What’s the best way to find property investment locations?

The approach a lot of property investors – and even property investment professionals – take is to identify a target area, then do suburb-level research within that area, and then look for individual properties within the suburbs that meet certain benchmarks.

However, as we’ll show later with a concrete example, this is a flawed approach, because it means you exclude a lot of potentially high-quality investment properties. That’s because while the property itself might tick all the boxes if you were to ever look at it, you never would because it’s located in a suburb that you would’ve filtered out.

That’s why Suburb Help prefers to research at what the Australian Bureau of Statistics (ABS) refers to as a ‘Statistical Area 3’ or ‘SA3’ level. Australia is divided into about 350 SA3s. Generally, the population of an SA3 ranges from 30,000 to 130,000 people, although, for technical reasons, some have populations above or below that range. SA3s are clusters of suburbs and are similar in size to local government areas (LGAs).

Here are the key metrics we research at the SA3 level:

1. Jobs data. We look at job concentration, the current employment rate and the trend employment rate. Our goal is to understand the main employment sectors and the state of the local economy. That helps us identify the likelihood of attracting and retaining quality tenants.
2. Rent prices. We look at weekly rental rates for different property types (houses, townhouses and units) and different property sizes (i.e. number of bedrooms). We look at both current rent prices and the trend over the past 12-24 months.
3. Vacancy rates. We research the current vacancy rate and the trend over the past 12 months. We also look at the actual number (as opposed to percentage) of vacant rental properties.
4. Yields. We estimate yields, based on median sale prices and rental rates at the suburb level. This can work well when the suburb is homogenous and there is plenty of data (i.e. lots of sales and rentals). But, often, the yield is better calculated on a property-by-property level.
5. Capital growth. We look at price movements over 10 years, rather than just one or two, so we can better understand an area’s long-term fundamentals.
6. Inventory levels. We research inventory levels to understand how hot a market is and whether the trend is towards easier or harder buying conditions. When an area has less than three months of inventory, the market is strongly favouring sellers. If you want to buy in that kind of hot market, you might want to work with an experienced local buyer’s agent, who will have strong relationships with local real estate agents and access to off-market properties.
7. Pipeline supply. We research the back-series of building approvals to understand how many new builds are likely to hit the market soon. That gives us a picture of how the balance between supply and demand might change in the years ahead.

There are several other options you can use, such as:

• Infrastructure projects (proposed, approved and current)
• Regentrification
• Local renovations

The next stage of the property research process

Once Suburb Help has identified promising SA3 areas, we do further due diligence by researching suburb-level data within those SA3s. 

The ABS has a lot of high-quality suburb data available through the Census. Here are the key metrics we research:

1. SEIFA socio-economic scores – to find out the levels of advantage or disadvantage within a suburb
2. Household income – to find out what capacity residents have to pay higher rents
3. Size of rental market – to find out the ratio of owner-occupiers to renters
4. Amount of social housing – to find out what percentage of properties are occupied by social housing tenants
5. Vacancy rate – to find out both the share of vacant rental properties and the number
6. Inventory level – to find out how hot or cold the sales market is
7. Price segments – to find out the selling prices being achieved for different categories of property

Shortlisting investment properties

Once you’ve chosen your property investment location, you’re ready to research individual investment properties.

Remember how we said it’s better to look for property investment opportunities within an SA3 than a suburb? Well, to give you a concrete example to look at, Suburb Help decided to research properties in the Lake Macquarie – East SA3, via this realestate.com.au search.

(If you go to Suburbtrends and sign up for free membership, you’ll find a list of SA3 search links that have already been created for you.)

At the time of writing, the Lake Macquarie – East search delivered 311 results. As we scrolled through the results, we spotted a two-bedroom, 632sqm house in Cardiff Heights. Our research revealed that 37% of the houses that had sold in Cardiff Heights in the previous 12 months had sold for between $600,000 and $800,000, while 41% had sold for between $800,000 and $1 million. So we estimated there would be a 37% chance of the property selling for under $800,000.

 To do a quick yield estimate, we decided to assume the house would sell for $780,000. By then looking at median sale prices and weekly rents for two-bedroom houses, we calculated that the house would probably rent for $440 per week, which would deliver a gross yield of 2.93%. However, after looking at the floor plan, we realised that with some modest renovations, we could easily turn this from a two-bedroom to a three-bedroom house. At that point, we’d be able to secure a rent of about $525, for a 3.50% yield.

Suddenly, a property that many property investors and property professionals would have excluded because the suburb didn’t meet certain yield benchmarks was now back on the table. Given the land size and location, we thought this property would enjoy a strong amount of capital growth in the years and decades ahead, so we added it to our shortlist.

As we continued looking through the realestate.com.au search results, we found other attractive properties in other suburbs, including Floraville and Warners Bay, that we also shortlisted.

Widening your property investment net

By searching at a SA3 level, Suburb Help is able to uncover a lot more quality investment properties than someone who does a suburb-only search. We still reference suburb-level data as part of our due diligence, but only after shortlisting properties that meet our criteria. So the Cardiff Heights property mentioned above would still need to pass another test before we seriously considered buying it. Now, though, we’d have more options open to us than other property investors.