5 yrs or less)

I am happy for others to prove me wrong, if there is a cash flow property model that works consistently (I guess Nras or overseas or certain mining towns might do it) and safely to generate really big cash flows in short space of time then this would be a discussion I would enjoy. I have some exposure to mining town properties but have seen the volatility first hand too, it's higher risk and rents rise and fall dramatically at times. For a first timer to go all into a mining town at the wrong time it's very high risk and can end in tears.

 

[knightm]

Given this thread is diverting I started a new thread on deposits over at the below location

http://somersoft.com/forums/showthread.php?p=1197433#post1197433

Perhaps deposit talk is better on that one and this one can return to more detailed discussion on regional investing for yield