Everyone loves a bargain, so surely finding one in a property hotspot is even better? Not so, says investment expert Chris Gray.
A cheap property in a booming area can seem like a great buy. 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 long-term gain in mind.
The property market has gained strength over the last 12 months and it’s attracting more investors. It’s 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.
What makes an area 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 doesn’t occur.
Similarly, rather than booming suddenly, a predicted property 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.
Fair price, right property
For smart investors, getting the lowest price is not nearly as important as getting a fair price on the right property. Buying a bargain 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 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.
Most hotspots can offer the potential to earn a lot of money in a short timeframe, but this isn’t guaranteed. Before buying you must assess how much expert knowledge you have in the area you’re buying. That way you can determine 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 buyer’s agent will be able to do the legwork for you. Analyse the sale price of properties that have actually sold, so you understand their true value. And don’t be afraid to make an offer (start low and gradually increase your price).
This is an edited version of an article that was originally published on Your Empire.
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.