Where To Make The Most Money In 3-5 Years - Buy For Capital Appreciation , Not Yield

Nila Sweeney
Your Investment Property magazine

High-yields produced by cash-flow positive properties maybe tempting right now, but it’s important not to lose sight of the fact that only growth investments bring you the ultimate financial freedom in the long run.

Focusing on capital growth at the time when rental yields are rising may seem counterintuitive. What’s not to like with having extra cash in your pocket, right?

Having positive cash flow means you are able you to ride out the economic downturn easier as it provide that cushion to help you hold on to your investment.

On the contrary, high growth properties generally have lower return, so they tend to push you into the red as you subsidise the holding cost of your investment with other income than rent.

“Drawing on your own resources to support your investment property could be potentially dangerous in a downturn,” says Louis Christopher, managing director of SQM Research.

However, focusing only on yield won’t help you expand your portfolio to be able to build a substantial asset base to support a comfortable retirement.

“The truth is you need capital growth to do this, not cash flow properties,” says Michael Yardney, director with Metropole Property Investment Strategist.

“A lot of investors never get pass 1.5 properties. The reason they can’t get more than that is that they can’t save enough deposit out of cash flow. What you need is for your property to go up in value so you can borrow against it to buy another property. So if you’re going for cash flow, you’re taking a short term approach to what is a long term investment.”

Luckily, with the right property, you can now have the best of both worlds: high growth and yields to boot.

“This is probably the first time in 17 years that you can actually get a combination of both. You get good growth properties in the area that are going to perform well over the long term and in the short term it’s going to give you cash flow that in the past could never have expected. If you lock in interest rate when it’s appropriate, your outgoing won’t go up again as the economy moves on to the next pace of the cycle,” says Yardney.

If you’re looking to position yourself for capital growth, we’ve enlisted the help of Australia’s top property experts to pinpoint the suburbs that could see strong growth over the next 3-5 years.

The suburbs were selected based on their proximity to the city centre, waterfront, prime suburb or those areas undergoing gentrification.

The suburbs also have to be affordable, still relatively undervalued, accessible via public transport and receiving government and public investments. The following are their recommendations.

Where to find massive growth over the next 3-5 years
Chippendale, NSW
Peter Koulizos, author of Top Australian Suburbs, believes Chippendale in Sydney has all the essential elements needed for strong capital growth over the next few years.

“It’s very close to the city, units are still relatively cheap and it’s in high rental demand area being close to Sydney University. The university is very popular to international students even at the current slowdown, so it’s recession-proof. Because it’s close to the city, it’s also an attractive location for workers in the CBD. It has a low vacancy rates and there are many older properties providing investors opportunity to add value through renovations,” says Koulizos.

What to buy
Units in wider streets that offer off-street car parking would be the best bet because the area is so compact. “If you can find a property where you can park your car next to your home, people will pay premium for that,” says Koulizos.

Average annual growth over past 5 years:
Forecast over the next 3-5 years: 40% growth*

Darlington, NSW
Located about 4km from Sydney CBD, Koulizos also picked Darlington as a high growth area due to its proximity to the city and to Sydney University. The suburb is well-serviced by buses and is popular among students and Sydney workers. Units are still relatively affordable at $490,000.

“Darlington features smaller period homes and has typical narrow inner city streets, so if you can find somewhere on a wider street and even better if it’s a period home, you’d be laughing. The sheer number of students in the area means you have a strong and steady demand for rental properties. Investors going for growth should look at period-style homes that can be renovated to add value,” says Koulizos.

What to buy
Look for period style properties in the widest streets in particular parts of Abercrombie and Shepherd streets. “As with Chippendale, off-street car parking would boost property price,” says Koulizos.

Average annual growth over past 5 years:
Forecast over the next 3-5 years: 40% growth*

Camperdown, NSW
Being right next door to Sydney University and a short drive from Sydney CBD, Camperdown’s growth is underpinned by strong demand from students and young professionals working in the city, according to Koulizos.

“You can practically walk from the Sydney CBD to Camperdown. It’s a lively place with lots of nice restaurants and cafes. It’s also close to Prince Albert hospital so you get extra rental demand from people who work in that hospital. There are also many Federation style cottages that investors can renovate to add value,” he says.

What to buy
Look for Federation style properties with off street parking to ensure strong growth

Average annual growth over past 5 years:
Forecast over the next 3-5 years: 40% growth*

Greenwich, NSW
Cameron Kusher, senior research analyst with RP Data is tipping Greenwich to grow strongly over the next 3-5 years. While unable to make growth prediction, Kusher says the suburb is well-positioned and has strong fundamentals for solid growth ahead. Situated on Sydney’s lower North Shore, just 4km from the Sydney CBD, the suburb is very strategically located close to major office markets and retail precincts at Crows Nest, North Sydney, St Leonards and Chatswood.

“Greenwich itself also enjoys elevation which affords properties excellent views and many units enjoy these views,” says Kusher.

“Greenwich units are generally older walk-up style units which in most instances have strong internal renovation potential and will lend to have a lower body corporate fees.”

The suburb can be accessed via train found nearby in the adjacent suburb of Wollstencraft, while ferries can be taken from Greenwich Ferry Wharf to Circular Quay in the Sydney CBD.

Where to buy
Look for units in elevated areas with views of the city.

Ultimo, NSW
Kusher also tipped Ultimo to outperform in the medium term thanks to its proximity to the Sydney CBD and relative affordability.

Situated approximately 2km from Sydney CBD, Ultimo is a suburb which is well and truly dominated by unit development. However, Kusher says investors can still find converted factories and warehouses in the area.

“The rental market within the suburb is very strong due to the proximity to the CBD, the University of Sydney and Sydney TAFE. The strength is reflected in the current average gross rental yield if 6.4 per cent,” says Kusher.

Ultimo has an adequate shopping facility with majority of the retail outlets located in the Sydney CBD, Pyrmont and Broadway.

The suburb is accessible via the Sydney Light Rail Stations at Paddy’s Market and Exhibition Centre as well as trains at the Sydney Central station. It’s also right next door to the prime suburb of Glebe and walking distance to Darling Harbour.

Considering its close proximity to the CBD, Ultimo units are still relatively affordable at $360,000.

Where to buy
Units overlooking Wentworth Park along Jones Street are the best bet

.Maidstone, VIC
Peter Koulizos is also predicting strong growth ahead for Maidstone in Victoria by virtue of its close proximity to the city and affordability.

“Maidstone is not the prettiest suburb at the moment because it’s mostly a working class area and there are a lot of housing commission homes, but it’s right next door to the biggest shopping centre in Melbourne – the High Point Shopping centre in Maribyrnong.

“For a median price of $473,000, well under the Melbourne’s median price, and only 10km from the CBD, the suburb offers exciting opportunities for investors.

“Some parts of Maidstone also offer great views of the CBD and is accessible via trams and buses. There are also a number of multi-million dollar developments currently underway in Maidstone, which is a strong indication that the area is on its way,” says Koulizos.

Where to buy
“Buy in areas with a view of the city, people pay premium for that,” says Koulizos.

Average annual growth over past 5 years:
Forecast over the next 3-5 years: 40% growth*

Braybrook, VIC
Like Maidstone, Koulizos also sees strong potential for Braybrook due to its proximity to Melbourne’s CBD and affordability.

“It’s only about 11km from Melbourne. Houses are under $300,000 and being that close to Melbourne is pretty good,” he says.

“I think it will be targeted by first home buyers because of the high concentration of homes in the area. It’s currently undergoing gentrification, making it more attractive for buyers. Like Maidstone, Braybrook is a working class suburb that’s currently undergoing gentrification. It’s got two major shopping centres and is well-serviced by train and buses.

“However, you can’t just buy anywhere in Braybrook and think you’re going to do well. You need to stick to streets that already have nice housing and that already redeveloped.”

Where to buy
Stick to the developed areas and look for houses overlooking the river or park.

Average annual growth over past 5 years:
Forecast over the next 3-5 years: 40% growth*

Footscray, VIC
Koulizos still sees strong growth ahead for Footscray because of the proposed developments in the area.

“Footscray has been designated as a transit city and principal activity centre as a part of the Melbourne 2030 Strategy. This means that this suburb is where the government is focusing on with their spending and therefore that’s where the private sector will be putting their money as well. It’s only 6km from the CBD and median price at $450,000 is well below that of the Melbourne house price,” says Koulizos.

The suburb is multicultural and features universities and TAFE campuses. Footscray features a broad range of shopping and retail facilities. It’s easily accessible via buses, train and tram. It’s also sitting right next door to Seddon, which is currently undergoing gentrification. The Victoria University and Nicholson campus ensure continuous rental demand from students providing investors with healthy returns as well.