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Hotspotting or Flop-spotting?

What dormant suburban/town jewel lies in the property backwaters waiting to be awoken like Cinderella by her Prince Charming? ... a 'hotspot' property!

Finding the places that are about the boom, buying property, waiting for the boom to hit, and then selling it at a great profit - this is the essence of property 'hotspotting'.

It's a topic covered every few months or year by many property websites and print media in general, and the reasoning behind their choices often appears very sound.

The big success stories make the media ... but the flops just seem to disappear into media nothingness.

How successful and accurate is hotspotting??

Without doubt, there are some very experienced property analysts out there who have often been accurate about some suburbs, townships are regions. Finding the right time to sell is the real art of getting the most out of these booming areas, before they bust.

However, when you look at the overall results it's a far more sobering picture that emerges of the 'hotspots'. For instance, over 50% of the 'hotspots' of 2011* ended up being 'flopspots', with average or lower than average capital growth since 2011. Even some of the hotspots that did better than average still didn't justify the hype that was written about them in 2011.

Recently, property analyst Michael Yardney looked at the reality of hotspotting.

"People who ask my opinion are usually disappointed that firstly, I don't know and secondly, I don't really care. I'm not in the business of speculating.

Instead, I make my investment decisions based on proven long-term performance, rather than short-term speculation.

The fact is hotspotting – seeking out the "next big boom" location – is speculation and not true property investment.

If you look at the track record of people chasing the next trend it's been pretty poor.

On the other hand to "invest" in property requires the intention of generating long-term capital growth that tracks above average long-term price growth for the area.

If you're into investing in short-term trends, being right isn't what's important, it's being right at the right time that counts. Very few can do that, so the history of investors trying to find the next boom town is littered with people who get the story right and the outcome wrong.

Instead I buy in areas that have a proven long-term history of outperforming the average capital growth and are likely to continue to outperform because of the demographics of the people living in the area.

Hotspotting is virtually the opposite of this sensible, not-so-sexy, tried and tested system for successfully building a property portfolio.

Let's have a closer look at a few other reasons why I steer clear of looking for hotspots:

1. Hot spotting is about short-term speculation, not long term wealth creation.

The key to building a substantial property portfolio 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 on.

You will only have the ability to do this if you invest in locations that consistently provide long-term capital growth.

By definition, 'hotspots' are not these types of areas.

2. Hot spotting often means following the crowd and more often than not, the crowd gets it wrong!

Many people trying to buy in the next hotspot get their advice from online reports or "get rich quick" seminars and in the short-term some of these predictions are self-fulfilling.

If you suddenly get a diverse group of investors buying up in a small town that has little market depth, this tends to push up prices "proving" this area really is a hotspot.

What's really happening is that you're seeing an over-inflated market that more often than not, is unsustainable in the long term.

Some of our mining towns, the Gold Cost and Sunshine Coast are great examples of this phenomenon.

On the other hand strategic investors buy counter cyclically, when others are afraid to get into the market.

3. Hotspotting requires accurate timing, yet most investors don't have the necessary knowledge to know when it's the best time to buy.

Some hotspots have excellent potential to generate long term capital growth, but these are rare.

For example, there's the inner-city suburb that's yet to take off because while it's on the verge of gentrification, yet it still has an air of industrialisation. Some investors can pick these areas before the market takes off, but timing markets like this is difficult.

The real problem is that by the time you find out about the next hotspot, it may be too late to benefit from that substantial early growth.

Or the opposite could be true. You might end up jumping in too early and not reaping the rewards for many years while in the meantime, your money has been tied up and you've missed out on real opportunities in proven areas.

A great example of this is the inner western Melbourne suburb of Footscray, which has been "going to improve" for the last 35 years but just hasn't!

4. Hotspotting is usually based on opinions rather than 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're simply just being given someone's opinion.

Be careful, are they biased because they have properties to sell and it suits them to be spruiking a certain area?

You're better off to rely on your own research and due diligence, rather than blindly accepting a so-called expert's potentially biased advice.

5. Hotspotting can generate short-term inflation in suburbs that can't sustain a high level of price growth over the long term.

Today's hotspot could be tomorrow's over heated market.

For example, when the resources boom hit Western Australia and far north Queensland, thousands of investors jumped on the bandwagon and bought into the mining towns that sprung up overnight and became a buzz of activity.

But now that the resources sector has cooled off, many of these towns have gone from boom to bust as the major industry supporting the local economy came crashing down.

I know of many investors who are still having trouble offloading their under-performing properties in these mining towns and regional centres which recently were called hotspots.

My suggestion is avoid the excitement of hotspots.

This may make your investment boring, but it allows the rest of your life to be more exciting as you growth your wealth.

So what is the alternative?

To ensure I buy a property that will outperform the market averages in the long term; I use a Four Stranded Strategic Approach:

  • I buy a property below its intrinsic value.
  • I buy in an area that has a long history of strong capital growth and one that will continue to outperform average capital growth because of the demographics of the people living there. I look for affluent areas where people are prepared and can afford to pay a premium to live, or gentrifying areas where a wealthier demographic is moving in and pushing up prices as they improve the area.
  • I look for a property with a twist – something unique, special, or a bit different or scarce about the property.
  • And I look for a property where I can manufacture capital growth through refurbishment, renovations or redevelopment.

By following this approach I minimise my risks and maximise my upside."

* Australian Property Investor & Your Investment Property forecasts. Figures from RPDATA & APM

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