Think of your nearest “rough” neighbourhood. There’s always at least one in every city or town – the kind of area where broken glass litters the pavements, windows are boarded up and neighbours haven’t repainted their houses since they were built.
Of course, the exact attributes that make up a poorer area differ across towns, cities and regions. It’s much like Leo Tolstoy’s Anna Karenina Principle: nice neighbourhoods are all alike; every rough neighbourhood is rough in its own way.
Just how bad these places may seem and where they are, most of us probably already know. What we’re much less likely to know is whether these areas are worth investing in. That’s because, tacky as some of them may seem, they offer huge investor benefits. Property prices are cheap, rental yields are usually high and history suggests that cheap rental accommodation is always in demand.
“It’s counter-intuitive,” says interstate buyer’s agent Brian Watson. “When people call me, typically one of the first requests they make is for a house in a ‘nice’ neighbourhood. I mean, fair enough, it makes sense to want to invest in an area that you would want to live in yourself, but when you remove emotion, some of the so-called bad areas offer some really good deals.”
How it can work
One person who knows all too well how profitable such deals can be is B Invested founder Nathan Birch. Birch has purchased more than 70 properties over the last nine years, the majority of which have been in Sydney’s lower socio-economic areas.
Birch says that a strategy of aiming for cheaper, high cash-flow properties makes a lot of sense. “It makes it much easier to get loans from the bank and the real trick is if you can find a property at a bargain, something that is going well below the market. That way, if something goes wrong and you’re forced to sell, you’re breaking even and not losing any money.”
Birch adds that a lot of the areas where it is possible to score these types of properties are in areas that might not be many investors’ first choice to personally live in.
Andrew Peterson of The Next Hotspot is not as convinced. Peterson’s agency uses a number of variables to predict future property price growth areas across Australia and he believes that if an area has a lot of social problems, which is typical of lower-income suburbs, its values won’t move. He uses Western Sydney as a good example.
“If you look in Sydney’s Blacktown area, there’s good population growth and rising incomes, and suburbs like Ropes Crossing will probably see good prices growth in the future. Across the road that borders Ropes Crossing, prices are not going to move in some of the neighbouring suburbs because of some of the social problems there,” Peterson says.
He uses Canberra as another example. “In 1996, when the Howard Government came to power, about 12,000 or so public sector jobs were cut. The result: prices in many parts of the ACT fell back by about 20%. I’m not saying this as a political statement. I’m saying that cheap property is relative. Social conditions can make a big difference.”
The debate
Realising just how much opinions can vary on the issue of investing in poorer areas, we decided to let a range of property investment advisors try to settle the debate. We presented them with a simple question and asked them to motivate their answers. The advisors were Greville Pabst of WBP Property, Bryce Holdaway of Empower Wealth and Jennie Brown. Here’s what we asked:
“Can it ever be a good idea investing in low socio-economic areas, or similarly, investing in areas with a high proportion of public housing?”
Expert: Jennie Brown, property author and mentor
View: Lower end properties are always in demand
Logic:
- The market is consistent
- There are good (and bad) tenants in any suburb, including poorer ones
- A good property manager can remove a lot of these suburbs’ risk
Regardless of what type of property market – booming, busting or flat lining – there are huge advantages to investing in low socio-economic areas.
One is that there will usually always be demand for lower end housing. Almost all buyers start at the bottom or low end of the market. Over time, as their families expand, they upgrade. As they approach retirement, their needs change and they usually downsize, often ending up back in a lower end property.
This cycle of buying means that the lower end is always in demand, while higher end properties are more likely to experience price variations as demand fluctuates.
Because the demand is more consistent in lower end housing, prices tend to rise and fall less than the higher end. This means that investing in the lower end is less risky.
In my personal property investing experiences, all of my rental properties are in the lower end of the market. This is quite deliberate as I believe that this end of the market is more consistent.
I think that generally there is a stigma attached to a lot of poorer areas that is not necessarily true. Yes, in some ‘poorer’ areas we’ve had problems with the quality of our tenants, but they are the type of problems that tend to occur in high end properties too and are more about the selection process of the tenant. We’ve discovered that a good agent who selects carefully makes a difference.
In fact, we have tenants who look after our low end properties better than most home owners. They care for the gardens, rarely ask for anything, and we have even had some who did their own maintenance. We also rarely have a vacancy – over half of our tenants have lived in the properties for five years or more.
If you want to identify which of these types of areas is suitable for investing, I believe that you should look for the same things that you would look at in any investment – consistent industry and employment opportunities, facilities, the general appearance of the area and crime rates, to name a few.
Also, be clear on who your ideal tenant is. Put yourself in their shoes. Would they want to live in the area you are looking to invest in? In that regard, keep the property well maintained and looking nice. Gardens, a coat of paint, regular contact, and a few little extras to make the tenants feel at home encourage them to look after the property.
In respect to housing commission, I have known a lot of people who have been in the situation of needing help with housing. And, just like anywhere, the tenants can be good or bad.
These days I believe that the housing commission properties are more spread throughout, rather than in a cluster. That said, I would be wary of areas where housing commission is among very high quality homes, as I believe that will de-value the market. Again, do your research. .
Expert: Bryce Holdaway, Property advisor, Empower Wealth
View: Low socio-economic areas lack a key forward indicator
Logic:
- Good areas to invest in should have growing incomes
- Capital growth and rising rents usually occur where average income is higher than the city average
For me, the question here is not one of “yes or no” to investing in a low socio-economic area but more a fundamental question about income.
One of the keys I look for when investing is to buy in a suburb that has growing incomes and ideally where the average income in that suburb is greater than the city or regional average as a whole.
This is important for selecting an outperforming property. And that’s because growth in incomes is a leading indicator of the future prospects of an area – in terms of both capital growth and rental income. By definition, low socio-economic areas generally do not satisfy this requirement when it comes to income. So, with this in mind, I would probably not target a low socioeconomic area.
In a separate, but interrelated issue, choosing not to invest in a low socio-economic area does not mean I would disregard an area just because it had housing commission. I would consider an area that had housing commission as part of the community if the suburb was centrally located and the housing commission was mixed with a diverse range of other types of housing.
In Melbourne, for example, you will find very visible housing commission accommodation in suburbs like Prahran, Richmond, Kensington, South Melbourne and Albert Park but there is also a history of strong price growth. This shows that it can be rewarding to invest in these suburbs.
Expert: Greville Pabst, WBP chief executive
View: “Poorer” areas are changing
Logic:
- New public housing developments are much harder to spot
- The effect of public housing on property values is exaggerated
Modern public housing design tends to be a mix of public and private ownership in a way that they are usually indistinguishable from each other. This reduces the social stigma that previously existed with public housing.
Take Melbourne as a case in point. The city areas of Kensington Banks and Beacon Cove are two recent examples of this new style of public housing where parkland, shops and other social and public infrastructure are shared by both private and public communities.
This is in contrast to the high density public housing towers that were constructed around Melbourne in the 1960s. These created, in many cases, the social stereotyping of public housing due to the density of living, higher crime rates and the lack of up keep and maintenance on these buildings over the last 40 years.
The injection of both government and private capital into the replacement and refurbishment of older style social housing in poor condition has rejuvenated many areas. This has no doubt had positive benefits to private landlords.
Public housing is now very well designed and integrated into the surrounding landscape, which is a positive for private and public ownership. These new designs don't label public housing as something that is undesirable. In fact, if you walked past you may not even be aware that it is public housing.
Property values for private homes part of these new mixed developments have also been good. This is in some part due to good site selection and the fact that a good proportion of public land is located in the inner city of Melbourne, but also the attractiveness of the new public/ private community design development.