Is second best good enough?

27th September 2006

Ever thought about buying a property on the 'wrong side of the tracks'? Or a cheapie on a main road? September's Australian Property Investor magazine reveals the pros and cons of buying in 'secondary markets'.

API editor Eynas Brodie said buyers needed to know what they were getting into.

"Buying the worst house in the best street could be the best investment a buyer makes, but the same rule of thumb doesn't necessarily apply to a house on the wrong side of the tracks," she said. "There's no question that buyers can pick up great bargains with secondary properties, but they need to look beyond the cheap price tag and consider the bigger picture.

"Will it have capital growth? Will it be easy to rent out? And if you need to offload it, how difficult will it be to sell?

"For investors who prefer to hold properties and are focused on rental returns, the secondary market has some attractive options. It's just a matter of weighing up the pros and cons and seeing if it fits in with your overall strategy," she said.

Some of the pros and cons of buying in secondary markets, as revealed in API, are:

Advantages

• Bang for your buck: you’ll get a lot for your money compared to the surrounding area.
• Yield: detractions such as having a property on a main road aren’t likely to affect rents as much as they will prices. That means you can buy at a cheaper price but still achieve almost the same rent.
• Rezoning opportunities: many properties in secondary locations are being refurbished or can have potential for rezoning, producing possible pay-offs for investors.

Disadvantages

• Capital growth: secondary locations are unlikely to see the same capital growth that a standard area will.
• Resale: second-tier locations tend to be much harder to sell than prime areas, even at reduced prices
• Beware the downturn: if supply levels are high and demand low, secondary areas can suffer the most as people tend to stay away from any negative feature.
• Vacancy rates: renters tend to prefer better locations where possible, so secondary locations can suffer from more periods of vacancy.

How much of a discount?

It's virtually impossible to generalise about how much of a discount a secondary location will attract. It comes down to:

• the individual property;
• the timing in the property cycle; and
• the city where the property's located.

The last of these can be an important factor, said Brodie.

"For instance, a busy road may have considerably less of a price impact in Sydney - where more people are willing to accept the noise in order to be closer to town - than in Perth, where resistance to living near a main road remains high."

 

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission. To subscribe to API, go to www.apimagazine.com.au or pick up a copy from your local newsagent.

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