Property Investing in the Melbourne Market

I wrote this a couple of years ago, but updated this article to reflect the current times. Investing in Melbourne property always has been and always will be a great idea, here's why.

Melbourne always ranks highly as one of the world’s most livable cities. Combine that with the cafe culture, restaurants, arts and night-life, it's no surprise that there is strong population growth here. Vacancy rates may be up and down (currently close to 3%), but if you purchase the right property, you can pretty much be assured of good rental yields and good growth. 

Here are the important factors to consider when buying a Melbourne house and land package for investment purposes in Victoria.  

LOCATION

Houses are generally rented by couples, families and 'empty nesters' seeking properties close to schools, universities, parks, cafes, restaurants and public transport. Traditionally, new house and land developments are located in areas that have a high rental demand.

It is important to investigate your desired Victoria location and check the:

• average rent and yield is of similar new houses in the area
• capital growth of the region you wish to buy a new house in
• changes to infrastructure or new developments planned that may affect the new house you wish to purchase and
• estimated population growth and demographics of the location.

Remember investing in property is a long term strategy and the property market is a cyclical so make sure you undertake extensive historical research along with projected planning reports for the area.

RENTAL INCOME AND YIELD

Houses may attract a different demographic than apartment dwellers such as couples, families and retirees looking for extra space and pet-friendly dwellings. The increased privacy and additional outdoor space such as a garden or courtyard are also attractive to prospective tenants.

Research rental reports in the Melbourne region you wish to buy an investment property in and find out the average rent for other similar new houses and the demographics of your desired location. Historically, new house and land developments that attract a high rental demand in Melbourne have the following features:

• within 10kms of the Melbourne CBD
• access to nearby schools, universities or TAFES such as Monash University or Melbourne TAFE
• within a short distance to one of Melbourne’s many shopping precincts
• close proximity to one of Melbourne’s beachside suburbs such as Elwood and St Kilda
• located near restaurants and cafes such as Carlton or Fitzroy
• near to public transport and highways and
• located in a region with a diverse industry and employer base.

CAPITAL GROWTH

It’s important to research the capital growth potential of the area that you are planning to buy in. Houses generally have a greater potential for capital growth than apartments because of the land content.

The advantage of buying a house is also the greater potential to add value by landscaping the garden, restoring the roof or painting the property and greater control over the property. Renovations to the property are not restricted by an Owners Corporation as in the case of apartments, units and townhouses but you do have to comply with local planning laws.

Capital growth in Melbourne for houses may be affected by the following factors:

• The location of the property. Historically, the best performing houses in terms of capital growth have always been within 10km of Melbourne.
• If the house is bought off the plan and there is a long settlement period, there may also be potential for capital growth when the property is finally completed.
• Whether there are any major developments or infrastructure planned for your Melbourne location such as a shopping complex or a new highway.
• Demographic changes to the region increasing a demand for certain types of property.

TAX ADVANTAGES 

Many property owners are losing potential tax exemptions by failing to take full advantage of a property’s tax depreciation potential and tax credits. Any legitimate expenses incurred in running your investment property should also be tax deductible.

Tax credits are available to any property owner who obtains assessable income by way of rent or operates a business from a property. These can include:

• insurances;
• repairs and maintenance of fixture and fittings;
• loan interest and related bank fees;
• property management fees;
• any legitimate expense incurred in running your investment property;
• depreciation – the ability to claim the cost of replacing fixtures and fittings such as carpets, curtains and so forth in advance of actual replacement;
• capital works deductions such as installing a pool, removing an internal wall or adding a bathroom.

Consult your accountant before buying an investment property to find out all the possible tax deductions you may be entitled to.

COSTS

As well as the usual costs of buying an investment property, a house owned for investment purposes is also subject to land tax in Victoria and it is calculated annually as at midnight on 31 December of the year preceding the year of assessment (i.e. 2013 assessment is based on land holdings at 31 December 2012).

A house will not incur any strata fees and generally does not have the high maintenance costs of an apartment such as pools, gyms and landscaped gardens. When buying a new house and land package as an investment property, additional expenses may include:

• conveyancing
• loan application and valuation fees
• mortgage insurance (if applicable) and
• a tax depreciation report
• Stamp Duty

Other ongoing expenses include building and home contents insurance, council and water rates, property management fees and landlord’s insurance.

Melbourne’s ‘cafe culture’, strong sporting culture, love of the arts and night-life and tenant-friendly lifestyle have resulted in generally low vacancy rates and good rental yields. Astute property investors understand the charm and attraction of Victoria land and house packages and the potential for capital gains growth. There is also a bigger resale market for houses as they are attractive to both investors and owner occupiers alike.