Australia's top suburbs and towns for rental yield

13 May 2020
The economic impact of the COVID-19 pandemic has forced many Australians to tighten their purse strings and demand for property has slowed. This means there is less pressure driving property prices up.

Depending on your perception of risk, this could make 2020 a risky time to buy property – or an ideal opportunity to negotiate a great deal, explains Simon Pressley, director and head of research at Propertyology.

“A strong property market will lead Australia out of this latest coronavirus health crisis, potentially starting as soon as six months’ time, as… there will be an enormous release of pent-up demand for goods and services, including property,” Pressley told Canstar.

The Reserve Bank of Australia’s cash rate, which is one factor banks consider when setting their mortgage interest rates, is currently the lowest it’s ever been. Although property values in some markets have surged in recent years, mortgages are currently more affordable, which could make it easier to buy real estate and earn more money from the rental home than it costs to own.

If you have the appetite to proceed with your property investing ambitions, where can you find these high-yield properties that have the potential to pay a profit from day one?

What is a high-yield property?

Rental yield is a percentage that expresses the amount of money you make on an investment property, compared to its purchase price. It’s a valuable tool for calculating your return on investment.

A property’s yield is expressed as a percentage. For example, if you receive $600 per week in rent ($31,200 annually) and the property cost $700,000, then your yield is calculated as follows:

  • the amount of rent each week (eg. $600)
  • multiplied by 52 weeks in the year (eg. $31,200)
  • divided by the purchase price of the property (eg. $700,000)
  • equals 0.0446 or 4.46%

A high-yield property is one that delivers a high amount of rental income to the property owner – generally, an amount that is in excess of the costs of owning the property. When your rental income is higher than the mortgage and other ownership costs, this is known as positive gearing.

In the past, a property generating a yield of 7% or above was considered high yield. In the last half a decade, as mortgage interest rates have continued to fall, the threshold for a high yield property has also fallen. In general, a yield of at least 2-3% more than the average current variable mortgage rate is considered high yield. For example, if hypothetically speaking the average standard variable mortgage rate was 3%, a property that returns a yield of 5-6% would be considered high yield.

For instance, if an investor owned a $725,000 house that costs $700 a week in mortgage repayments, property management fees, insurance and maintenance, however it receives a rental income of $800 per week – they would have a surplus of $100 per week, making this a high-yield property that is positively geared. As a percentage, the yield of $800 per week on a $725,000 is 5.74%.

Lowest interest rates for 1-year fixed home loans

The comparison table below display some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below display some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

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Source: Monkey Business Images (Shutterstock)

Where can you invest in Australia for high rental yield?

To find a high-yield property investment, often the key is to research suburbs that have both affordable property prices and realtively higher rental returns. You will generally need to look outside of the major capital cities to find these, as suburbs in metropolises such as Sydney and Melbourne are typically more expensive than regional areas and deliver lower yields.

Simon Pressley from Propertyology used recent data from CoreLogic to analyse suburbs across the country and compile a list for Canstar of Australian suburbs where rental yields are strong. Here is his list of the top-10 locations for rental yields:

No.1: Port Hedland, Western Australia

Median house price: $400,000

Median rental yield: 10.2%

“If rental yield is a property investor’s number one priority, the very best in Australia right now is in Port Hedland, Western Australia – home to one of the world’s largest reserve of the steel-making commodity, iron ore,” Pressley told Canstar.

“The volatility of one-industry towns creates obvious risks, but we do appear to be at the very early stages of a new expansion cycle. The median house price for the township of Port Hedland peaked at $900,000 in 2013, then plummeted to $210,000 in 2018. Today, a standard house in the centre of town will cost about $400,000 and attract a staggeringly high rental yield of 10.2%.”

With current mortgage interest rates at just 3%, and a yield of 10%, this provides a lot of scope to make a profit.

No.2: Karratha, Western Australia

Median house price: $445,000

Median rental yield: 7.2%

Also in northern WA, Karratha is a town that is benefitting from a recovering economy, which is supported by a thriving offshore gas province, Pressley said.

Median rents have increased by $170 per week in the last 12 months, reports REIWA, to reach $620 per week.

“Karratha’s median house price ramped up by 20% over the last 12 months and rents are rocketing with it.”

⇒ Related: Top 5 investment home loan rates

No.3: Broome, Western Australia

Median house price: $415,000

Median rental yield: 6.6%

Following a period where the local economy slowed down for many years, driven by high unemployment and a slowing mining industry, Pressley said Broome is now on the road to recovery.

“We anticipate that the popular holiday spot of Broome will benefit from a growing economy, which will encourage extra discretionary spending from within the state’s residents,” he said.

“In addition to the high 6.6% rental yield, 63% of local residents live in rental accommodation.” This means that currently there is generally a steady stream of tenants for landlords in this region.

No.4: Koongamia, Western Australia

Median house price: $227,000

Median rental yield: 6.6%

Still in WA, the Perth suburb of Koongamia, located about 30 minutes’ drive northeast of Perth’s CBD, offers both a strong rental cashflow and a low entry price point, Pressley said.

“Koongamia has an affordable $227,000 median house price, together with a 6.6% rental yield,” he said.

“Keeping in mind that interest rates, a property investor’s biggest expense, are now circa 3.5%, that could be very enticing.”

No.5: Risdon Vale, Tasmania

Median house price: $285,000

Median rental yield: 6.6%

Situated 11km from Hobart’s city centre, the suburb of Risdon Vale – home to Hobart’s prison complex – has a median house price of $285,000 and offers a 6.6% rental yield.

“Out of Australia’s eight capital cities, we believe that the collective drivers of property price growth in Hobart are still the best there is,” Pressley said.

“Rental and general housing supply are in lower supply here than anywhere else in the country, the market already has good momentum and the outlook for Hobart’s economy continues to be exciting.”

No.6: Cairns, Queensland

Median house price: $370,000

Median rental yield: 6.4%

The tropical city of Cairns in Far North Queensland, approximately 1,650km north of Brisbane, is a property market that Pressley is “very surprised to see has not produced meaningful price growth before now”.

“The rate of job growth in our nation’s 14th largest city over the last few years is one of the strongest in all of Australia, and the pipeline of infrastructure projects still to come is substantial,” he said.

“For a median price point of $370,000, you can buy a quality house in the Cairns suburb of Mount Sheridan. If purchased using a 10% deposit and rented for 48 weeks out of 52 per year, and after provision for costs such as mortgage interest, property management and insurance, an annual pre-tax profit of $4,200 is achievable. That’s outstanding!”

No.7: Crestmead, Queensland

Median house price: $325,000

Median rental yield: 5.7%

Twenty-five kilometres south of Brisbane’s CBD is the suburb of Crestmead, in the Logan shire – a region that is tipped to grow in population from about 314,000 people in 2018, to more than 550,000 in 20 years’ time, according to the Queensland Treasury.

While Pressley believes better capital growth potentially exists in other suburbs, he points to Crestmead’s 5.7% rental yield and affordable $325,000 median house price as being “very attractive to investors, for a house near a capital city.”

No.8: Gaven, Queensland

Median house price: $665,000

Median rental yield: 5.3%

On the northern Gold Coast, the suburb of Gaven ­– located round 13km northwest of Surfers Paradise – is another area that Pressley suggests has potential for investors who are seeking an investment property that generates a high cashflow.

“A $665,000 median house price in the suburb of Gaven is getting pricey for an investor, but even putting down a 10% deposit could enable you to acquire a positive cash flow house in this area,” he said.

No.9: Heatley, Queensland

Median house price: $213,000

Median rental yield: 7.6%

The suburb of Heatley, located southwest of the Townsville CBD in far north Queensland, could offer a strong annual return on investment capital, according to Pressley.

“For an investor putting down a 10% cash deposit of $21,300, excluding one-off acquisition costs, the $21,300 deposit for a $213,000 basic 3-bedroom house could produce an annual pre-tax profit of $4,900. If, instead, one put that $21,300 into a term deposit, they’d generate only $200 annual income and zero prospect for any capital growth.

No.10: Davoren Park, SA

Median house price: $163,000

Median yield: 8%

If it’s high yields and a low entry price point that an investor is seeking, then the outer Adelaide suburb of Davoren Park, about 30km north of the CBD, could be worth further research.

Davoren Park is known as a more affordable area to live and has struggled with issues around unemployment, crime and a slow economy in the past. However, The Playford North Urban Renewal project, a 15-year project launched in 2007, aims to assist in boosting the community.

Pressley added that “yield chasers might consider the $163,000 median house price and 8% rental yield to be a reasonable compromise,” to the higher risks of investing in this location, which include investing in an area where unemployment can be an issue, crime rates may be higher and you may be buying cheaply constructed properties from former housing commission stocks.

⇒ Related: Property trends: Has COVID-19 changed the way we want to live?

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What are some risks of investing in high-yield suburbs?

While the idea of a high-yield property can be very appealing, there are some risks involved. Amongst the biggest risks for investors seeking a high-yield investment property are high vacancy rates and low capital growth.

High vacancy rates:

The vacancy rate refers to the number of unoccupied rental properties in the market.

 “A high vacancy rate is better for tenants, as it provides more choice. A low vacancy rate means the market is tight and this generally puts upward pressure on rental prices,” reports the Real Estate Institute of Western Australia.

When investing in a high-yield suburb, you are more likely to be investing outside of the major capital cities and buying into regional areas,  property advisor and director of Metropole Property Strategists, Michael Yardney, told Canstar.

“The best way to minimise vacancies is buying the right property in areas where there’s a wide demographic of potential tenants,” Yardney said.

“That’s why I avoid mining towns, regional areas and holiday locations, because that’s where you tend to get the large fluctuations. Sometimes lots of people are looking and at other times hardly anyone will want to rent your property.”

Low capital growth:

A property that delivers a strong rental return may not be as likely to grow in value as a lower-yield captial city property, Yardney said. Capital growth is the increase in a property’s value over time.

“The major factor that influences capital growth in property values is the relationship between supply and demand. When there’s a lot of supply and not much demand, capital growth is poor. When there’s low supply but plenty of demand from property buyers, capital growth will be strong,” he explained.

“Outside of the major capital cities, there’s lots of land, which means ample supply. Add to this the fact that much of the demand comes from a small segment of the market, being first homebuyers who are limited by affordability, and you have restricted demand, which keeps a lid on capital growth.”

Investing in property is never completely risk-free, however investing in a high-yield property is one way that could help make your property more affordable, as it pays you more than it costs you.

Some landlords choose to re-invest any positive cashflow from their rental income straight back into the mortgage, as it means they will accelerate their mortgage repayments and own the property outright sooner.

There are many benefits and risks that you should consider before investing in property, to ensure the strategy you choose best suits your budget, income, risk profile and goals.

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Cover image source: Jandrie Lombard (Shutterstock)

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About Sarah Megginson

Sarah Megginson has been a finance and real estate journalist for more than a decade, having written for; She Knows Australia, Your Investment Property, Mamamia, Marie Claire, and travel features for Tourism Australia, BUPA, Jetstar and more. Sarah has also been the editor of Your Investment Property magazine since 2016, while being an opinion columnist, a freelance writer, and an editor who has penned 20+ books. She has three young children and is an ambassador for Act for Kids. Sarah holds a Bachelor of Communications from Griffith University.

Keep up to date with Sarah through her site.