A boom town is traditionally a low demand area that has been revived by a major industry. Examples of this are a regional town that has had a new mining operation started up which creates a whole lot of new job opportunities.
Other types of industries that can dramatically affect the demand of property in the area are Tourism, Government Departments, Military Bases or even Technology companies (think Silicon Valley). It’s also possible that a town starts to become more popular due to new infrastructure (such as a train line or highway) that makes accessing it quicker and easier; however this factor by itself rarely creates the start of a boom.
The main thing to realise is that people follow jobs, so if a lot of jobs are created in an area, a population increase is needed to fulfil those positions.
One example of a boom town is Las Vegas, Nevada. In the 1930’s, Las Vegas legalised gambling and on top of this, the construction of the massive Hoover Dam on the Colorado River began.
When a quiet town starts demanding a larger population to fulfil jobs, the demand on the property market also increases. Since the building of new dwellings takes time and resources, the demand for property usually becomes much stronger than the available supply.
Depending on the nature of the industry, the demand may be focused more in rental properties (where the incoming population are not intending to be permanent residents) rather than owner/occupiers. If this happens, the price of property may increase a little, but more likely the rental value of the properties will surge.
This gives investors the opportunity to buy high yielding investment properties that are positive cash-flow. For example, a boom town might have rental yields of 8% to 10% where as a densely populated city not far away may only be achieving 4% to 5%.
The Down Side
The main problem with boom towns lies in how many industries are supporting the population. If the town has one major mining operation and then that mine shuts down, it can ruin the town (which can lead to what’s known as a “Ghost Town”).
During its peak, property may have been going up and getting great rental yields but then all of a sudden the demand drops and you may not even be able to sell for a profit or rent it out.
This is the risk.
If we take our Las Vegas example, even though it has been a growth town for most of the 2nd half of the 20th century, when tourism took a big hit during the Global Financial Crisis (GFC) it had a major impact on the population and property prices.
Unemployment shot up and property prices dropped as much as 40-50%. Foreclosures rose and so did the rate of homelessness. Although similar problems were occurring throughout other areas of the United States at the time, Las Vegas was hit particularly hard because it relied so heavily on one particular industry.
The good news is that Las Vegas should recover for the most part, given time, because it is still unique in the fact that it’s one of the few states with legalised casinos in America.
The lesson here is that investing in boom towns can be very profitable in the short term, if you’re timing is right, but if it is a one or two industry town the risks are very high. You may be fine and the town in question may continue to grow other industries, and become a modern city one day, but that is speculation.
The final word is that investing in boom towns is akin to speculating with small-cap stocks on the share market. With higher risk, comes potentially higher short term reward, but also the possibility of losing a lot of money. Choose your investments wisely.