Weighing up rental vacancies and unemployment rates

Ideally property investors will purchase in a suburb where vacancy rates are high and unemployment figures are low, but the two factors have to be weighed up if either is less than ideal.

Choosing a suburb to buy an investment property is basically a lengthy research assignment. What’s the historical growth? What kind of yield is the suburb delivering? Why would people want to live there?

Unless you’re Snow White’s stepmother, and you’ve got a nifty magic mirror that can tell you the answer to all of life’s mysterious questions, then you’ll have to rely on good old facts and historical data for those answers.

But what if you have to make a choice between two less-than-ideal factors?

Let’s look at the conundrum of high unemployment figures vs high vacancy rates. As a property investor, should you choose dubious job opportunities for a better shot at a tenanted property? Or vice versa?

If you choose a high employment rate for low vacancy rates:

  • Low vacancy rates suggests rentals are in hot demand, which is great news for investors who won’t have to worry about their place going untenanted while they foot the bill.
  • Rental demand also means you can increase your rent each year without too much worry about getting a tenant and being competitive with other properties.
  • Low vacancy rates support capital growth.
  • However, high unemployment could jeopardise property values, since the local economy drives population growth and housing demand.
  • If the unemployment issue is severe enough, then a host of foreclosures could do real damage to a neighbourhood’s property prices.
  • Furthermore, if your tenants are affected by unemployment, they may not be able to pay the rent – or you may have a high turnover of tenants as people move out in search of jobs.

If you choose great employment figures in place of a higher vacancy rate:

  • The health of the local economy and job stability are pillars of growth (and they can’t be easily or quickly rectified when they go wrong, which is why it’s important that they’re in place).
  • A vigorous economy equals well-paid and happy residents, and strong population growth as job-seekers move in.
  • High vacancy rates might mean you’ll need to drop your asking rent to fill your property, and it increases your risk of longer vacancies between tenants.
  • If supply is outstripping demand, which is often the case when vacancy rates are high, it’s unlikely that capital growth will occur in the short-term.

How you decide which is more important?

Ideally, you’ll find a property in a suburb where vacancy rates are high and unemployment figures are low. But if you’re considering investing in a suburb where these stats are less than ideal, and you’re weighing up the two factors, there’s really only one conclusion: You’ll have to become your own magic mirror and look into the future, to decide whether rental vacancies or unemployment are the more important consideration.

It will often come down to the specific market conditions in the suburb you’re looking at, and extensive research will help you make this decision.

For example, high vacancy rates can quickly change for the better. Are there any plans to add new infrastructure, universities, hospitals, or are there signs of gentrification occurring, which could help positively impact vacancy rates?

Or, are your good vacancy rates going to be stopped dead by a whole lot of new supply that’s about to flood the market? A number of elements can fairly quickly swing vacancy rates in the other direction.

In terms of employment problems, consider if there are any emerging industries that might shift the employment rate, or government incentives to increase job creation or drive other local trades.

In other words: a thorough look at the suburb’s history, its present condition, and its potential future is the best magic mirror you could ask for right now.

Source: The Real Estate Conversation