If you’ve started your journey as a property investor, then you probably hope to one day amass a property portfolio. While only 28.8% of investors own more than one investment property1, the benefits of compounding annual growth and multiple sources of income are well recognised.
What is sometimes overlooked from the conversation is the role that investing in interstate property can play. We often have a tendency to favour investment opportunities in our own city, and that can be a good place to start. However, it doesn’t always need to start, nor remain that way.
Stepping outside your comfort zone and investing in other cities is one way to optimise your returns. On the one hand, an interstate market might be more accessible for you to make your first investment or find a property that suits your investment strategy. Alternatively, it could be one initiative to diversify a broader property portfolio.
North Bondi, New South Wales
Access to secure the right property
For investment purposes, whether you’re at the start of your journey, or a seasoned professional, location is everything. We’ve seen the main markets of Sydney and Melbourne surge for some years before recently cooling.
Elsewhere, as seen in Figure 1, markets like Brisbane and Adelaide have bucked the trend. Brisbane property prices have largely remained steady, down only 2% since their mid-2018 peak. Meanwhile, Adelaide has continued growing, including a 1.4% rise between January and July this year. Perth and Darwin however, have been in the midst of declining prices for several years.2
On the face of it, higher median prices in Sydney and Melbourne may set a greater threshold to invest in those cities. But at the same time, signs of a rebound are looking more promising since the Federal election. If you’re located interstate, these markets could provide leverage to a turnaround.
Conversely, with lower capital requirements, other cities like Brisbane could be poised for the largest investment upside. There, a weak economy and oversupply of apartments has dampened prices. But looking backwards is only part of the story. The more relevant thing is the future growth outlook for that market, which is expected to improve dramatically.3
This is where it becomes important to isolate local factors affecting each city. Differences in state economies play a role, especially as interest rates are cut. In addition aspects like housing supply, infrastructure, tourism, and population growth will shape variances in rental yields and property price growth.
Interstate properties are means for diversification
As you would have heard with other asset classes, concentrating all your capital in one position is a risky approach. Sure, it may help you maximise gains when everything is working in your favour. But things can and do go wrong, and this means your exposure is heightened when there is a downturn. As such, interstate properties will help you diversify your portfolio and mitigate risk.
The premise behind this is that investing in property in another city can smooth out market variances. Each capital city is at a different cyclical position. Using an earlier example, an investment property in Adelaide, which sustained growth in recent years, would have helped you hedge against a slowdown on the eastern-seaboard. Further back, if you had or have multiple properties in Perth, the end of the mining boom would have left your investment portfolio reeling. All the while, property prices in Sydney soared.
Each capital city is an individual market and has its own unique place in the broader Australian property cycle. Because of this, each market has the capacity to strengthen and temper at different times, and by different rates. An interstate investment strategy also provides your portfolio with exposure to different types of suburbs, properties and socioeconomic factors mentioned earlier.
What to consider when investing interstate
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Find properties in growth areas
As you would with a property in your own city, investing in an interstate property requires extensive local market research. DPN’s research team provides comprehensive property data. The differences between markets should not be understated or overlooked, particularly as far as employment levels, vacancies, yields, types of renters and more.
Buying an established property sight unseen can be a major risk, as you may not get a true feel for what you are investing in. Be prepared to budget for flights, or otherwise entrust an advocate on your behalf. In any case, you will need to pay for a property manager to handle the day-to-day affairs associated with renting the property.
There are also differences in legislation and regulations to be wary of. This spans from land tax, to stamp duty, renting terms, and contracts among other matters. In NSW for example, land tax is based on the cumulative value of properties you own, whereas if spread interstate, the properties would be subject to individual tax at a lower rate. Your DPN Property Strategist can help to model out the different costs to purchase property in different states.
The lesson to take away here is that you shouldn’t let your comfort zone or fear of the unknown prevent you from investing interstate. Whether it be means to access the market, find the right opportunity, or mitigate your risk, there is a strong case to invest in property outside your city.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186 Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and related entity of DPN. Credit for Dream Big 100% Offset and Work Smart 100% Offset is provided by Adelaide Bank a division of Bendigo and Adelaide Bank Ltd, ABN 11 068 049 178 and Australian Credit Licence 237879.