Why Investing in ‘Hotspots’ Can Bleed Your Cashflow

I am frequently approached by journalists from various newspapers and magazines, wanting to hear my views and opinions on hot spotting.

They want to know which areas in Australia I believe will be next to ‘take off’.

Frankly, I am not a huge fan of nominating a hot spot or using advice from ‘hot spotters’ to make my investment decisions.

This is for several reasons:

1. More often than not, hot spotting involves short-term speculation about an area, which in turn will lead to short-term investing outcomes.
2. Hot spotting advice is more often than not based on someone’s personal opinion.

   Hot spotters often haven’t undertaken the necessary extreme ‘due diligence’ to provide meaningful hot spotting advice.

3. Hot spotters’ advice may not be appropriate for every investor’s circumstances. For example, what may be affordable for me might not be affordable for you.

Some suburbs that have been nominated as a hot spot may have a high median house price of up to $600,000 for a house in a blue chip area in a capital city.

Yes, it may be a hot spot, but how many investors can afford to invest at this price point, especially if they are new investors?

The negative cash flow of a property costing $600,000 would be huge for most, and will therefore make it difficult for most investors to afford the expenses on an ongoing basis.

If a lender is prepared to lend you $700,000, I would recommend that you buy two cheaper properties rather than one expensive property.

That’s because if you buy two cheaper properties and one of these properties is vacant, then you only have 50 per cent of your portfolio vacant.

If you only have one more expensive investment property and it is vacant, then you have 100 per cent of your property portfolio vacant. You can lower your risk by buying two cheaper properties.

The point I am making here is, be mindful of the entry-level price in a hot spot area. Make sure it suits your budget, lifestyle and risk profile.

How to Protect Yourself Financially

The only way you can protect your financial future is to do your own research. If you find someone spruiking a hot spot, listen, but then make sure you research the fundamentals such as population, infrastructure and local industries before you buy.

If the hot spot ticks all your boxes for investing and meets your buying strategy, then consider buying a property – but if it doesn’t, then bow out!

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