The top 10 Success Rules for investing in Mining Towns

Here’s a great email from Simon @ Results  Mentoring:

Welcome to The Sophisticated Property Investor, our controversial eNewsletter for smart property investors. In this edition, we’ll take a look at the potential and the perils of investing in mining towns, and reveal our Top 10 Success Secrets for Mining Town Investments!

It’s a big topic with a lot to cover, so grab a cup of your favourite brew, sit back, and let’s get started…

What’s The Big Deal With Mining Towns?

Property magazines are full of articles about mining boom towns at the moment, often profiling young investors who’ve bought property in the towns and made big gains through high capital growth and positive cash flow.

The severe accommodation shortage in many mining towns has led to soaring rents, in turn giving rise to positive cash flow opportunities. The promise of very high rental returns has attracted many investors, leading to upward pressure on property prices.

Websites and property expos are now teeming with companies offering opportunities to purchase ‘off-the-plan’ units offering high rental yields in mining towns – often in excess of 10 per cent!

With this kind of publicity and the potential returns on offer, it’s easy to see the appeal – especially when these returns are compared to the flat prices and average 4-5 percent rental yields in metropolitan centres around Australia.

And aren’t we a resources-driven economy? So shouldn’t it make sense to ‘go where the money is’ and invest in the towns that are the engine room of the mining boom?

There’s no doubt that high returns are possible. In fact several of our Results Mentoring students have recently acquired properties in mining towns that deliver 5-figure positive cash flows even after all holding costs (including loan interest) are deducted. And indeed rising property values in many mining towns have outstripped growth in capital city prices in the last 2 years.

It’s easy to be blinded by promises of high returns, but (as with any investment) before deciding to buy anything it’s important to analyse the risks.

Safe As Houses?

There are several categories of risk which need to be taken into account when considering a property investment in a mining town, including:

  • Risk of Government Intervention
  • Reliance On Demand For Resources
  • High Holding Costs and Property Management Issues
  • ‘Achievable’ Rent Versus ‘Promised’ Rent
  • Housing Supply Risks
  • Rental Market Manipulation

Let’s look at each risk are in turn…

Risk of Government Intervention

Anyone who was investing in mining towns in 2010 probably gets a knot in their stomach thinking about what happened when the Federal Government first proposed a ‘Super Profits Tax’ on mining companies.

Concerns and uncertainty about the proposed Super Profits Tax had a significant impact on many mining towns, leading to several large projects being put on hold. With less work, less people needed to travel to the towns, resulting in higher vacancy levels and downward pressure on rents in affected areas.

Uncertainty is poison for investment, and so fears about the impact of the proposed tax on mining companies meant fewer investors were willing to buy properties in the towns, temporarily undermining property values as well.

An announcement about a new tax might be a rare event, but there are other factors that can affect mining companies and property values in the towns within which they operate…

Reliance On Demand For Resources

An obvious risk with many mining towns is the reliance on the fortunes of a single sector of industry. As was seen at the onset of the Global Financial Crisis, and the resulting recession in most developed countries around the world, a fall in global commodity prices (the prices of resources like gold, iron ore, coal etc) can have a drastic impact on the mining industry.

Fortunately for Australian mining towns, demand for Australian resources actually remained high during the GFC, largely due to orders from China and India, which helped to sustain commodity prices once the initial panic had passed.

International demand for Australian resources continues to be strong and largely underpins the Australian economy. The projected investment in mining projects and related infrastructure over the next few years is massive – running into hundreds of billions of dollars!

But lately there has been talk about a potential fall in demand for Australian resources due to slow down in China’s growth. China’s position as Australia’s largest trading partner for resources means that if demand from China does fall significantly (and is not offset by demand from other developing nations such as India), then a fall in Australian commodity prices may result.

A substantial fall in commodity prices may lead a mining company to make cutbacks or even close a mine. Closure of a mine will mean significant loss of jobs in the area, which in turn can have a catastrophic effect on rental demand and on property values.

The history of some mining towns around the country bears evidence to what happens to the local property market when a mine shuts down. Some never recover, becoming abandoned ‘ghost towns’.

And ‘getting in early’ when a new mine has just begun production, isn’t necessarily any protection… In 2009 BHP closed a $2bn mine at Ravensthorpe in WA just months after completing construction, at a cost of 1800 jobs, crippling local towns.

Mining companies are first and foremost driven by a profit objective. If it becomes commercially unprofitable to run a mine due to falling global commodity prices, then the mining company won’t hesitate to scale back or shut down the facility.

While you can’t control international commodity prices, or the commercial decisions of mining companies, some of the risk of vacancy or variability in rents over time can be mitigated by the kind of lease you seek for a mining town investment property.

For example, rather than renting to transient contract mine workers (and suffering the risk of vacancies or volatility in rents), could you negotiate a long-term (say 3 year) corporate lease with the mining company itself? With a lock-in corporate lease, the mining company must keep paying over the term regardless of whether the property is occupied or vacant.

It’s also important to keep a very close eye on the performance of global commodity markets for the particular resources mined in the area, and be ready to move swiftly should adverse trends materialise.

High Holding Costs and Property Management Issues

Other issues in mining towns may include a lack of available tradespeople to carry out maintenance on properties in the area, or a lack of property managers.

Many investors are surprised by the often higher outgoings for mining town properties, such as higher insurance premiums, fire protection levies, water rates, property management fees, unusually high body corporate fees on units, etc.

Any of these issues may increase the costs of holding the property to the point where what seemed at first to be a positive cash flow ‘goldmine’ becomes a negative cash flow ‘money pit’!

Before buying a property in a mining town or isolated area, make sure you carry out thorough due diligence on the deal. This includes determining the current demand for rental accommodation, expected longevity of the local mines, availability of tradespeople and property managers, and verifying all outgoings associated with the property.

‘Achievable’ Rent Versus ‘Promised’ Rent

In the last couple of years a number of property development companies have emerged in mining towns, offering ‘off-the-plan’ units with promises of rental yields over 10 per cent.

BEWARE! Your due diligence on such a deal should include confirming whether the promised rental yield is actually guaranteed, and – even more importantly – whether the rental yield is sustainable.

Many an investor has come unstuck where they’ve paid a premium and bought into the promise of high rental returns, even a rental guarantee for 6 or 12 months, only to find that the reality is very different once the guarantee period comes to an end.

Some unscrupulous developers will simply build the rental guarantee into the price of the property, i.e. inflate the price of the property by the amount they’ll have to fork out for an artificially high rent during the guarantee period.

When the guarantee period ends, the property deal that looked great on the numbers at the beginning suddenly has to take a significant ‘haircut’ on rent in order to keep it tenanted!

Worse, having paid too much, the investor might discover that the realistic market value of the property is actually less than the bank loan, putting the property into a negative equity position.

If considering an off-the-plan purchase, ALWAYS validate the price against other comparable COMPLETED units in the area, to make sure you’re not paying an artificial premium.

And if there’s a promised rental return, don’t rely on a ‘rental guarantee’ that might not be sustainable. Insist on including a condition in your purchase contract that the whole purchase is subject to a real tenant being put into the property on a fixed-term lease prior to settlement, with both the tenant and the terms of the lease having to be “to the purchaser’s satisfaction in all respects”.

Housing Supply Risks

Prices and rents in mining towns are driven up when there’s a shortage of available housing compared with the demand for housing in the town.

Rents (and property values) will stabilise and possibly fall if new rental accommodation is made available at a faster rate than the rate of population increase in the town, leading to an over-supply.

What could cause a significant increase in the housing supply in a mining towns? An obvious possibility is the development of a new housing estate, or a large scale development of units/apartments.

Some mining companies are even building their own houses – either for the purpose of accommodating their own staff, or as a required contribution to community housing needs. For example, as a condition of approving the $4 billion Caval Ridge Mine near Moranbah the Queensland State Government required the BHP/Mitsubishi Alliance (BMA) to build 400 new homes, with 160 of these due to be provided in Moranbah by June 30, 2013.

But the dynamics of mining towns give rise to another, less obvious way in which the supply of rental housing may rise all of a sudden

Remember that not all housing in these towns is already owned by investors – a reasonable proportion is currently owner-occupied. An influx of investors paying premium prices can result in home owners ‘cashing-in’ by selling their property to an out-of-town investor, and then leaving town – suddenly increasing the supply of vacant properties for rent.

Moranbah, for instance, became a ‘flavour of the month’ among mining town investors in late 2011. The supply of vacant houses for rent rose in a short space of time, at least in part due to the transfer of a large number of houses from home owners over to investors (with the former home owners then leaving town rather than staying back and renting). Supply ran ahead of rental demand in Moranbah, and there may be a lag before the available supply is soaked up.

Rental Market Manipulation

With the rate at which rents have risen in many mining towns over the last couple of years, it’s hardly surprising to see some of the bigger miners looking for ways to contain the substantial accommodation costs involved in housing workers in these towns.

In some instances it can actually be cheaper for a mining company to fly personnel in at the beginning of a day, and fly them out at the end of the day, than it is to rent properties in the town. Constructing temporary accommodation ‘villages’ can also be more cost-effective for a mining company than leasing established houses.

Either option helps reduce the demand for rental accommodation in the town, taking away some of the pressure on rents.

We can see these approaches reflected in moves by BMA in 2011 where pressure was put on the Queensland State Government to allow a 100% Fly-In/Fly Out (FIFO) arrangement for the huge Caval Ridge Project, and to approve a 2500 bed accommodation village to service many of the FIFO workers.

The Top 10 Success Secrets For Investing In Mining Towns!

Investing in mining towns isn’t for everyone. You need to be prepared to accept a certain level of risk, and to take steps to actively manage the risks.

However, no form of investing is without risk. If you’re looking for an absolutely safe investment, where there’s no risk of something going wrong, then you shouldn’t be investing in property at all!

Done right though, a mining town investment can be lucrative and may well fit in with an investor’s financial goals.

Here are our Top 10 Rules for investing in mining towns:

  1. Choose a town with multiple resource companies and varied industries, in order to reduce reliance on the demand for a single commodity.
  2. Seek areas with scarce land and/or high building costs, keeping vacancies low and rents high.
  3. Secure a long term lease (e.g. 3+ years) directly with an established large company or government institution in the town, rather than renting the property to transient contract workers, to minimise the risk of vacancy and ‘insulate’ yourself somewhat from variations in the industry.
  4. Choose a house with land, rather than a unit. This avoids body corporate costs and opens up future redevelopment potential, which may mean the property outperforms on growth over time.
  5. Buy on net returns, not gross rental yield. Take the time to research and confirm all anticipated ongoing costs involved in holding the property, and deduct these from the rent to assess the actual cash flow (positive or negative) that the property will generate.
  6. Buy for the short-medium term, not for the long term. While there may still be a significant run left yet in the current mining boom, eventually the house prices and rents in the mining towns will fall back – either due to increasing housing supply or falling demand for resources.
  7. Never buy ‘site unseen’. Know what you are getting into! The only time we might consider breaking our own rule here is if we have a relationship with someone else who can be our trusted eyes on the ground, and if we first obtain full detailed reports on the property from both a building inspector and a local property manager.(As an aside… Property managers can be a very useful source of insights into the nature of the street and the local neighborhood. Most property managers don’t want to take on a house that will be a hassle in terms of delinquent tenants or local criminal elements, and are in our experience likely to be quite up-front in voicing their opinions if they think it will be a problem property!)
  8. Avoid putting all your eggs in one basket. Consider diversifying across different mining towns or different types of location and property altogether. If a particular town or commodity is adversely affected, you don’t want this to bring down your entire portfolio.
  9. Don’t over-extend yourself. Prices, and therefore bank loans, can be quite high in many mining areas. Know whether you can sustain the holding costs on a property if you have to carry it vacant for a time. Always have a ‘safety net’!
  10. Don’t get fooled into thinking that a mining town property will be a ‘passive’ investment. Invest time in ongoing research, monitoring, and ideally spending a fair bit of time in the area yourself (to keep tabs on sentiment, local developments, etc). This investment of time may be critical to the overall success of the investment.

Follow these rules, and you’re much more likely to see a successful, profitable outcome on your mining town investments!

Until next time…

Invest Wisely!

– Simon Buckingham

Hit and miss hotspots: Box Hill flames out while Highgate, Karratha, Newman and other WA mining locations are on fire

By Larry Schlesinger
Tuesday, 23 April 2013

Investors who purchased a house in the east Melbourne suburb of Box Hill based on its inclusion in last year’s Hot 100 list published by Australian Property Investor (API) magazine are unlikely to be a happy bunch.

As API published its flagship 2013 Hot 100 list this month, Property Observer analysed the performance of all 100 suburbs that made it on to last year’s list.

We found that Box Hill was the poorest performing detached housing market on last year’s list, which included suburbs that were expected to show growth over the following 12 months and beyond.

But rather than rise as expected, Box Hill’s median house price has fallen 19% between publication of the 2012 and 2013 Hot 100 reports. And it fails to make a re-appearance on the latest list of hotspots.

Of the 90 hot spot suburbs from 2012 where comparison were possible, 25 locations recorded declined of 1% or more over the year, 19 locations treaded water, 34 recorded gains of between 1% and 10% in their median house prices and 12 managed gains of more than 10%.

According to Australian Property Monitors (APM) data published by API Magazine, Box Hill recorded a median house price of $545,000 based on sales of 111 houses over the 12 months to January 2013.

This compares with a median price of $748,000 recorded from 101 sales for the 12 months to December 2011.

Box Hill was picked last year because of its good local council,  good location – just 13 kilometres east of the Melbourne CBD – and because of its status as one of Melbourne’s biggest transport interchanges “expected to accommodate a significant increase in housing around the core retail district”.

The suburb is the site of the $447 million Box Hill hospital redevelopment while the Cromwell Property Group recently raised $66 million from investors for a new 20-storey ATO building.

While investing in property is clearly a long-term play – a point highlighted by API Magazine – and Box Hill prices may yet rise as these major projects are completed, investors who bought in the suburb will be dismayed to learn that Box Hill is not among the 29 suburbs that have scored consecutive mentions in both 2012 and 2013 Hot 100 lists prepared by API Magazine.

Three other Melbourne suburbs, picked as hotspots last year by API, recorded near 10% annual declines in median values, with Broadmeadows house prices falling 10%, Sunshine prices down 9.4% and Northcote prices down 8.1%.

At the other end of the spectrum, the inner Perth suburb of Highgate, just 1.7 kilometres from the CBD, has been a hotspot standout, with house median prices up 43% over the same period.

For the 12 months to January 31 2013, APM records a Highgate median house price of $609,000 from 40 sales compared with a median house price of $497,000 for the 12 months to December 2011.

Highgate was included on the Hot 100 list based on good local council involvement in creating “mixed-use hubs” in surrounding areas, great accessibility to the city centre via road and train and good amenities and services in neighbouring suburbs like Mount Lawley and East Perth.

In addition, and as indicated by the small number of sales recorded, Highgate is a tightly-held suburb with “aesthetic appeal”

Surprisingly and despite the strong showing, Highgate is not listed as a hot spot in this year’s list, though a number of other eastern Perth suburbs are, including Dianella (6 kilometres north east of Perth), Carlisle ( 6 kilometres south east of Perth), Bayswater (6.6 kilometres north east of Perth) and Belmont (6.5 kilometres east of Perth.)

WA locations dominated the best performing locations from the 2012 list with Highgate followed by the Pilbara mining hotspots of Karratha (up 36.4%), Newman (up 25.5%) and Onslow (22.6%).

Just 29 suburbs have made it onto the hotlist for the second year in a row demonstrating the fleeting nature of so-called “hotspots”

The report highlights the challenges in picking property investment hotspots and the importance of doing your own research.

Indeed, API Magazine, in its guide to this year’s list says readers should not buy a property in a location “just because it’s in the Hot 100”.

However, it does say that suburbs have been picked for their “growth prospects over the next 12 months as well as the longer term”.

“This list isn’t your due diligence. You must do your own detailed homework into any area you’re going to invest in, as well as the property type,” says API.

 

Suburb Houses (12 month change)
Box Hill, VIC -19%
Port Adelaide, SA -14.80%
Broadmeadows, VIC -10%
Sunshine, VIC -9.40%
Townsville, QLD -8.30%
Northcote, VIC -8.10%
South Brisbane, QLD -8.10%
Ascot Vale, VIC -7.90%
Mandurah, WA -6.90%
Oakey, QLD -6.90%
Carindale, QLD -6.70%
Frankston, VIC -5.70%
Smithton, TAS -5.30%
Dickson, ACT -4.80%
Keperra, QLD -4.00%
Magill, SA -3.70%
Warrane, TAS -3.60%
Eden Hill, WA -3.20%
Werribee, VIC -3.20%
Stafford, QLD -2.20%
Dandenong, VIC -2.10%
Warrnambool, VIC -1.90%
Coorparoo, QLD -1.60%
Ningi, QLD -1.50%
Woodville West, SA -1.50%
Maitland, NSW -0.90%
Southport, QLD -0.90%
Ceduna, SA -0.80%
Indooroopilly, QLD -0.80%
Camperdown, NSW -0.70%
Sherwood, QLD -0.60%
Armadale, WA -0.40%
Coburg, VIC -0.20%
Moorooka, QLD 0%
Parap, NT 0%
Port Lincoln, SA 0.20%
Turner, ACT 0.20%
Ballarat, VIC 0.30%
Mentone, VIC 0.40%
Bunbury, WA 0.50%
West Footscray, VIC 0.50%
Fremantle, WA 0.60%
Granville, NSW 0.90%
Ringwood, VIC 0.90%
Footscray, VIC 1.00%
Chermside, QLD 1.10%
Como, WA 1.10%
Marrickville, NSW 1.30%
Westminster, WA 1.30%
Yeerongpilly, QLD 1.50%
Toowoomba, QLD 2.00%
Edgewater, WA 2.30%
Thornbury, VIC 2.30%
Enmore, NSW 2.50%
Erskineville, NSW 2.60%
Blacktown, NSW 2.70%
Perth CBD, WA 3.00%
Orange, NSW 3.30%
Heathridge, WA 3.50%
Maroubra, NSW 3.80%
Murarrie, QLD 3.90%
Kellyville, NSW 4.00%
Underwood, QLD 4.30%
Hackham, SA 4.40%
Joondalup, WA 4.50%
Willetton, WA 5.10%
Osbourne Park, WA 5.40%
Dunsborough,WA 5.60%
Hamilton Hill, WA 5.70%
Yangebup, WA 5.80%
Cloverdale, WA 6.10%
Belmont, WA 7.40%
Midland, WA 7.70%
Roxby Downs, SA 8.30%
Bendigo, VIC 8.70%
Whyalla, SA 8.70%
Mackay, QLD 9.40%
Carlton North, VIC 9.60%
Summer Hill, NSW 10.90%
Neutral Bay, NSW 12.50%
Port Hedland, WA 13.20%
Roma, QLD 14.20%
Moranbah, QLD 14.50%
Norwood, SA 14.50%
Nundah, QLD 16.30%
Broome, WA 16.70%
Onslow, WA 22.60%
Newman, WA 25.50%
Karratha, WA 36.40%
Highgate, WA 43.00%
Source: API Magazine

http://www.propertyobserver.com.au/hotspots/hit-and-miss-hotspots-box-hill-flames-out-while-highgate-karratha-newman-and-other-wa-mining-locations-are-on-fire/2013042260643

Concerns about unscrupulous property spruikers remain

The Property Investment Professionals of Australia welcomes the release of the Australian Securities and Investment Commission first SMSF taskforce findings.

PIPA applauds the regulator for its recognition of concerning property spruiking activities with regards to self-managed superannuation funds.

The report, which focused largely on the standard of advice provided to SMSF trustees, found that the majority of advice provided is ‘adequate’ but it noted pockets of ‘poor’ advice, particularly with regards to recommendations that investors set up an SMSF in order to invest in real property.

Moreover, ASIC noted its concern regarding a rise in aggressive advertisements pushing property investment through SMSFs.

ASIC commissioner Peter Kell said ASIC did not want to see SMSFs become the vehicle of choice for property spruikers.

“Where we see examples of unlicensed SMSF advice, or misleading marketing, we will be taking regulatory action,” he said.

Such news is welcomed strongly by PIPA, which has long held grave concerns about property spruikers, particularly those targeting SMSF investors.

As ASIC would be fully aware, reports of Australian investors suffering at the hands of unscrupulous marketeers are all too common and such cases have the potential to explode as interest in property investment via SMSFs continues to grow.

While PIPA welcomes ASIC’s heightened awareness of property spruiking, the association remains concerned about the provision of advice with regards to property investment within SMSFs.

ASIC’s investigation found that the majority of advice provided to SMSF trustees by financial planners and accountants is adequate.

While ASIC remains comfortable for such professionals to provide advice on property selection however, PIPA believes trustees not only require but deserve specialised property investment advice.

From PIPA’s perspective, financial planners and accountants lack understanding and formal education in relation to real property so we believe they have two choices when it comes to providing their clients with advice around SMSF property selection.

One, they can refer their client to someone who does have formal property investment advice accreditations – or they can undertake their own formal qualifications in order to deliver qualified property investment advice and a more all inclusive service.

PIPA will continue to lobby the Australian government to regulate the property investment industry – and this is top of our agenda.

But for the here and now, we are calling on financial services professionals to act in the best interests of the customer,and either up-skill in order to provide advice around property investment, or refer your client to someone who is appropriately accredited.

Ben Kingsley is chair of Property Investment Professionals of Australia.

Passive Income vs Cashflow – Don’t confuse the them!

Here’s a great post from Michael that clarifies the terms Passive Income vs Cashflow – they are not the same and are often confused from investors new and old.

—————–

Hello Guys,

We  often hear the terms ‘Passive Income’ and ‘Cashflow’ – sometimes they are interchanged.

Here is our view of each definition

PASSIVE INCOME

Is  that income received  that is not a direct result of trading your time( job) . All rent received is passive income. It has nothing to do with the performance of a property. Any income that is not passive is EARNED INCOME.

CASH FLOW

This is the cash received or paid due to owning an investment portfolio( could be one or more properties). It is the actual cash amount left after paying ALL expenses and interest associated with an investment property after receiving the rent.

If the expenses/interest exceed the gross rental income( rent received before deducting expenses) then the Cash Flow will be  NEGATIVE.

If the expenses/interest are less than the gross rental income( rent received before deducting expenses) then the Cash Flow will be  POSITIVE.

Regards

Michael & Sara

Ultimate Coaches

The road to excellence is always under construction.