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Answering the million dollar question: Where should I invest in property?

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Finder's new Property Investment Index helps investors determine which suburbs have the highest potential for growth.

The future is daunting and unpredictable, and as humans we fear that unpredictability. From the weather to stock prices to virology, there are trillions of dollars to be made in industries that claim to predict future events. One of those is the property market, and while it's impossible to know which suburbs will grow and by how much, there is a wealth of data out there that can give us a clue.

Enter Finder's Property Investment Index.

Maybe you already own an investment property, or perhaps you've floated the idea among friends after a few bottles of wine. Investing is a great idea in theory – you buy a house, rent it out and use the rental income to pay off your mortgage. It basically pays for itself, right?

Once you start drilling into the details though it can start to feel more overwhelming. Should you live in the house first to avoid capital gains tax? Will you actually break even with the rental income? And perhaps the most important question of all: What suburb should you buy in?

What is the Property Investment Index?

Finder set out to answer the all-important question of where to invest by building a model based on a range of market demand, demographic and property data inputs. We considered property prices and historical price growth, but as we know past growth doesn't necessarily indicate future growth – and sometimes the suburbs that are quickest to rise are the quickest to fall.

To account for this 'bubble' factor, we incorporated demographic factors like income growth, population growth and unemployment because these are indicators of longer term growth. Making up the largest portion of the score are market demand factors. These include sales turnover, the number of days a property sits on market, and the suburb's distance to the CBD – indicators of a suburb's desirability.

Finder scored each suburb out of 100. Because the markets for houses and units are very different, we kept these separate.

Which suburbs come out on top?

As of June, the Index shows the suburbs with the highest potential for house price growth in Sydney are Cammeray, Redfern and Wahroonga. In Melbourne, Alphington, Aberfeldie and Carnegie come out on top for houses.

When it comes to units, Waverton, Narraweena and Davidson take the top spots in Sydney, while Aberfeldie, Yarraville and McKinnon have the highest growth potential in Melbourne.

Generally, the Index shows the inner-city suburbs have the highest potential for growth, which is not too surprising. In Sydney, suburbs located on the harbour typically have the highest scores, but there are some exceptions, with the northwest suburb of Wahroonga scoring 97 points. Even further out, Castlereagh (92) and Oakville (91), both in the city's outskirts, score particularly well.

When it comes to units however, we find more disparity between the suburbs. A select number of inner-city suburbs perform very well, but the scores very quickly drop off as you move towards the western suburbs. Part of this is because units are less common in suburban areas, and so an established market does not exist.

But is an investment property actually worth it?

There's no doubt owning property is a smart way to accumulate wealth over time. But can you turn a profit as a property investor from your rental income? It's possible but difficult to do. For instance, on a $600,000 property, assuming you paid a 20% deposit upfront, you would need to earn around $660 in weekly rent just to break even on your mortgage repayments – and that excludes all the extra costs like agency and maintenance fees.

However when you take into account the value of the property, it's a different story. On that same $600,000 property, an annual growth rate of 2% – which is extremely conservative for Australia's housing market – would translate to $12,000 of wealth accumulated in the first year. After 30 years, the investor would be $487,000 wealthier, despite rental income only just equalling mortgage payments. That's not to say that investors will always be better off – but the possibility is certainly there.

So what should I do?

There's a lot going on in the economy right now. Rising interest rates, the increasing cost of living and the energy crisis have thrown us all out of whack. So it's understandable that buying an extra home isn't exactly front of mind for most people, let alone attainable. Nobody can tell you if and when an investment property is a good idea – that depends on your own financial circumstances. And if your heart isn't in it, it's probably not for you. Liaising with a rental agency and managing the ongoing costs of being a landlord can be time-consuming and stressful.

If you're in the market though, the timing of your investment is crucial. Property prices are projected to fall by up to 20% in 2022, in response to rising interest rates and expectations of an economic downturn, with suburbs in Sydney likely to see the largest drop. Once you've made the decision of where to invest, make sure you spend time comparing home loan options – and be extra careful when calculating whether you can afford future rate rises. Many new homeowners will be caught out in the rain when rates go up – and that's one weather event we don't need a prediction for.

Disclaimer: Finder's Property Investment Index analyses the latest available data and is provided as a guide only. It should not be relied on as financial advice or to make financial decisions. This data and information are provided for information purposes only. You should seek personal advice from your financial planner or property investment advisor before making purchase decisions.

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