Finding a property investment hotspot: 5 top tips

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Everyone wants to know where the next big thing in the property investment world will be in terms of capital growth, but how can you go about being a step ahead of the pack and getting into that next hotspot before it becomes common knowledge. Read on for five top hotspotting tips.

Step 1: Population growth

Identify areas whose population is growing faster than the national average rate. The Australian Bureau of Statistics (ABS) website is an excellent, and free, tool that you can turn to for population statistics. ABS figures for the 12 months to December 2010, for example, reveal a nationwide annual population growth rate of 1.5%, so you’ll want your target suburb to be outperforming this benchmark.

“What’s happening when a population is growing faster than the national average is that there’s something about that area that is attracting people there over and above just the normal process of us just living somewhere and having babies,” says Destiny Financial Solutions founder Margaret Lomas.

But you can’t just look at population growth in isolation. An area’s population may have swelled for short-term reasons, such as a need for workers to complete a local infrastructure project, which – while it might boost the rental market for a couple of years – won’t provide sustained capital growth.

Step 2: Household income

While you may be targeting affordable areas to get into the market, you’ll naturally be hoping that your investment grows in value once you’ve staked your claim in the area. Given that supply and demand for property from the local residents is the major driver of capital growth in an area, it’s worth taking a look at the suburb’s median household incomes – and whether they’re growing faster than inflation. With CPI rising by 3.3% in the 12 months to March 2010 according to ABS stats, you’ll be looking for an area whose household incomes are growing faster than this rate.

“What that’s telling us is that the population that lives there is becoming more affluent. We need people to do that, because as they become more affluent they trade up in their housing. And when they trade up, then housing turns over and there’s pressure on prices,” says Lomas.

Step 3: New business

As mentioned, a short-term project can bring in a short-term population boost, but what you should be looking for is evidence of sustainable employment growth.

“We need to see whether or not new industry and new businesses are opening in town – not closing,” says Lomas. “Are we seeing industry thriving? Are bigger industries coming to town and opening major call centres and warehouses? And is it diverse industry that’s coming to town, not just all the one industry that’s coming to town?”

Step 4: Vacancy rates

The influx of new residents that all this new industry brings will initially put pressure on the rental market, so keeping an eye on vacancy rates is also vital.

“In the first two years they rent, and so you get a real pressure on rents. But after that they decide to settle and start to buy,” says Lomas.

It’s important therefore to find out if vacancy rates are on a downward trend, but also why. It might be that the rental market is being squeezed for short-term reasons, such as road workers coming to town to build a new freeway, rather than due to long-term employment opportunities.

Ask if they’re on a downward trend because suddenly there has been a short-term influx of people to work on the new infrastructure project nearby, for example. Or are they on a downward trend because there is a long-term trend of new industry coming into town, which in turn is attracting long-term residents.

Step 5: Speak to the council

It’s no good finding an area that ticks all the right boxes for sustainable population growth if the local council isn’t going to make provisions to encourage these new residents to stay. Therefore it’s well worth picking up the phone and quizzing the local lawmakers on how they intend to support the area’s new residents and encourage them to stick around.

“A growing population becoming more affluent needs to be supported with the right kind of services and the right kind of commitment to infrastructure from the council. If they’re not going to build the schools that cater for the growing population, if they’re not going to make the roads better and they’re not going to build the shopping centres, then that population will not stay,” says Lomas.

Look at council economic briefs and publications that indicate major projects are in the pipeline, and that the council is seriously preparing to support a growing population.

Visit the where to buy section of our property investment forum for more discussion of the latest property investment hotspots.

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