A property investment hotspot is an area or suburb that has been identified as having potential for stronger growth and development compared to the rest of the market. They are often identified as areas that are underperforming, usually within close proximity to more popular suburbs.
It all sounds too good to be true and that is because in the majority of cases it is. Hotspotting reports might be okay for the person who prepared the report but using hotspotting reports for long term property investment are typically a waste of time and money. Successful investors never buy real estate in identified 'hotspots' because they're buying before an area becomes 'hot' and follow their own plan rather than following the crowd.
Smart buyers know that hotspotting is for mugs and here are the reasons why:
• It's an easy trap: Hotspotting reports are one of the most misleading components of the property sector with a plethora of organisations and businesses offering advice on the next 'hot' area. While the premise of this can be hugely appealing to investors who use data, statistics and facts as a base for their property purchasing decisions, the problem lies in the quality and accuracy of the reports. Many organisations produce reports on unsubstantiated evidence and then sell these reports to the unsuspecting public. Smart investors know to do their own research.
• Questionable data: Using hotspotting reports to influence your property purchases will usually be a waste of your time and money, and may lead you to invest in unsuitable properties while missing out on purchases more suitable to your portfolio needs. The reports can be questionable for a number of reasons:
– Reports are based on the sales history in particular areas, which is approximately 6-8 weeks out of date because sales have to settle before they can be 'counted', and settlement occurs 6-8 weeks after an offer has been accepted. In fast moving markets [let's face it . . any market] if you're basing your decisions on data that is two months old . .you're completely out of touch.
– Due to the out-dated nature of the reports, investors may be influenced to purchase in areas that have already peaked.
– The reports often lump suburb information and data together when more detailed comparisons are needed. They often do not accurately compare 'apples to apples'.
• Misleading: Reports may appear to contain all the information investors need to know about a particular area which could stop them from doing their own independent research and discovering crucial information. Always validate any 'reports' you're given by checking the information with an independent and reputable source. The scenario we're referring to here . .is when a property marketer gives you a report about the performance of an area for a property they're trying to sell you. Never trust this information and always check the data from an independent source such as SQM Research.
• Limited detail: the reports are usually at too high a level to provide real insights. Remember we have 15,000+ suburbs in Australia and within each suburb there can be 100s of mini markets – for example four bedroom houses, versus two bedroom units.
• Over inflated prices: Hotspotting reports can often cause a pack mentality with investors flocking to purchase property in a particular area that is deemed 'up and coming'. When real fundamentals kick in, the suburbs don't hold their value. Successful investing success happens when you are one step ahead of the rest, not when you are blindly following whatever trend is happening.
• Group mentality: suburb hotspotting reports assume all buyers want the same kind of property or have the same strategy, or funnels buyers into thinking there is only one kind of strategy.
So, what are the more critical elements that keen property investors should be looking for when adding to their portfolio?
Successful investors understand that real estate is a long term journey with both highs and lows. In order to maximise the highs and minimise the lows successful investors consider:
• Strategy: The most important factor in property investing is to have a personal strategy. Resist the temptation of false success following others and rather focus on having a long-term plan and an achievable strategy to execute the plan.
• Economics: Successful investors study the economics of their specific property market rather than city, state or national 'averages'. Become specialised in a handful of specific areas – the smaller your niche the more likely you are to be successful.
• Teamwork: Smart investors need a smart and loyal team around them. Choose your team carefully and ensure it contains specialists such as an accountant, mortgage broker, and lawyer – particularly those who will actively work to benefit you achieving your investment potential.
• Realistic time frames: Real estate investment success is a long-term project, so set realistic time frames and don't get disheartened when things don't happen over night. Look at the big picture and your main objective.
• Accurate data: Choose your data wisely and ensure that it is accurate and comprehensive. Be sure to use information that offers sound comparisons. Successful property investors achieve their results by clearly analysing quality data – no shortcuts and lots of research.
• Questions: There are no bad questions so don't be afraid to ask them. Top investors are not afraid to be inquisitive and to ask as a many questions as they need to find out the most information they can. Tap into every available resource on offer and don't try and problem solve on your own but validate the success and credibility of those you rely on for advice.
There are lots of ways to excel in the property market but beware of the hotspotting trap.
