The importance of hot spotting
Many investors are guilty of following the media, or known property commentators, when it comes to choosing where to buy next. It’s come to be known as ‘hot spotting’ and, these days, investors are so busy running their own lives that they feel it’s suitable to simply take the advice of some expert who has done the research, and buy in the areas they recommend.
I can’t count the number of times that I have either had experts on my show, or read tips in magazines, all touting the next best area in which to buy, only to find that I personally bought in that very same area many years before.
Don’t get me wrong – at least if you follow the experts and buy where they say, you are getting something into your portfolio, and taking their advice most often means it should perform OK for you. But think about how much better it all would have turned out if you had bought long before anyone had picked the area as being a potential hotspot. Just how much better could it be?
Take my property purchase in the Logan Shire as an example. In the past three years, everyone has been rushing to Logan, most of the ‘experts’ have had it on their lists and it’s likely that the investor interest alone has pushed up prices. You can buy a townhouse there for around $200,000 and get pretty good rent at about $265 or so a week, a nice 7% return. It seems like a great buy, and it’s most likely going to see some fairly solid growth, since the area abounds in growth drivers and is becoming less stigmatised as the years progress.
Imagine, though, if you had bought when I did, about 9 years ago. These same townhouses were around $95,000, and the rent at the time was $160 per week, or a cool 8.75% return on investment. The value doubled in around 6 years, and the present rate of return on that investment of $95,000 is 14.5%.
My two townhouses have easily looked after themselves in terms of their cash flow, and already doubled once in price. I don’t expect them to double again, however they will grow some more and, overall, it’s a pretty successful investment.
Following the experts is one thing, but true hot spotting is about finding the area first, way before anyone else does, and then sitting tight and waiting for the crowd to follow. And while it’s not an exact science, there are definitely characteristics about an area which should mean you can at least buy something which will hold its value, and very likely grow well into the future as well.
By now, most would know what growth drivers are, and how to recognise if an area has them. There are a few fundamental drivers which all must be in an area to make it a potential future hotspot. They include:
A population growing faster than the national average which includes
A high concentration of families, with children of primary school age, who are
Within commutable distance of varied major employers of both blue and white collar workers and are
Supported by the services which families demand – i.e. local schools, day-care centres, shopping centres and public transport who can buy
Affordable housing within growing communities
What you’ll notice about that list is that the fundamentals are interdependent – and, in my opinion, a true future hotspot must have all of them. Outside of those five fundamentals, the other growth drivers which I discuss in my 20 Must Ask Questions book are the characteristics which help determine how soon the growth can be expected – the more of them which exist, the more likely the area is to already be a hotspot.
True hot spotting requires a small leap of faith, and a fair amount of patience, as you wait what could be a number of years before too much happens. But if those fundamentals exist, the risk diminishes, as it’s highly unlikely that an area with those characteristics will fail dismally, and in the meantime they often fetch a good return for the buy in price.
Such an area usually has a fairly solid foundation upon which a community can build – and communities are generally stable, inclusive and grow fast as people want to move into them and build their new lives. They are usually less desirable, initially at least, often in the outskirts of major cities, and considered to be remote by CBD standards.
But as the country’s population continues to rapidly expand, these same areas will enjoy improved demand and house price growth pressure. And if you can get into some of them before it’s talked about in a magazine or on TV, you can sit back and enjoy yourself while the experts talk the area up on your behalf.
Published: Wednesday, May 09, 2018