Investing in property in the outer suburbs - should you do it?

Some buyers’ agents promote investing in more affordable locations. I can understand why some investors might be attracted to follow their advice. But it’s not until you delve into the theory and evidence that it becomes blatantly obvious that such investments have a high probability of under-performing.Here’s an example I saw on social mediaI noticed a buyers’ agent advertise that he bought this "north Brisbane" property for a client for $530,000. He estimated that the rental income would be $480 per week. The land size is large. It’s on 1006 sqm, which apparently has subdivision upside. Sounds good?Firstly, a bit of research revealed that this property is located 17kms north of Toowoomba, not Brisbane. In fact, it’s over 140 kms from the Brisbane CBD.Secondly, it’s not going to work as an investment for the following reasons:§ Toowoomba has a population of only just over 120,000 people. It’s a very small city with plenty of vacant land surrounding it. The property is located in a new estate surrounded by literally an endless supply of vacant land.§ The land was purchased for $90,500 in March 2007 and a 5-bedroom home was constructed on it. Whilst the land may have appreciated in value since 2007, the value of the dwelling has (and continues to) depreciated. This is evidenced by the past growth rate. The completed property first sold in September 2013 for $445,000. Therefore, over the past 7 years the overall value of the property has appreciated by a mere 2.5% p.a. (inflation was 1.7% p.a. over that period).§ Apparently, the property will rent for $480 per week. That equates to a gross yield of 4.7% p.a., which is high by capital city standards. But it’s indicative of the fact that the property is mostly building value, not land value. Most importantly, a 14-year-old, 5-bedroom house will start to require an increasing amount of ongoing maintenance, which will diminish the property’s net income.At first glance this asset might appear to be a good investment because of its affordability i.e. low price compared to capital cities and high rental income. However, it is very clear that it doesn’t have the attributes to drive any meaningful capital growth. The rental income will diminish over time unless capital improvements are made. This is not an “investment”.But there are lots of similar examplesI picked the above example randomly (in fact when I picked it, I thought it was in Brisbane, not Toowoomba). But I come across many similar examples.For example, for almost 20 years I have heard various buyers’ agents suggest that Melbourne’s suburb, Frankston is the next growth suburb. Of course, whilst some properties in Frankston may have performed well (as there’s always exceptions that prove the rule), investors have been better rewarded by investing in blue-chip suburbs over the last 20 years.Attractions of investing in outer-suburb locationsI’d imagine that the price point is the big attraction for some investors. That is, houses are substantially cheaper. That means that people can spread their eggs across multiple baskets i.e. invest in multiple properties. It also means that people that cannot afford a house in a capital city, can still “invest” in property.Secondly, because properties in outer locations tend to have a lower land value component (land is cheaper than the building), rental yields are higher. This makes property more affordable to hold, particularly while interest rates are so low. Quite often, in today’s market, the property’s rental income will cover all expenses and loan interest.Investment weaknMy new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.