Is investing in rural property a good idea?

Investing in rural property can seem like an attractive prospect for many investors. The lower property prices, potential for capital growth, and more relaxed lifestyle are tempting. However, before jumping in, it is important to carefully consider the pros and cons of buying rural property as an investment. This will help determine if it is the right investment strategy for your goals and circumstances.

What are the potential benefits of investing in rural property?

There are several potential advantages that make rural property investment appealing:

Lower purchase prices

Property prices in rural and regional areas are almost always considerably lower than those in capital cities and urban centers. The median property price in many rural towns can be under $300,000, while median prices in Sydney, Melbourne, and Brisbane are upwards of $800,000. This allows investors to potentially buy better quality properties for less money.

Increased rental yields

The lower purchase prices also mean rental yields in rural areas are often higher. Gross rental yields of 5-8% are not uncommon for rural property investments, compared to 3-5% seen in capital cities. This can provide good ongoing income returns.

Stronger capital growth

While past performance is no guarantee of the future, many rural markets have experienced stronger capital growth trends compared to cities in recent years. This is driven by the increasing popularity of lifestyle and treechange areas. Investors hope this growth continues.

Diversification

Rural property investments can help diversify an investment portfolio that is heavily weighted towards residential property in major capital cities. This spreads risk across different markets.

Lifestyle benefits

For some investors, buying a rural or regional investment property can enable them to also enjoy an improved lifestyle with more space and greater tranquility when taking holidays there.

What are the potential downsides?

However, investing in rural property also comes with some drawbacks to consider:

Higher vacancy rates

Many rural towns have smaller populations, so rental pools can be tighter. This can lead to higher vacancy rates between tenants, reducing income returns. Vacancy rates above 5% are not uncommon in rural areas.

Poorer liquidity

Rural property markets generally have lower transaction volumes than residential property in major cities. This means it can take longer to sell and there are fewer potential buyers.

Higher maintenance and management costs

Managing a rural investment property can be more difficult if it is a long distance from where you live. You may need to pay higher fees to a property manager to look after maintenance and tenancy administration.

Limited infrastructure and amenities

Many rural towns have fewer services, healthcare facilities, entertainment options and public transport. This can make attracting and retaining tenants more challenging.

Increased risks from agriculture or mining dependence

Some rural communities are heavily reliant on agricultural or mining industries. Downturns in these sectors can quickly impact the local rental market.

Key factors when choosing a rural investment location

Carefully researching and selecting the right rural area is crucial to maximizing your chances of success:

Proximity to regional centers and infrastructure

Look for towns within commutable distance of larger regional cities and centers. These tend to perform better, as residents can access nearby jobs and amenities. Proximity to highways, rail lines, ports, and airports is also advantageous.

Economic diversity

Aim for towns with a mix of industries such as manufacturing, healthcare, education, tourism, and professional services. Reliance on a single sector brings increased risks.

Growing population and investment

Positive population growth, new infrastructure spending, increasing buyer demand and rising rents all indicate an area with strong investment prospects.

Affordable area with consistent demand

While very cheap rural markets might seem tempting, prices may be low for a reason. Look for markets with sustained demand from both owner-occupiers and tenants to avoid high vacancies.

Location	Median House Price	Gross Rental Yield
Major City	$800,000	3-4%
Major Regional Center	$400,000	5-6%
Rural Town A	$200,000	6-8%
Rural Town B	$150,000	8-10%

Analyze rental demand and vacancy rates

Do thorough research into current vacancy rates, average rental prices and tenant demand in any rural area you are considering. This will help avoid investing in an oversupplied market with minimal rental returns.

Should you buy an existing property or vacant land?

When researching rural investment options, you may come across both existing rental properties and vacant blocks of land for sale. Both have pros and cons:

Existing property

– Produces rental income immediately
– Can get a feel for the market through current rents
– Renovation costs may be required

Vacant land

– Gives greater flexibility to build new dwelling
– No renovation costs
– Need to fund build costs upfront
– No rental income until construction finished

If buying vacant land, it is generally best to have a plan to develop and build within 12 months to start generating returns on your investment sooner.

Development opportunities in rural areas

As well as buying established homes, some rural markets also provide opportunities for development projects such as subdivisions, townhouse complexes or new housing estates. These can enable higher returns, but also involve greater risks and complexities.

Key factors to research include:

– Council zoning regulations and approvals required
– Costs of surveys, design, engineering, construction
– Analysis of supply/demand to avoid oversupply if others also developing
– Finance availability for development projects

Proceeding with a development project without experience is not recommended in rural areas where markets can be less forgiving of failed projects. Seeking professional advice from architects, developers and finance brokers is essential.

How to manage and maintain a rural rental property

Once you have purchased a rural investment property, you need an ongoing plan to manage it efficiently. This is critical to maximize returns and minimize headaches. Key tips include:

Use a local property manager

Appoint an experienced property manager based as close to the property as possible. They will have good knowledge of the local market and tradies to handle any maintenance. Expect to pay 10-15% in management fees.

Leverage technology

Remote monitoring technology like cameras and sensors can provide visibility and alert you to any issues arising. Smart locks also allow contactless entry for tenants and property managers.

Have an emergency maintenance fund

Set aside funds to cover any urgent repairs like plumbing or electrical faults given your distance from the property. Slow repairs can impact tenants and income.

Inspect the property frequently

Even if using a property manager, inspect the property every 6-12 months yourself to keep an eye on its condition and look for any improvements needed.

Maintain good tenant relationships

Happy tenants are less likely to cause issues or move out frequently. Build rapport with regular communication and by promptly addressing any concerns they have.

Following these best practices can help your rural investment operate smoothly and minimize the risks associated with physical distance from the property.

Is buying rural property through SMSFs a good strategy?

Some investors consider using their Self Managed Super Fund (SMSF) to purchase rural property investments. SMSFs have some advantages, such as:

– Tax benefits – earnings within super are taxed at just 15%
– Ability to leverage into property through limited recourse loans
– Business real property investments allowed in super

However, there are also complications to weigh up:

– Cannot derive personal benefit from the property
– Complex rules around leases to related parties
– Liquidity issues if the property needs to be sold to pay benefits

Professional advice is recommended before buying rural property in an SMSF. All transactions must adhere strictly to ATO regulations to avoid severe penalties.

An SMSF can be a suitable vehicle for rural property investment provided you fol-
low the rules and are prepared for reduced liquidity compared to other super funds.

Tax considerations for rural property investors

The tax rules applying to investment property also apply to rural real estate assets. Key points to consider are:

Claiming expenses

All expenses related to the property such as rates, management fees, maintenance, and interest on loans used to purchase it can be claimed as tax deductions against rental income.

Depreciation

Depreciation on building construction costs and fittings can be claimed over time to offset income. Get a quantity surveyor’s report to maximize these claims.

Capital gains tax

Tax is payable on 50% of any capital gain made if the property is sold in the future for a higher price. There are concessions if the property is held for over 12 months.

Negative gearing

Losses on the property can be used to offset other income you earn, providing potential tax benefits.

Consult an accountant or tax specialist when buying rural investment property to ensure you understand and optimize the tax implications.

Finance options for rural property investors

Accessing finance from lenders requires more effort when investing in rural versus metro areas. Banks perceive greater risks outside major cities. Key finance considerations include:

Higher deposit requirements

Expect lenders to require a 20-30% deposit for any rural property loans. This is higher than the 10-20% often needed in cities.

Check lending restrictions

Many lenders have “postcode blacklists” ruling out finance for particular towns or regions they deem too high risk.

Shop around for most favorable lenders

Don’t assume major banks will offer the best rural finance deals. Many smaller lenders specifically target rural borrowers.

Consider private financing

Private lenders sometimes bridge the finance gap when Institution-

al lenders won’t. But interest rates are higher.

Maximum LVRs of 60-80%

Banks will likely cap maximum borrowing to 60% or 80% LVRs for rural purchases.

Apply with multiple lenders to expand your chances of approval for a competitive loan. Be prepared to provide detailed information demonstrating the property’s income potential.

Should you invest in rural property?

The verdict

Rural property investment can deliver strong returns but involves greater research and risk management compared to buying in major cities. Investors who select the right location, leverage local knowledge and networks, and manage their investment diligently can be well rewarded.

However, rushing into a rural purchase without laying proper groundwork frequently leads to disappointment. Patience and persistence is required to secure the ideal investment property at the right price.

If you have clear investment goals and are willing to put in extra effort, rural markets offer viable options. But they are not for inexperienced investors seeking quick profits. Conduct extensive research before diving in.

Further tips for rural property success

If you decide to become a rural property investor, maximize your chances of success by also:

– Finding a reliable and experienced property manager
– Using a quantity surveyor for maximum depreciation benefits
– Having a large emergency fund for unexpected costs
– Considering landlord insurance for protection against loss of rents
– Diversifying into multiple rural markets rather than just one
– Joining local property investor associations to access advice and deals off-market

With the right property selection and proactive management, rural real estate can be a rewarding investment asset class.

Conclusion

Rural property presents opportunities not available in saturated capital city markets. However, extensive research and preparation is required to ensure you choose an area with strong economic and demographic fundamentals. Selecting the right location and establishing effective ongoing management processes will determine how your rural investment performs. If you approach investing in the country methodically and are prepared for the additional responsibilities involved, it can prove a profitable path to diversify your portfolio and earn attractive long-term returns. But there are also more risks and obstacles to navigate compared to buying city real estate. Weigh up all the pros, cons and responsibilities before deciding if the rural lifestyle is right for your next investment.