13 Feb 2023
Highest rental yield suburbs revealed | Citi Australia
CitiThe market’s seeing excellent investment property returns in 2023. With the best yields in locations you may not have heard of, here’s expert advice on picking a property that works for you.
Looking to buy an investment property? Regional suburbs in Western Australia and Queensland provide among the best current returns on investment, according to a list of the top 20 gross rental yields compiled using property data sources.*
Kambalda West, inland from Perth, had the top rental yield, at 12.13% (rental yield is the difference between the rental income from your property minus the costs of your investment). The mining town has a median house price of $150,000 and a median weekly rent of $350.
South Hedland, in WA’s far north, was next best, with rent of $550 providing a yield of 11.92% on houses worth $240,000.
Third spot went to Zeehan in Tasmania. A median price house at the tourist destination costs $155,000 and returns $340 a week in rent for a yield of 11.41%. Central Queensland’s Collinsville took fourth place, with houses selling at $152,500 and returning $330 a week for a yield of 11.25%.
Fellow Central Queensland town Blackwater was fifth, with a yield of 11.03%.
A gross rental yield of between 6% and 7% is the general threshold at which a property becomes positively geared – where the rental income covers all mortgage repayments and holding costs with extra cash left over – so these suburbs will appeal to investors with a positive cashflow strategy.
However, there is more to consider than just rental income when choosing where to invest, says Matt Wood, Head of Mortgage Distribution at Citi.
“These high-yield areas are often underpinned by mining,” Wood says. “You might buy something for $500,000 and get $800 a week rent, because the mine is attracting people to the area. But if the mine closes, you might be left unable to find a tenant.”
The high-yield towns in the top 20 provide significant positive cashflow, but Wood says that may not be the right strategy for everyone.
“Most investors prefer a negative cash flow strategy for the tax benefits,” he explains, adding that an area’s fundamental metrics, such as infrastructure, population and diversity of economy, should all be considered before investing.
“Look at the infrastructure. What’s causing the demand in that area?” Wood says. “Is that demand sustainable?”
Choosing tenant type and location
Wood adds that an important part of your investment strategy is to decide what kind of tenant you want to attract, and where you plan to buy.
“The location is critical,” he says. “Have a look at where you want to buy and whether it’s close to transport, shops, schools and other amenities. If you want to buy a one-bedroom unit, you wouldn’t be buying in a regional area. If you want it tenanted, you need a single person who is willing to pay you a rental income for a purpose. You might look to buy near a university, where a student can walk to uni every day.
“If you want to attract a young couple with two young kids then you want something in the suburbs close to a good school.
“If you’re targeting white collar professionals, you’re looking close to a railway station where they are heading into the city. The location and the infrastructure around the location is critical.”
Picking the right property type
Wood says it’s also important to choose whether you want a house or an apartment.
“A house will probably appreciate and give you better capital growth over time,” he says. “While in the short term, you could be getting a better yield out of the unit.”
More affordable markets on the fringes of cities can also provide good rental yields, without the risk of being in a remote location.
“Some of these outlying suburbs, you can still buy something for relatively cheap and there’s still good rental demand and infrastructure growth in the area,” Wood says. “So you’re buying something at a low value and still getting a higher rental yield than in more established suburbs closer to the CBD.”
Do the numbers work?
Wood says first-time property investors can sometimes struggle with the stigma of a certain location. They may not want to live there personally, so they baulk at investing there.
They may also have a relative with horror stories about their own tenants, which can distract them from whether the numbers and metrics stack up as a good investment.
“All horror stories have solutions. To give people some comfort, the first thing is to get some landlord insurance, so if something does happen, you’re covered,” Wood says. “There has always been a stigma about some areas, but if you can get a low entry fee and attract plenty of rental demand from those looking at renting over buying, it makes sense. You’re not buying it to live in; you’re buying it because the numbers stack up.”
Top 20 yields (Sources: PropTrack, CoreLogic, ABS)
|Suburb||State||House/unit||Number sold (12 months)||Median price||Weekly rent||Gross rental yield|
|Port Pirie West||SA||H||81||$143,500||$288||10.42%|
*Yields may be subject to interest rate movements