Why property hotspotters are destined to fail
Is it just me, or does it seem like at least half of the ‘education’ we’re exposed to as investors relates to property hotspots?
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High rent mining towns, exciting new-build developments, growth areas over-flowing with positive cash-flow goldmines… We constantly hear about these types of property deals that are located in so-called property hotspots and the underlying message is always the same: “Get in now before you miss this opportunity for success”.
However, there’s one thing the spruikers don’t tell you. Occasionally they get it right, and the town they’re touting is genuinely going through a growth phase. But wherever that hotspot is, it’s generally no longer hot once everyone knows about it.
By the time the masses are flocking to buy properties in whatever this month’s latest, greatest property boom town is, real estate prices are often over-inflated. When a flurry of new interest is generated, it has the impact of creating the illusion of elevated demand, which can create false value gains as investors try to out-bid each.
Smart property investors know that this is not a solid strategy for investing. In fact, it’s not investing at all – it’s speculating. And if you’re not careful, speculating can lead to a whole world of financial pain.
Hotspotting is essentially the practice of seeking out the next big boom location before it actually booms and in my view, it feels a lot like gambling.
There are plenty of reasons why properties increase in value but there are just as many reasons why property price growth can stall, and a number of these are outside of your control. Economic policy, mortgage lending criteria, interest rate movements, and government regulatory settings are just a few of the external factors that can influence a property’s growth cycle.
Let’s say you want to jump on the bandwagon of a mining town hotspot, for instance. What if a major mining company backs out on a project that was previously set to make the town ‘boom’? What if the town’s major employers enter a bitter union dispute with their workforce?
If you’ve invested in that town in an effort to cash in on a property hotspot, you could wind up stuck with a dud investment that’s going nowhere, fast.
It’s often the case that investors who go down the path of hotspotting are lured by the promise of high yields and high (predicted) growth rates. The best way to avoid falling into this trap is to proactively manage your portfolio. It’s no coincidence that I work with my clients to regularly identify risks and gaps in their existing portfolios, which then assists them to minimise the risk involved in future purchase decisions. Regular reviews of your portfolio will enable you to skillfully manage the various types of both current and future investments you hold, giving you a clear idea of where they fit into your wealth creation plan. Remember, nothing is ever set in concrete so it’s healthy to be flexible and to course-correct if, for whatever reason, your investing strategy has gone off track.
You’re far better off ignoring the hotspotting crowds and buying in an area that suits your specific buying criteria. Your criteria might be a few lines long – “Under $400,000, stand alone house, positively geared at least $50 per week”. Or you could fill a full A4 page with a detailed list of wants and needs, such as the number of bedrooms, the size of the garden and the quality of fixtures and fittings.
Start by working out what you want to achieve. Would you like to invest in a property that shows strong long-term growth potential, and as such you’re prepared to redeploy some of your discretionary income towards it? Or do you need a property that will deliver immediate returns by putting cash back into your pocket each week? Your answer to this question will form the basis of your personal buying criteria, which will lead you towards locating a quality property investment for your investment portfolio.
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