How to find the highest-ROI property to invest in

By Nina Cuturic | 17 Apr 2020

Each property that dots the vast stretch of our country has investing potential – whether it’s good, bad or downright ugly. To have a successful outcome as a property investor, you need to create a strategy that’s tailored to your individual situation and can transform your real cash savings into growing equity or long-term cash flow.

While there are many different avenues for building wealth through property, nobody likes to sign up for a deal only to find out down the track that it has set them backwards financially. So, with such a vast array of locations to sift through – all of which have a point of difference – how can you best uncover a property that will maximise your return on investment while also keeping some of the potential risks in check?

Step beyond the city bustle

When it comes to buying their first investment property, many people look to their own backyard in the first instance.

“A majority of property investors have an unhealthy bias towards their home city, or a location that is desirable to them. And when it comes to research, they get absorbed in community features and benefits and the bricks and mortar of property. None of that is greatly relevant; it’s subjective stuff,” says Simon Pressley, managing director and head of property market research at Propertyology.

“There are a total of 185 individual towns and cities that have a population of 10,000 people or more, and that’s a lot of choice. For 111 of those, the medium house price has tripled over the last 20 years, and there are lots and lots of regions that have done a lot better than lots and lots of capital cities.”

In fact, when Propertyology compared the 20-year performance of Sydney and the regional city of Launceston, it was Launceston that showed the higher average annual capital growth.

“Sometimes a property seems to offerhuge positive cash flow but requiresa huge amount of maintenance ...that’s a big mistake that people make;they focus on gross return, not net return”

Drew Evans, director of Caifu Property, points out that, with the slowing down of the Sydney and Melbourne markets, regional markets have shown increased rental yields and “great amounts of capital growth”.

“You can still get in where [properties] are relatively affordable with a rather decent rental yield,” he says.

Crunch the dollar figures

When honing in on a location that offers a strong rental yield, it’s important to take a step back and consider the real cash earnings an investment property will make over the long term. “Most people are chasing yields as a percentage, not necessarily as a dollar figure,” Evans says.

“Sometimes a property seems to offer huge positive cash flow but requires a huge amount of maintenance, has a huge amount of wear and tear; there could be high council rates, huge insurance. So, for me that’s a big mistake that people make; they focus on gross return. not net return.”

Evans has paved a profitable route in residential developing, with a strategy to build large capital gains and equity rather than rental returns.

“For me, that’s where real wealth is generated,” he says.

“So, when you talk about getting a quicker return, it’s by looking at existing comparable properties [in a certain location], comparing like for like real estate and then reverse engineering the numbers to see whether, if you were to develop a similar property, you would have instant equity on completion.”

Pressley adds that if circumstances change or capital growth doesn’t meet expectations, a good rental income can offer security.

“While capital growth should be everyone’s primary goal, one should also respect the rental yield. Cash flow keeps you in the game,” he says.

Narrow down your search

When looking at the many locations around the country to pinpoint an opportune spot for investing, Pressley starts by placing all the options on the table.

“With 10 million dwellings, eight states and territories, eight capital cities, plus an additional 177 non-capitals that have individual populations of 10,000 or more, I progressively reduce the search engine,” Pressley says of his strategy.“

My first process of elimination is to disregard any city or town that’s already been running strongly for 12 months or more. History has taught us that growth cycles typically only last two to three years and they only come around once every 10 to 15 years.”

Pressley then prioritises locations that have diverse economies.

“Keep in mind that many great regional locations do have economic diversity,” he says. “There’s about 50 in total, but examples include Albany, Albury, Armidale, Ballarat, Bendigo, Bunbury, Cairns, Dubbo, Geraldton, Hervey Bay, Launceston, Mildura, Orange, Shepparton, Toowoomba, Townsville and Wagga Wagga.”

A carefully selected shortlist is made even more compact as Pressley then eliminates locations that have excess housing  supply or “a pipeline with higher than normal building approval volumes”.

Know what drives interest

Each location that has passed Pressley’s selection criteria so far is then probed for how its economy can further encourage interest.

“Job creation is the key driver of housing demand. Each year, we identify the industry sectors that appear to have the best potential for expansion,” Pressley says.

“Job creation is the key driver of housing demand. Each year, we identify the industry sectors that appear to have the best potential for expansion”

“In recent years, that’s included tourism, some specific agricultural commodities, food-related manufacturing, defence manufacturing, international students, and healthcare. We hone in on cities and  towns which have some of these industries in their own economic profile.”

Buying in a location that has an expanding local business hub is also of value, and once the time comes to select the property, Pressley says the “individual asset selection includes buying in close proximity to a major employment node”.

“We place emphasis on job creation for housing demand, we mitigate any potential oversupply, and we further reduce risk by insisting on economic diversity,” he says.

Monitor growth in surrounding areas

If a location is already riding a boom in values and it’s too late to enter the market at a comfortable price point, then it’s worth keeping track of the ‘ripple effect ’.

“The natural gentrification or urbanisation has this ripple effect. What happens is, as you get closer to the city, or closer to a particular area or suburb, the more unaffordable it gets, and naturally people have this urban-out sprawl, and that’s what generates growth,” Evans says.

But with speculation still at play here, what best indicates that a location will catch on?

“It’s population movements in the area. Huge amounts of money going into infrastructure, both public and private,” Evans says. “There’s lots of job creation close by, it’s a desirable area to live so there’s lots of amenities that are existing or planned, and it’s also more affordable than the neighbouring suburb.

”There’s a great deal to be said for a strategy that puts more power back into an investor’s hands, he adds, and knowing how to infuse value into a property can increase your chances of a higher return, whether you choose to hold it as a rental after the renovation, or sell it.

“It’s about being able to take control of your own equity creation as opposed  to purchasing something and then hoping it’s going to go up over the long term,” Evans explains.

“You need to be sure it’s specific to the demographic that’s moving there. That’s really important, because at the end of the day you want it to boost your returns from a yield perspective – and you would want to boost your returns from a capital growth perspective as well.”

It’s just as fundamental to know your end goal prior to starting a project, as this can help you avoid the risk of overcapitalising.

“There’s a different psychology to being a homeowner who is house proud and looks after things, and somebody who is renting a property,” Evans says.

“Focus on things that give you a return on your investment, rather than getting too emotional and spending on things you personally want.”

Top Suburbs : millner , windale , whyalla , st kilda west , toowong

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