Is Melbourne Property Investment Right for You in 2025?

Everyone's talking about Melbourne in 2025. And whilst there's definitely data supporting the strong opportunity, how do you know if that opportunity is actually even right for you? In this episode, we're going to unpack incomes, goals, and timeframes you need to consider to better understand if property investing in Melbourne is the right choice for you in 2025. I'm Arjun Paliwal. Let's get into it.

So with Melbourne being a hot topic, the first thing you want to consider is that before you dive into any city, do the numbers work for you, right? And in Melbourne, it's a city where it is not as cheap as everyone thinks. Is it affordable in comparison to others when it comes to how much it's grown or how much it hasn't grown? Yes. But is it a cheap market to get into from a house perspective, not units?

The answer is no. So we've got to look at value versus cheap or expensive. They're two different parts of the equation. Now, when you look at that, one way you can do it in terms of calculation is actually using borrowing power. Now, for the purpose of today's calculations, we're going to use something called debt to income ratio.

We're going to use a debt to income ratio of five times. What we'll take you through now is that the first scenario is someone who has a 90K income. And if they have a 90K income and use a five times debt to income ratio, they're only going to be able to borrow 450,000 if we just use that basic formula. And now the next scenario is someone or a household that makes 250,000 in gross income. And you look at the borrowing capacity there, it's 1.

25 million if you're using the scenario. Then the third part is say someone having a $500,000 income and you've got a $2. 5 million borrowing capacity total. Now, borrowing capacity isn't as simple as just taking that number and timesing over five because different banks have different debt to income ratios and different banks also consider your income differently. Some may have more bonus, some may have more commissions, and some may look at rental income more favorably, right?

So the key is don't just rely on this income, but use this as a guide to formulating the thought of whether you invest in Melbourne or not. Now, if you're looking at this number and you say that's your borrowing capacity numbers, which are the three scenarios, 450K for a 90K income, 1. 25 million for a 250K income, and 2. 5 million for 500K in income, what you've got here is a borrowing amount. Now, assume it's 80% loan, 20% deposit.

Let's turn it into a purchasing amount now. So for the first scenario, it's 562,500. For the second scenario, it's 1. 562,500. And for the third scenario, it's purchasing values up to 3.

1. So what you've got there is three very different scenarios, but let's just say all three are getting the same amount of news, saying that Melbourne's going to be great, it's got potential, it might be undervalued, and there are things that are exciting about it ahead. Now, of the three scenarios, the person in the first scenario with the 90K income, if you're looking at borrowing for 450K and having a purchase price of say 562,500, well, here's what's interesting. We calculated the data of about 442 suburbs across greater Melbourne, and what we found was that only eight, which is about 1. 8%, actually have a median price that's under 562,500.

So it's not to say you can't get a property there, but two things are happening. One is you're throwing all your capacity or nearly all of it in that market, but two, instead of a market where you're seeing the opportunity across the whole city and reviewing all options, you're forced into eight options or fewer when it comes to suburbs to actually use a median price calculation to find something. Now, of course, median prices mean you can buy below it, you can buy at it or above it, but if we just use that formula, you have very little choice. So that's an example of even though the market might be a go for many people from the analysis taking place, is it really the right thing to do from a budget in your personal situation? Maybe not, but here's what happens that I don't like to see.

Many people make mistakes with this data. They go and grab their number, they really get excited about Melbourne, they realize they can't get much for houses, so what do you think happens next? They go to units. And unfortunately, the data for units in Melbourne is very, very different to the data for houses. Now, with units, we've seen growth that has been so subpar that there are people with units that are 10 years ago reselling today for the same or if not less in real terms to what they bought it for.

So whilst that doesn't dictate future growth in isolation, it's not a great sign because if you get certain markets wrong again and you're just trying to get into a market because the hype's there at a top level, you may fall short a lot again with capital growth when it comes to that asset. When it comes to scenario number two and scenario number three being the purchasing values of 1. 562 and 3. 125, now you're starting to see some differences here because in scenario two, you may still have ability to purchase between 700 to a million and have leftover dollars for other markets, other properties in different locations to diversify. And then of course, if you're in scenario three with the 500K household income, you're much better placed to make a decision in Melbourne with more choice and still act in other markets and grow a holistic diversified portfolio.

So that's the first part of looking at Melbourne on if you should or if you shouldn't is taking into consideration your actual borrowing scenario, not just jumping straight into it because you think it's a market with a lot of excitement around it. That's the first part. Now, the second consideration for whether Melbourne's a go or not for your portfolio is actually cashflow because even if you go to part one and you assume everyone can borrow for it or has the deposit for it, can you service the repayments from day to day, month to month and actually handle the cashflow shortfall because that is a consideration to have. If you're trying to build a portfolio, you might get stuck even if borrowing allows it or deposit allows it, you might get stuck from an actual holding position and people forget that. They get the loans from the banks, they feel like they can get loans from brokers, they feel like they can use unique lending structures to get ahead, but they forget what's the point of getting ahead in borrowing or having the cash for a deposit and thinking you can expand a portfolio, can't actually hold it.

And so now when you're looking at Melbourne from a go or no go for your portfolio, you need to look at the holding position next. So diving into some numbers here, if we look at the after tax incomes for all three scenarios, the first one is an after tax income of approximately $70,000 in scenario one. The second scenario is an after tax income of 162,000 and the third one's an after tax income of just under 300,000, right? So you've got three different incomes in the scenarios modeled of that 90, 250 and then 500K turning it into after tax. Now let's just assume that you can save 25% of your net salary each month.

You're able to put that away and use that towards investing or life or just managing cash flows as an example. Now, if you're doing that, your annual net savings is 17,600 in the first scenario. In the second scenario, it's 40,500 and the third scenario, it's just under 74,000, right? So when you're looking at that, if you take that median house price of Melbourne of say 850K based on one of the data sets we're looking at, in the first scenario, it's just not gonna work because you think of the median rental yield, the median house, you take the gross rental income that you have, remove things like vacancy, council rates, water, a bit of land tax assumptions as well, property management, insurances, maintenance, and look, there could be more because vacancies and maintenance can range from property to property and there's also other things like rental compliance. But for this purpose, we've made some things a little bit conservative, some things a bit normal and overall, it should capture most of the scenarios here.

Obviously, things even change once more if you have different names of entities, whether it's purchasing joint names, individual or trust. So that's another consideration. But looking at this here, you're saving for that scenario one on 90K. If you're saving 25% of income and you have 17,600 in your savings, you're not gonna be able to handle the negative cashflow of that property. So even if the hype of the market is there for you and you wanna get into the city, you're gonna see a negative cashflow against your savings rates of 7.

9K. Now, of course, there could be some tax returns and you might be able to get some of that back, but you're playing with fire if you've actually got a property in a portfolio that you think is in a market that's gonna do well, but you can't even hold it. You're digging into your savings every single month to actually even hold the property itself. Now, if we move to scenario number two, you have a surplus of 15K per annum. So even if the negative cashflow property is in place, it's reduced to savings from 40K to 15K, which is still a great outcome.