If you want to be a successful investor, you need to know how to identify a hotspot before the rest of the herd, writes Your Property Your Wealth's Daniel Walsh.
A successful investor knows what drives a market and how to identify these key drivers to see future capital gains. What are the key drivers of growth and what questions do we need to answer before buying an investment property?
1. Cash flow
Before you even consider buying a property, you need to check the cash flow of that particular area. Cash flow is the amount of money this property costs you each week to hold.
You also have to work out your entire portfolio’s cash flow to determine the type of property and yield that you need to balance your portfolio.
2. Average days on market
Average days on market are important as they can tell you how strong the market is. If you find that the average days on market are coming down, this might be a market that is ready to see growth as it gathers momentum.
3. Population growth
When looking at an area, it is important to consider the population growth. I like to see population growing higher than the national average. This will create demand in the market.
4. Vacancy rates
Vacancy rates are a key indicator of whether that market is in demand. I like to see vacancy rates 3 per cent or lower, with an ideal vacancy rate of zero to 2 per cent. The lower the vacancy rate, the easier it will be to find a tenant.
5. Future infrastructure
Look out for projects that already have funding. You don’t want to be gambling your money on the hope that a project may get funding one day.
Infrastructure creates jobs and desirability to live in that particular area. Just because there is one project going on in that area, it doesn’t mean it is a good investment. You need to be sure that it ticks all the other boxes too.
6. Economic vibrancy
Consider whether the area has good transport, shops, supermarkets, hospitals, schools, roads and shopping centres. Remember, when an area becomes a hotspot, it is because everyone wants to live there.
7. Building approvals
Building approvals are the key to knowing how much supply is coming to an area and if that area will be in demand for years to come. You want to see that the population growth for that area is higher than the number of buildings being approved.
8. Diversity of industries
You want to choose areas that have multiple industries to ensure that the suburb you invest in has jobs. After all, it is money that allows people to buy houses, and jobs are key to sustainability.
9. Household income
You want to see incomes rising or higher incomes relative to that area. If people can afford to pay more and all the other boxes can be ticked, this area is ready to be invested in.
If you answer these questions every time you invest in an area, you can rest assured that you are one step ahead of the herd and you will be able to maximise your growth.