Why do smart investors shy away from hotspots?

Everyone loves a bargain, and a bargain in a property hotspot is even better. A cheap property in a booming area can seem like a great buy as it provides an affordable starting point into the property market and a way to gain immediate equity. However, these bargains may only be profitable in the short term. Investors need to keep the longterm gain in mind.

With the property market gaining strength over the last 18 months and attracting more investors, it is important to know that you make money in property when you buy, not when you sell. It may be better to pay market price for a blue chip property in a good suburb rather than trying to find a bargain in an area on the verge of becoming a hotspot.

A suburb is declared a hotspot when it is tipped to undergo massive capital growth. The benefit of buying into a “hot” suburb is the potential for instant equity and strong gains in the short term but there is also a very real risk that the predicted hotspot fails to take off and growth does not occur.

Similarly, rather than booming suddenly, a predicted hotspot can grow at a steady pace for a few years then remain flat for decades. This may place you into a forced-sale position if prices have dropped. Taking into account the costs and taxes associated with entering and exiting the market, you may be left with minimal profit or even a loss.

For smart investors, getting the lowest price is not nearly as important as getting a fair price on the right property. Buying a bargain or a property in a hotspot could make you a few thousand upfront. On the other hand, if you buy a blue chip property at market value you may not see an immediate return but you are likely to reap tens of thousands of dollars extra in the long-term.

There is often a reason that properties are cheap – usually they are cheap because there is little demand and plenty of similar properties to choose from. Growth is higher where demand is higher and stock levels are lower, which is why smart investors should pay market value for a better property in a top suburb rather than trying to get something at a bargain basement price. Investing in property in a good suburb will not only ensure a steady stream of rental returns, but you will also be able to enjoy more consistent capital growth.

While hotspots can offer the potential to earn a lot of money in a short timeframe, this isn’t always guaranteed. Before buying you must assess how much expert knowledge you have in the particular area and whether the reward is worth the added risk.

Smart buying is all about knowing your market so you can recognise the right property when you see it. Pick two or three suburbs and then inspect at least 50 – 100 properties across the area before making a purchase. If you are time poor, a buyers’ agent will be able to do the legwork for you. Analyse the sale price of properties that have actually sold so you understand its true value and don’t be afraid to make an offer (start low and gradually increase your price).

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