One of the common questions I’m asked by property investors is “What’s the next ‘hot spot’ – where should I should buy my investment?”
I guess I annoy some people because I don’t tell them what they’d like to hear, instead I say something like – “We are in the business of helping our clients buy the best investment possible based on proven long-term performance, not speculating with their hard earned money!”
The truth is hot spotting – seeking out the “next big” boom location to buy into – is really speculating – not investing.
To truly invest in property requires the intention of generating strong long-term capital growth that tracks above average price growth. To achieve this, investors must do their due diligence, research locations that have a proven history of outperforming the averages when it comes to property values and have a clearly defined investment plan that outlines their goals and how they intend to achieve them.
Hot spotting is almost the complete opposite to this sensible, not-so-sexy, tried and tested methodology for successfully building a property portfolio.
There are a few problems with hot spotting, so let’s have a closer look at why we steer clear of this approach.
1. Hot spotting is about short-term speculation, not long-term wealth creation.
The best approach to investment is to buy in areas that are proven to deliver long-term, above average growth. The key to building a portfolio that delivers solid gains for the long haul is to use your first property to leverage into your next property, and then use those two properties to leverage into more investments and so forth. You will only have the ability to do this if you invest in locations that consistently provide strong returns and therefore grow equity in your portfolio.
By definition, “hot spots” are not these types of areas, because just as quickly as they heat up, property values in such towns can come off the boil and cool very quickly.
2. Hot spotting means following the crowd and more often than not, the crowd get it wrong!
Smart investors know that you’re generally going to buy better when others are afraid to get into the market. Following the crowd can often mean you end up paying too much for property, particularly when the masses are in a buying frenzy – such as in hot spot locations when everyone is trying to cash in on the area – because this creates an over-inflated market that is more often than not unsustainable in the long-term.
In other words, it’s easy to over-capitalise if you choose to invest somewhere that becomes popular overnight for one reason or another.
3. Hot spotting requires precise timing and most investors don’t have the necessary knowledge to know when it’s the best time to buy.
Some areas could be classified as true ‘hot spots’ that have excellent potential to generate growth over the lon-term, but these are extremely rare. For instance, there’s the inner city suburb that’s yet to take off because while it’s on the verge of gentrification, it still has an air of industrialism.
Experienced investors can often pick such areas before the market takes off, but timing the markets in such a way is incredibly difficult and even those of us who’ve worked in the industry for years tend to steer clear of what is again, a form of speculation.
The real problem is that by the time you find out about a possible “hot spot” it may be too late to benefit from any type of growth, or the opposite could be true – you might end up jumping in too early and not reaping any rewards for many years. And in the meantime, your money has been tied up and you’ve missed out on real opportunities in proven areas.
4. Hot spotting is usually based on opinions rather than proven facts.
When you read articles in the media or hear reports on TV that suggest an area is about to take off as the “next big thing”, in reality you are simply being given someone’s opinion. Sure, they might claim to be an “expert”, but how successful have they been in their own investment endeavours?
And are they biased or trying to feather their own nest by spruiking a certain area? You’re always better off to rely on your own research and due diligence, rather than blindly accepting a so-called expert’s potentially biased advice.
5. Hot spotting can generate short-term inflation in suburbs that cannot sustain a high level of price growth over the long term.
Today’s hot spot could be tomorrow’s over heated market. For example, when the resources boom hit WA, thousands of investors jumped on the bandwagon and bought into mining towns that sprung up literally overnight and became a buzz of activity with new residents. Of course, when the resources sector cooled off, many of these towns went from boom to bust as the only industry to support the local economy came crashing down.
A lot of investors are still having issues trying to offload their underperforming properties in such mining towns, which were yesterday’s hot spots and the same has occurred in some regional centres.
In such instances, the act of “hot spotting” generally creates a buying frenzy in a location that leads to prices becoming artificially inflated. More often than not, these prices are not sustainable and it’s just a matter of time before they come crashing down.
So if you want to grow your wealth through property investment, rather than looking for the next hotspot, find an area that has outperformed the market averages for a long time. All else being equal it’s likely to continue outperforming. Then buy the right property in that area – one with an element of scarcity and one which will be in continuous strong demand from both owner occupiers and tenants.
That’s the road to property investment success.