Property investing hotspots: The suburbs where investors are getting the best returns

Analysis of PropTrack data has revealed the investing hotspots around the country, highlighting suburbs with the strongest rental yields and long term price growth that has outperformed the wider property market.

The data shows there are many suburbs across the country where rental income could well and truly cover typical mortgage repayments, even with interest rates at a 12-year high.

Gross rental yields are a key metric for property investors which measures the total annual rental income received from a property before tax. It’s expressed as a percentage of the property’s purchase cost. Generally, the higher the yield, the greater the cash flow.

For the purposes of this analysis the rental yield for a suburb is calculated using the suburb's median rental price and median sale price.

While a useful metric, yield doesn't take into account any expenses associated with holding the property such as interest costs and management fees, which provide the net rental yield when factored in.

PropTrack senior economist Eleanor Creagh said gross rental yields can provide investors a useful starting point in their property search.

“A higher yield can indicate a potentially more profitable investment, particularly for cash flow,” Ms Creagh said. 

“However, a lower yield in a high-growth area might still be attractive if the investor is seeking capital appreciation.”

With Australia facing a rental crisis driven by a shortage of available rental properties to house the rapidly growing population, investors have been returning to the market.

The value of investor lending is up a massive 36% compared to a year ago, the latest data from the Australian Bureau of Statistics shows.

Ms Creagh said the return of investors has come amid very tight rental market conditions, particularly in areas where prices were rising rapidly.

“Strong growth in rents, stronger rental yields and increasing property prices have attracted investors to return to the market,” Ms Creagh said.

Investment lending has surged in Western Australia, Queensland and South Australia, with rental yields typically higher in Perth (pictured), Brisbane and Adelaide compared to the larger capitals. Picture: Getty

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“Investor lending hit record highs in Queensland, South Australia and Western Australia. These states are also home to the tightest capital city rental markets in the country and the strongest housing markets.”

Although growth in rental prices has slowed recently, rents have grown at a faster rate than property prices, pushing gross rental yields to the highest point in almost four years, according to the latest PropTrack Rental Report.

Rental yields fell during the pandemic, Ms Creagh said, with property prices surging much faster than rents when interest rates were low.

“More recently, in most markets stronger growth in rents than prices has started to rebuild yields,” she said.

Gross rental yields across the combined capitals hit 4.3% in the March quarter, while yields in regional Australia were a little higher at 4.6%.

The typical rental yield for a house reached 3.9%, compared with 4.9% for units.

But in some parts of the country, yields are more than twice as high, with high rents relative to property values creating conditions that are attracting investors to buy in.

Ms Creagh said more property investors entering the market could help address supply shortages in the rental market.

“Increasing investor activity should add to the pool of long-term rentals, helping to ease rental market constraints and the chronic shortage of rental supply that has fuelled strong rental price growth and record high rents.”

Many of the Melbourne suburbs with the highest rental yields for houses are found in the outer suburbs, like Wollert, where this brand new home is on the market. Picture: realestate.com.au/buy

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Knowing which suburbs offer the best returns can also help renters who can't afford to buy into their own suburb to enter the property market sooner by 'rentvesting' – renting where they want to live while buying an investment property in a more affordable high growth or high yield suburb.

The suburbs with the highest rental yields

While rental yields tend to be higher in the regions, rents have grown faster in the capitals recently.

For investors looking for a house in a capital city, the data shows that suburbs with the highest rental yields tend to be found in the outer suburbs, with yields typically higher in cities where vacancy rates are lower.

In Melbourne, investors can expect house yields above 4% in outer northern suburbs like Wollert, Coolaroo and Dallas.

Many Canberra suburbs such as Phillip, Coombs and Isabella Plains have house yields above 4% too.

Investors seeking strong yields in the Sydney market are best off looking at suburbs of the Central Coast like Killarney Vale, Watanobbi and Blue Haven.

High rental yields and solid capital growth has attracted investors to Killarney Vale on the NSW Central Coast, agents report. Picture: realestate.com.au/sold

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Real estate agent and LJ Hooker Tumbi Umbi & Killarney Vale principal Justin Bond said more investors were buying into the area, attracted by high yields and the expectation of price growth.

“We have seen quite a few investors returning to the market in the past three months,” he said. “It’s mainly the rental return, but Killarney Vale has seen good capital growth over the years as well.”

“There is definitely strong rental demand. When a property is advertised for rent, it’s usually leased within a week.”

Many of the suburbs with the highest rental yields are in affordable areas, such as Elizabeth North in Adelaide's northern suburbs. Picture: realestate.com.au/sold

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Meanwhile, yields are above 5% for houses in northern Adelaide suburbs like Elizabeth North, Smithfield Plains and Davoren Park, and several outer suburbs of Hobart including Gagebook, Clarendon Vale and Bridgewater.

It’s a similar situation in suburbs of Ipswich in Brisbane’s west, including Laidley, Churchill and North Booval.

Yields are above 6% in many outer Perth suburbs including Hilbert, Medina and Stratton. Property prices have grown faster in Perth than any other capital, but the city also has one of the nation’s tightest rental markets.

This house in Laidley, about an hour west of the Brisbane CBD, sold for $445,000 in May. The suburb's typical rental yield for houses is 5.6%. Picture: realestate.com.au/sold

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Darwin’s highest yielding suburbs for houses are mostly found in the Palmerston area, including Moulden, Gray and Woodroffe, with yields as high as 7%.

Ms Creagh said rental yields varied between capital cities due to differences in property values, diverse local conditions and broader economic factors.

“Generally in Darwin, the cheapest capital city market, property prices are significantly lower compared to Sydney, whilst rental incomes remain proportionally strong, resulting in higher rental yields.”

Gross rental yields in Darwin tend to be higher than in the other capitals. Picture: Getty

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For units, inner city suburbs and pockets of density further from the CBD can deliver strong rental returns.

Sydney suburbs with relatively affordable apartments like Auburn, Lakemba, and Granville have rental yields above 6%.

Several inner Melbourne suburbs like Carlton and the CBD have yields between 6% and 7%.

But the city’s standout, and the highest yielding suburb of all the capitals is Caulfield East, with a unit yield of 10%.

Most Caulfield East apartments that sold in the past year were compact and relatively affordable, with a median unit price of $330,000 and a median advertised rent of $360 per week.

Affordable unit prices and strong rental demand, particularly from students, means unit rental yields are high in Caulfield East. This one-bedroom Caulfield East unit sold late last year for $330,000. Picture: realestate.com.au/sold

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Local real estate agent and Gary Peer director Leor Samuel said the suburb was popular with students, given the proximity to Monash University.

“It’s a small suburb but at the same time it offers a lot in terms of train station networks, universities and easy access to Dandenong Road,” he said.

In Brisbane, unit yields are highest in the CBD, Fortitude Valley, Bowen Hills and Spring Hill, as well as many suburbs of Logan such as Woodridge and Slacks Creek.

In the regions, larger towns and suburbs of major regional cities offer the strongest returns for units.

For example, the unit rental yield is 9.5% in Heatley, a suburb of Townsville in Queensland, 7% in Port Augusta in South Australia, 6.7% in Scone in NSW, and 6% in Sale in Victoria.

Investing expert and University of Adelaide Master of Property program director Peter Koulizos said units tended to have better yields than houses, but gross yield wasn’t the only factor investors should consider.

“It's easier to find a tenant for a unit than for a house, and your vacancy tends to be lower in a unit,” he said. “But then you have additional costs in a unit like body corporate and sinking funds.”

“Even though the gross yield looks fantastic, the net yield might not be.”

Some of the highest-yielding areas for houses tend to be found in mining regions.

Kambalda West (12.2%) and South Hedland (10.9%) in WA, Collinsville (10.4%) and Pioneer (9.6%) in Queensland and Broken Hill (9%) in NSW are among the mining towns with the highest rental yields, with rents surging in many areas off the back of the recent resources boom.

But while mining towns often have affordable property prices and high rents, these areas can also be subject to the ups and downs in resource pricing, creating boom and bust conditions and mining investment ebbs and flows.

Mining towns like Broken Hill can offer investors strong rental yields and affordable property prices, but are subject to the ups and downs of the commodity cycle. Picture: Getty

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Property values and rents in mining towns can surge when mining investment increases and there is a need for accommodation to house workers, but prices can decline just as quickly when resources prices fall or if mines close, Mr Koulizos said. 

“The commodity cycle is very volatile,” he said. “You can get a big rent, but you take on a big risk, and the big risk is vacancy.”

Ms Creagh said the relationship between gross rental yield and property prices is generally inverse, with strong price growth associated with lower rental yields, and vice versa.

Suburbs with high property prices often have lower rental yields. For example, Paddington in inner Sydney has a median house price of more than $3 million, but rental yield of just 2.5%. Picture: realestate.com.au/sold

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“In areas with high property prices, rental income often doesn’t increase at the same rate as the purchase price,” she said. “Despite higher rents in absolute terms, when compared to the high property prices, yields often appear lower.” 

“Conversely, in areas where property prices are lower, rents might not be proportionately low, which can lead to higher rental yields.”

Suburbs with outstanding five-year price growth

The data crunch has also unveiled the locations where property values have gone up the most in the past five years, delivering property owners astronomical capital growth over a turbulent period in the housing market.

Despite prices more than doubling in some suburbs over the past five years, most of the top suburbs for house price growth have median values under $500,000, with northern Adelaide and Queensland mining towns well represented in the national top 10.

Meanwhile, the tree and sea change trend of the past few years is evident in big jumps in pricing in the unit market, especially in suburbs of the Gold Coast and Sunshine Coast.

Huge increase can also be seen in towns in the Riverina region of NSW as well as regional Victoria, driven by a surge of interest from buyers relocating from the cities when interest rates were low, as well as investors chasing capital growth.

However, while those who bought five years ago in many of the suburbs with the biggest price rises are now sitting on substantial equity, growth isn’t always steady.

Unit prices have doubled over the past five years in sea change hotspot Sunshine Beach in Queensland. Picture: Getty

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Mr Koulizos said the sudden shift in lifestyle priorities and reduction in interest rates during the pandemic meant strong price growth in sea and tree change destinations wasn’t sustainable.

“Significant capital growth in tourist areas is not going to continue to increase,” he said. “During Covid when interest rates were really low, people could afford to borrow more. That peak has already been reached. It will plateau and then slowly dip.”

Meanwhile, many mining towns with strong growth over the past five years have lower or even negative 10-year growth, showing prices tend to fluctuate considerably, rather than grow steadily.

Ms Creagh said investment decisions were influenced by more than just rental yield and capital growth, with factors such as how long it will take to find tenants and expenses like strata, maintenance, insurance and tax also affecting profitability.

“What is optimal will vary based on local market conditions, property type, and the investor’s strategy regarding cash flow versus capital gains.”