VIC First IP in VIC: Should I go regional?

Hi everyone,

I am looking to buy my first IP, which will be my PPOR for 12 mo to benefit from stamp duty concession before being rented.

Looking to buy with 300-350k cash + mortgage and max budget 550-600k in order to be positively geared or neutral cash flow. Already discussed with broker.

I was considering 1 or 2br apartments/units in inner north Melbourne (Brunswick, Coburg, Thornbury, Northcote) because I know the areas very well, making it easier to scope the market. However, I've been questioning regional VIC (particularly Bendigo), where I could afford house+land. I worry that I have missed the surge in regional prices and that buying regional with my budget for CG might not be sensible. Also given I am currently in Melbourne, it makes it harder to attend viewings and build relationship with agents etc.

I am late 20s, work remotely. Looking for something that could use a bit of fixing up, which I will do myself. Both CG plus cash flow would be nice in an ideal world; but my main priority is that I am not negatively geared. My investing style has always been passive; I buy and hold investments for the long term. I am unlikely to stay in VIC long-term.

I am curious to know:

Whether you would prioritise house+land in regional VIC over a strata property in inner Melbourne and why?
Whether you think Bendigo and Ballarat prices are likely to continue surging?
Any general tips for investing regional?

I appreciate everyone may have their own opinion on this, but I am very curious to know the reasons why.

 

I certainly considered it. However, since it is my first property of any kind, I would prefer if it were residential so that it could offer a safety net for me and put a roof over my head if things go south in my life for whatever reason. I am planning to look again at commercial for a second investment.

 

Breaking the 2 options down:

• Metro strata (I am assuming this is an old-style apartment - circa 1980s or earlier)
  • I think the next 10-20 years will be favourable from a CG perspective for these properties (please note I am biased as I own one myself). The primary reason is that the cost of properties in the inner-ring have increased to a point where single high-income earners (or couple medium income earners) looking to buy their 1st home (ie: can't sell another property to unlock equity) cannot afford a free-standing house. I think the next option for these people will be a good sized (2-3 BR + 1 car spot in small block <10 units) old-style apartment, this will lead to CG imo.
  • Typically an "okay" cash flow ~3%
  • By virtue of their age you can't expect any catastrophies with the building itself (compared to new builds) - you may have to replace a roof etc. but that goes for free-standing houses as well
  • Holding onto quality land in the inner ring is always a winner (this is why I reccomend <10 units in the block OR a high sqm entitlement)
• Regional IP
  • You have missed a good 20-30% CG in the last 2 years, but realistically there isn't anything you can do about that. I have lived in Bendigo for 3 years prior to moving to Melbourne and my partner grew up in Ballarat. They are both excellent towns and from a long-term risk PoV I view them in a similar vein to Melbourne (ie: they won't go bust if industry X disappears like some smaller towns). Based on this I feel the long-term CG prospects are good.
  • Rental yield is superior to Melbourne - typically +1-2% higher than an equivalent Melbourne property. This is for two reasons - low rental vacancy in regional towns + lower prices (identical homes in Ballarat and Melbourne will be say 700k and 2.5M respectivelly, but yields probably 3-4% vs. 2% by virtue of the price [no one is going to pay 100k for a 2.5M rental in Melbourne!)

Overall if you buy an existing 2-3Br apartment in inner Melbourne with good land content OR for the same price a 3-4Br house in Ballarat or Bendigo (make sure you understand the suburbs well before buying - people that live there will say if an area is good or bad in seconds), hold it for 40 years and remain patient it'll perform well as an asset in the long-term imo. The only other way to invest your money (excluding super contributions or personal business) is an index fund, which doesn't give you access to 80-90% LVRs.

On a side note:
"Looking to buy with 300-350k cash + mortgage and max budget 550-600k in order to be positively geared or neutral cash flow. Already discussed with broker."

I would strongly reccomend if your borrowing capacity and cash flow allows buying something in the 700-800k price bracket. The quality of both inner city apartments and regional houses jumps ALOT compared to the 600k price range. I think it is primarily becuase you leave the FHO stamp duty concession area where competition is fierce (realistically these are 500k properties pushed to 600k by the FHO). Buying either of the two abovementioned properties should be cash flow neutral with an LVR ~65-70%. With the above cash you can afford to buy something for $800k w/ a 70% LVR + costs. It'll probably be neutral initially but over time will become positive and be a much better asset than a 600k property. However, your borrowing capacity may be the limiting factor.

 

Do you think there is still room for CG in regional Victoria or will the return to normalcy and the office dent the growth prospects there?

 

Ultimately the price of a property is determined by two things: what people can AND are willing to pay for it.

What people can pay for a property is primarily determined by their borrowing capacity, which in turn is primarily determined by their income. As regional cities like Ballarat and Bendigo continue to grow, you should see a rise in the number of people earning above $X. People typically want to live close to the CBD (nicer, old style houses + close to amentites) and the number of properties in that area are fixed. With that you should see a rise in house prices as a growing group of people with increasing incomes compete for a set number of properties.

What people are willing to pay for a property is subjective and impacted by many factors. But typically for those buying a PPOR what they are willing to pay often equals (or exeeds) what they can pay.

Overall even if you ignore the fact people can work in the country and work in the city more now due to COVID related changes, places like Bendigo and Ballarat will continue to grow as they have for the past 150 years and with that CG will flow on. (By grow I don't mean population as a whole - I mean both population and incomes). The increases in the last 2 years have just been a short-term growth in the "wealthy" population, whether they stay is yet to be seen, but the background growth will continue.

 

What people can pay is 100% determined by what they can borrow. No property is inherently worth $1m but if I can borrow that amount of money and the out of pocket expense is palatable then to me the property is “worth” that amount.

The next thing you need to ask yourself is if wage growth in rural areas is enough to offset the impact of rising borrowing costs over the next 12-36 months as rates rise. My guesstimate is that they come nowhere near this as rural areas historically lag in this very area. As people move back to the city for work (which is already happening) there will be further downward pressure on wage growth as the pool of funds which assists in lifting it has driven down the high way.

Its important to highlight that rural areas have had very, very little capital appreciation compared to cities over the last 20 years, COVID was an anomaly which changed that but as we return to normality, so will the norm.

For these reasons I would be hesitant to touch rural right now.

 

100% agree with you.

Also interesting point about wage growth and cost of borrowing. I would agree with you that assuming no more unsual events CG should slow/cease in the short-term in in areas outside of Melbourne. I guess one thing to consider is will the rising cost of houses in Melbourne push people to move regional (independent of COVID). If you're a family w/ 2 kids you realistically want a house w/ 3BRs. Your options at the moment are (unless you are very wealthy):

• Buy a nice place in a regional town
• Buy a nice apartment in inner Melbourne
• Buy an okay place in outer Melbourne

If your job allows - I think lots of people would chose option #1. (Please note this is all independent of COVID, I just mean w/ reference to ongoing increases in house values in Melbourne relative to incomes)

One further thing: I think it's important to group Victoria into 3 areas:

• Melbourne + Geelong
• Ballarat/Bendigo (Geelong could go into this group)
• Everything else

I predict the next 20-30 years for Ballarat/Bendigo will be quite different from the rest of regional Victoria. I think we will see steady CG in the inner suburbs of those towns for houses. Who knows - in 20 years we may be in a situation where transport is such that living in Melbourne vs. Ballarat is similar to Elwood vs. Clayton.

 

Interesting Inputs.I have decided to invest near Bendigo and I see there will be growth in these areas Bendigo/Ballarat