Introduction

Investing in rental properties can be a lucrative venture, especially in a thriving market like Melbourne. However, to make informed decisions and maximize returns, it’s crucial to consider various key drivers that influence the performance of investment properties. In this comprehensive guide, we will explore the 15 key drivers for successful property investments in the Melbourne market. By understanding these drivers and conducting thorough research, you can make strategic choices and avoid costly mistakes.

Macro Drivers

Market Cycle

The Australian property market operates in cycles of boom and bust, or expansion and contraction. Timing your entry into the market is essential for accelerated results. Investing at the bottom of a market cycle, when supply levels are low and demand is triggered by factors such as low interest rates or increasing market confidence, can lead to significant growth and rental yield.

To assess market cycles, it’s important to analyse long-term data spanning at least 10 years. This data can be obtained from licensed websites like pricefinder.com.au. However, remember that market cycles should never be considered in isolation. Researching other drivers will reveal vital facts and trends that must be taken into consideration for a sound investment.

Unemployment Rate

The unemployment rate plays a significant role in the performance of investment properties. In Melbourne, where the average unemployment rate is relatively low, high unemployment rates in specific areas, such as mining towns or lower socio-economic regions, can negatively impact property performance. When the local population lacks sufficient income to pay rent or support price growth, investments in these areas may suffer.

To gather information on unemployment rates, the Australian Bureau of Statistics (ABS) website (www.abs.gov.au) and profile.id.com.au are valuable resources. However, as with other drivers, unemployment rates should not be analysed in isolation. Consider other factors and trends to make well-informed investment decisions.

Supply & Demand

The fundamental economic principle of supply and demand heavily influences property market growth and rental yields. When demand exceeds supply, vacancies decrease, and prices and rental yields increase. Conversely, an oversupply of properties can lead to downward pressure on prices and rental yields.

When evaluating supply and demand, it’s important to assess future supply levels and potential impact on the market. Areas with high-density housing and fewer height restrictions can be more volatile and prone to oversupply. Similarly, “greenfield” estates on the outskirts of the city, where land is abundant, may experience faster development than demand can keep up with.

To access information on supply, local council websites and platforms like sqmresearch.com.au provide data on new approvals for supply and vacancy rates. Remember to consider other drivers and trends alongside supply and demand to make well-rounded investment decisions.

Population Growth

Population growth is a vital driver that puts pressure on the demand side of the property equation. An increasing population indicates a positive growth rate in a defined area. This influx of people can result from interstate migration or external immigration. Areas with fast-growing populations may experience growth rates of 3% or more per year.

Investing in areas with population growth can signify a healthy local economy, job market, affordability, and desirability. To access population data, resources such as the ABS or profile.id.com.au offer valuable information.

While population growth is a key driver, it should not be considered in isolation. Careful research of other drivers will reveal additional insights and trends that inform sound investment decisions.

Economic Strength

The health and growt

h of an economy, as measured by Gross Domestic Product (GDP) or Gross State Product (GSP), significantly impact the property market. A vibrant economy with increasing output creates more jobs and wealth, positively influencing property market demand.

To gain insights into economic strength, the monthly report “State of the States” by CommSec provides diverse economic data from various sources. However, economic strength should not be the sole driver considered when making investment decisions. Combining research on other drivers will provide a comprehensive understanding of market dynamics.

Micro Drivers

Infrastructure

Infrastructure projects, such as roads, rail networks, schools, hospitals, and commercial complexes, play a crucial role in property market dynamics. These projects are undertaken by private and public entities and have a significant impact on urban renewal, gentrification, and population influx.

Investing in areas with new infrastructure projects can attract new generations of residents, create employment opportunities, and drive demand for housing. It’s essential to explore local council or government websites and consult local newspapers for information on upcoming infrastructure projects.

Vacancy Rate

The vacancy rate is a valuable measure of the relationship between supply and demand in a specific area. A low vacancy rate indicates that demand is outstripping supply, lea

ding to upward pressure on rents and subsequently, property prices. A market is typically considered balanced at a 3% vacancy rate, and anything lower indicates an undersupply. For investors, a 3% vacancy rate translates to approximately 1-2 weeks of vacancy per year.

Platforms like sqmresearch.com.au provide access to vacancy rate data, enabling investors to gauge the health of a market. However, it’s crucial to consider other drivers and trends alongside vacancy rates for a comprehensive understanding of market dynamics.

Affordability

Affordability, as measured by the relationship between average household incomes and average mortgage repayments, is a key driver of property market dynamics. When a significant portion of household income is allocated towards mortgage repayments, it limits the ability to push prices upwards. Ideally, a comfortable market with room for growth should see less than 30% of household income allocated towards mortgages.

To determine affordability ratios in each market and suburb, data from the ABS Census can be analysed. By considering affordability alongside other drivers, investors can make informed decisions and identify areas with growth potential.

Demographics

Demographic factors, such as average incomes, average age, transportation patterns, household structure, crime rates, and employment, provide valuable insights for property investment. Understanding the local demographics allows investors to cater to the specific needs and preferences of the target market.

For example, investing in a one-bedroom unit in an area dominated by families seeking houses may result in low demand and limited growth potential. To access demographic data, resources like the ABS or profile.id.com.au offer valuable information.

Sales Data

Sales data, including auction clearance rates, days on market, and online listing views, provides an understanding of market health and transaction frequency. Long days on the market may indicate a sluggish market with low demand, which can impact sale prices and future price growth.

Websites such as realestate.com.au and sqmresearch.com.au offer access to sales data, enabling investors to assess market trends. However, sales data should be considered alongside other drivers and trends to make well-rounded investment decisions.

Property Drivers

Build Quality

The build quality, condition, and age of a property are essential factors to consider when making investment decisions. While no building is entirely free of defects, understanding their extent and impact is crucial. Conducting a pre-purchase building and pest inspection helps evaluate the overall condition of the property and identify any potential maintenance or repair issues.

Licensed building inspectors provide comprehensive reports summarising the occurrence and condition of defects, empowering investors to make informed decisions and minimise unexpected expenses.

Price & Rental Yield

Paying the right price for an investment property is crucial for long-term success. Overpaying can take years to recoup, while underpaying may result in missed opportunities. Additionally, achieving a steady rental income that aligns with your budget is essential for cash flow management.

To determine the right purchase price and predicted rental yield, gather sales and rental evidence from the last six months within a 1km radius of the property. These comparables should be similar in size, features, and inclusions.

Size (SQM)

The size of a property, including land size, house size, bedroom size, and living space, impacts its desirability and suitability for specific demographics. Matching the property size to the target market’s needs is crucial for attracting tenants and achieving growth potential.

Floor plans, council records, and planning websites provide valuable information on the size of properties. Analysing size alongside other drivers enables investors to make well-informed decisions.

Features

Property features, such as views, design, architecture, extra car spaces, large outdoor areas, air-conditioning, and north-facing aspects, contribute to the attractiveness and desirability of an investment property. Identifying features that appeal to the local demographic and owner-occupiers is crucial for future value appreciation.

Consulting local agents and platforms like sqmresearch.com.au, which show the ratio of investors to owner-occupiers in a suburb, helps determine popular and in-demand features.

Location

The adage “Location, Location, Location” holds true in property investment. Well-placed real estate in desirable areas with essential amenities, such as shops, schools, transport, and hospitals, ensures future growth potential. Locations within popular school catchment areas may command higher prices due to increased demand from families seeking quality education for their children. On the other hand, unfavourable locations, such as flood zones or busy roads, should be avoided, as they can impact potential resale value.

Platforms like Walkscore, Google Maps, Suburb Scores, and local school catchment resources provide valuable information on property locations.

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