Hotspotting is for mugs
When buying a property, there’s plenty of traps to fall into – one of the biggest is using hotspotting reports to chase the next ‘hot’ suburb.
It’s an easy trap, particularly for smart investors who do their research in a bid to use data as a base for their decision making. After all, smart investors know they should be taking emotion out of their purchases and using ‘facts’ to influence their choices.
While the premise is good, there’s now a flourishing industry filled with plenty of organisations who have rushed to meet this information need. Unfortunately, many of the organisations are just plain bad and designed to fleece more and more money from the unsuspecting public.
Setting aside the issue of the quality of the data, using hotspotting reports can at best waste your time, or lead you to invest in areas that will restrict your investing and cause you to lose money. The problems are summarised below.
- The reports use sales ‘history’ – sales history is just that . . it’s history and not a predictor of what is about to happen. Even worse, the data is usually at least six to eight weeks old because the purchase has to go through before the sale is registered, then the information has to make its way to the reporting organisation.
- Hinders ability to actually find a hot spot – due to the ‘historical’ basis of the data, investors can find themselves purchasing in areas that have already peaked and may be quickly on the slide.
- Suburb data lumps everything in together – many reports will split information into houses and units, however a more granular level of detail is required – eg – two bedroom houses v three bedroom houses; block size and width.
- Drives investors to only focus on capital growth – there has always been many ways to prosper in property other than waiting for capital growth to occur.
- Creates a herd mentality – successful investing occurs when you’re ahead of the curve, not following in the pack who have purchased reports.
- Minimal changes can make a suburb look ‘hot’ when it is not – occurs when one or two sales achieve a high price to make it look like the price is on the rise, but it will be another two years before anyone purchases there again. Results can also happen in reverse – ie – a few bargain sales can skew the median price downward so a good suburb looks like its on a downward spiral.
- The reports are ‘auto-generated’ so there isn’t any true analysis conducted into the data to identify a causal relationship.
- Leads investors to dismiss other critical information which is not included in the reporting – details such as zoning, condition of the properties, width of block, opportunity for uplift.
The critical issue
The main problem with chasing hot spots and using bad hotspotting reports is that the reports will not help investors identify the best property for their needs. The most important factor in property investing success is designing your property strategy first.
In other words, there’s no point buying a report and choosing a suburb before you understand whether you need a large or small block, or the sequence of property types you need to buy to ensure you leverage your current buying power.
So how then?
While it is true that purchasing decisions should be based on ‘facts’, ensure you’re using good quality information in the right way. This includes the following activities.
- Identify your property strategy and type first – there’s no point buying in a suburb that might look ‘hot’ when you’ll have zero opportunity to find good sized blocks in suburbs that are about to boom.
- Use sources of information that will point you to a cluster of suburbs – for example, infrastructure changes, population increases or changes, zoning changes or other key indicators that match your strategy.
- Use reports that track leading indicators such as days on market, demand to supply ratio, stock on market, online search interest, and rental vacancy rates.
- Be very selective about the service provider you use – companies such as Core Logic, SQM, and free sources from the two main sales platforms realestate.com.au and domain contain an extensive amount of data and analysis along with government and local council websites. Be careful if a supplier is only focusing on ‘reports’. If they’re not buying all the time, they will often be out of touch with critical factors in the market.
- Use data in the right way – this includes using good comparables as opposed to suburb level medians. For example, compare a three bedroom, well maintained property on a large block with other similar properties – don’t just compare it with the suburb median because this will include all types of houses whether small or large.
Successful purchases are achieved by clever analysis of quality data which takes time, effort and skill. However, be wary of getting caught in an endless analysis trap as you can miss opportunities right before your eyes. If you feel stuck, don’t hesitate to give us a call.
Buy smarter = limitless ways to build lifetime income
Debra Beck-Mewing is the Founder of Crave Property Advisory and CEO of The Property Frontline. She has more than 20 years’ experience in property investing, Australia-wide and has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business. As a passionate advocate for increasing transparency in the property and wealth industries, Debra is a popular speaker on these topics. She is also an author, podcast host, Editor in Chief of Property Portfolio Magazine and participates on numerous committees including the Property Owners’ Association.
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Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.