Expert Advice with Michael Yardney.
The problem is, hotspotting is about short-term speculation, not long-term wealth creation. Most property investors are trying to build their asset base so that one day it can replace their personal exertion income. And the key to building a substantial property portfolio is to use your fi rst 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 defi nition, ‘hotspots’ are not these types of areas. Just as quickly as they heat up, property values in these locations can come off the boil and cool very quickly.
Sure, many of the hotspots predicted by some of Australia’s property analysts turned out to be correct. Some of the regional areas and mining towns boomed, at least for a while as investors chased up prices, but unless they got the timing right, chasing the next hotspot turned out to be disastrous for most investors.
After the initial price growth, often driven by a flood of investors in these small markets, prices stalled and often dropped substantially, leaving many with properties worth considerably less than what they paid for them and with less rental income than they expected. They are now unable to sell their properties as buyers have abandoned these markets, which have little depth from local demand.
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; the history of investors trying to find the next boomtown is littered with people who got 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 that 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.
What works now versus what has always worked
If history repeats itself, and it surely will, many investors will get it wrong in this property cycle. They will be looking for the type of investment that ‘works now’, while sophisticated investors will only put their money into ‘what’s always worked’.
Property is a long-term investment and therefore my strategy doesn’t change because of short-term changes in the economy or the markets
Sure, next year there will be a new hotspot that will become a future ‘not stop’. Yes, some regional locations will outperform some of the big capital cities while they take a breather. And some speculators will make money out of the next fad touted at the get-rich-quick seminars. But most property investors will never develop the fi nancial independence they deserve.
In my mind, property is a long-term investment, and therefore my strategy doesn’t change because of short-term changes in the economy or the markets. I’d only invest in the type of property that has always been a good investment, rather than one that ‘works now’.
I know that location will do the bulk of the heavy lifting in my property’s performance so I would only invest in high-growth suburbs in our big three capital cities, knowing that their economic fundamentals, population growth and gentrification will underpin my property’s performance.
Then I would only buy an investment-grade property – one that would see continuous strong longterm demand from affluent owner-occupiers because it has a level of scarcity and a high land-to-asset ratio.
Property investing is dogged by dozens of different variables, and although many property spruikers attempt to make it an exact science, the reality is, there will never be a ‘perfect’ time to invest or the ‘perfect’ property to buy. That said, there are some principles that can be applied whenever you consider investing in real estate, to ensure that you are as comfortable as possible and expose yourself to the least amount of risk. These include:
- While many people generalise about ‘the property market’, there are many submarkets around Australia. Each state can be at a different stage of its own property cycle, and within each state the markets in different areas are segmented by geography, price points and types of property.
- Rather than trying to time the market, buy the best assets you can. Timing your purchase well will give you a one-off bonus. However, owning an investment-grade asset that grows at wealth-producing rates of return will see your portfolio outperform over the long term.
- Strategic property investors ‘manufacture’ extra capital growth through property renovations or development.
- Our property markets are driven not only by the fundamentals but also by the often-irrational and erratic behaviour of an unstable crowd of other investors. While the long-term performance of property is influenced by the fundamentals, its short-term performance is much more affected by market sentiment.
- Treat your property investments like a business, and adhere to a proven strategy to take the emotions out of your investment decisions. Don’t make 30-year investment decisions based on the last 30 minutes of news.
- Recognise that property is a long-term play, so set up financial buffers to help you ride the property cycles, because the cycle will keep recurring and testing your nerve.
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Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
