I most likely have mentioned this in each book I’ve written, but that’s because its importance is always relevant. When you’ve known me long enough, you’ll realise that there are constant facts which I’ll repeat over, and over again. This is because these particular facts are important, and they won’t change over time.
Don’t fall into the trap of believing that you should only buy in the area where you live because it’s an area that you know well. When people insist to me that they must at least start by buying in their own area due to its familiarity, I play a little game with them, and I ask a range of questions about their area. In virtually every case, I discover that the person has very little knowledge about the most common growth drivers in their area, and what they actually ‘know’ relates to lifestyle features.
What you know about your area includes information relevant to you as an owner occupier. While this also becomes important for a renter – your potential future income-producer – this information is by no means the catalyst by which an area will achieve that ‘better than average’ growth. The information most crucial when you are looking to invest in an area is data which local residents are unlikely to know about their own area.
It’s also unlikely that you’ll be lucky enough to be living in the area which, at the very moment you’re about to invest, is among the top hotspots of the country. While I’ve seen it happen, more often an investor, particularly one using home equity to leverage into an investment portfolio, will live in an area that is coming out of its major boom phase. They have most probably been able to grow equity in their own home because their area grew really well, but by the time they decide to use this equity, the area has settled into its stabilised growth phase, and it will begin growing less well than other potential areas.
Always remember that you don’t have to live in an area to know it well. By the time I buy in any area, I can guarantee that I ‘know’ it better than the locals do. What I know about that area, though, relates to economics, and what the locals know is more likely to relate to lifestyle. Lifestyle features rarely create boom towns, whereas economic vibrancy is the corner stone of a future hotspot.
It’s prudent to make note here that few areas remain a hotspot for years on end. That’s not to say that an area becomes the wrong choice – many areas I recommend against are solid areas and buying in them will not be a poor choice – it may just not be the best choice you can make, at that time. Remember that each purchase carries an opportunity cost, and that cost is that you may miss an area about to experience its greatest period of both values and rental yield growth.
The last important factor that all investors must know is that the window of opportunity to buy in a hotspot is always quite small. When I present my list of hotspots every year, I do so with a warning that, if anyone is going to procrastinate before they act on the information, it’s crucial that they confirm whether the information is still valid and the window is still open when they do eventually act. All hotspots settle down to become one of those stable areas, and once this happens there will be another, better area elsewhere.
