The dos and don’ts of buying in a boom town
‘Boom towns’ across Australia have delivered many property investors some phenomenal returns in recent times.
In very short periods, rents and house values in boom areas can skyrocket to unbelievable levels. They offer huge opportunities to fast track wealth creation – but they are not for the ill informed and under-prepared. When it comes to the rapid-growth boom towns, what goes up usually comes down.
To make money and avoid getting burnt, you need to know how to read them.
DO buy a property that’s desirable to the local leasing market
Every area or market has its own leasing demographic – certain demographics want certain types of properties. A boom town is no different.
Tapping into the corporate leasing market is what most investors aim for in boom towns. Corporate leases usually mean maximum rent, longer leases and quality tenants, helping to reduce risk. But investors shouldn’t ignore the private market either. Corporate demand for rentals can rise and fall in line with project activity. The resident population is more stable. The more (quality) demographics your property appeals to, the greater pool of potential tenants. Make sure the property you’re investing in will appeal to more than one group.
The best way to determine whether a property you’re considering buying will appeal to the right tenants is to speak to a local agent. They should be able to tell you the locations, types, styles and configurations that are most in demand. They will also tell you the rent you could expect to receive from these types of properties.
Ideally, you want to select a property that will perform well in both boom and quiet market periods, offering extra security on your return during these periods.
It’s important to remember that almost anything will lease for a good price during a boom period. When the market starts to settle, you want to ensure your property will still be desirable to the RIGHT tenants.
DO aim for a secure lease
Many properties for sale in boom areas will come with leases in place. This is what you should aim for. Purchasing an investment with a secure, medium to long term corporate lease minimises vacancy periods and new tenant fees, and ensures quality tenants.
Be careful not pay too much for a property just because if offers an attractive lease. Compare the property and rental rates against other similar properties in the area to ascertain its comparable value.
Don’t get caught up in the hype!
When a boom town starts to run it generally receives a high amount of media exposure. Very quickly, everyone wants a piece of the action. Investors flood in and the market rapidly turns into a seller’s paradise. When this happens, it’s not uncommon for investors to bid well over the asking price to secure a property, desperate to not miss out.
Avoid getting caught up in the hype. Make an informed, well-researched decision. This applies to your chosen area, property type and timing. Ensure your finances are in order. When you’re ready to take action on your selected property, put a condition on your offer. Limit the consideration period to that day only. This will place urgency on your offer and get the seller’s immediate attention.
Don’t buy in at the market peak
Short term boom towns generally have one strong market run which typically lasts from three months to two years. Long term boom towns offer these same growth periods, however growth cycles will usually come around every three to four years. Long term boom towns offer multiple growth opportunities for both the short and long term investor.
The key to ensuring you’re not buying in at the top of a cycle (which will drastically reduce your chances of a return) is to understand how to read the market. If prices in the town have been increasing rapidly for 12 consecutive months, chances are the end of the growth period is imminent for that cycle. If the town has gone through a period of flat or negative growth over the previous 12 – 24 months, it’s likely that a long-term boom town may be ready for its next project-based upswing. Buying in at this point will reward you with capital and rental growth as the market recovers.
Short-term boom towns will continue to appear in Australia, providing opportunities for nimble investors to make a quick return if they get their timing right.
The established hubs, with their strengthening industry and continued civil investment, will experience ongoing growth cycles and will continue to reward those with a buy and hold strategy.
Designing your personal property investment strategy to reach your goals
Is your current property investment strategy working for you? Or more fundamentally, do you actually have a strategy?
If the answer to either of these is no, then it’s time to take control of your investment journey to ensure you reach your goals.
The below points are key to ensuring your strategy is tailored to your personal circumstances and desired outcomes.
1. Write down your goals. Consider what you would like property investing to achieve for you and the timeframe you want to achieve it in – but be realistic. Do you want to retire earlier, enjoy more time away, pay off your mortgage sooner or purchase a new family home?
2. Which type of property investment best suits these goals? Looking at your goals, what do you need most from your property investment? Growth, cash flow, tax relief? Do you require another form of revenue immediately to top up your salary so you can enjoy a better lifestyle, work less and retire earlier OR are you currently positioned well with cashflow and prefer a capital city investment that will slowly appreciate and provide positive cashflow over time?
While it’s certainly possible for an investment to achieve both – as many regional areas have proved over the last several years – in theory, areas with high rental yield typically have slower capital growth and vice versa.
3. Do a loan comparison and find out what you can afford. It’s wise to align yourself with a mortgage broker that specialises in investment property but arming yourself with loan product and comparison information will still be invaluable. Understanding what your loan options are and identifying the best product for your needs will empower you to secure the best deal.
When you have a clear idea of your borrowing capacity and payment plan, you can then start to identify potential investments.
4. Pick your next purchase in line with your goals. As well as the mortgage, you need to consider the additional expenses involved with holding a property as this may affect the type of properties you can afford. Additional expenses can include agent’s fees, if you expect to have the property professionally managed, maintenance, strata and insurance. A new build typically ensures minimum maintenance, while a well planned reno could deliver instant equity on an older home. Think about whether a property that requires minimal managing would suit you best or if you’re prepared to put the time and effort into a reno project.
5. Identify where to invest. This is the most challenging part. Everyone will have different opinions on where the next boom area is. My recommendation is don’t follow the masses! Do the research and find your own hotspot. The key is to pinpoint areas where demand is on the verge of outstripping supply. Don’t spend too much time analysing where the median house price is going up as this can be very deceiving. How to conduct your research is explained in more detail in one of my previous blogs here.
6. Create your shortlist of properties and run the numbers. Once you’ve identified promising areas, look at what properties are available that fit your profile and create a shortlist. You’ll then need to calculate the economics of each property weighing up the holding costs versus the rental income and projected growth. There are some excellent spreadsheet templates to be found on the web that will help you calculate and compare the costs and returns quite easily.
7. Determine how much you want to pay. The only real way to get an accurate notion of the market value of a property is to look at what other similar houses in the area have recently sold for.
Then it’s time to brush up on your negotiation skills and contact the agent!
Repeat this process for each property you buy and try to diversify the markets you’re investing in to reduce risk. And remember, professional advisors are there to support you every step of the way if you need them.
With each property the process will become easier, your knowledge more extensive and you will be one step closer to achieving your goals!