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.
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