Investing In Mining Towns?
Investing in mining towns isn’t for everyone because you need to be prepared to accept a certain level of risk and to take steps to actively manage those risks…
There’s no question a great return can potentially be made buying property in a mining town, everyone wants a piece of the action. You’ve got to jump out of the way to avoid the stampede of investors racing to these one-horse towns for their piece of investing gold.
Investing in mining towns, no form of investing is without risk. The name of the game is managing risks and risk mitigation because if you’re looking for an absolutely safe investment strategy, where there’s no risk of anything going wrong, you wouldn’t be investing in property at all.
Investing in mining towns present the ultimate risk-return conundrum for property investors. Its so hard for property investors to resist because of the highest capital growth rates in Australia with highest rental returns.
Mining towns are the riskiest options for property investors. Why? Because some mining towns are basically single industry economies and sometimes single employers which are vulnerable to downturns in the lone industry.
Investing in mining towns, there’s a misplaced confidence which comes from a bank valuation. Especially when the bank agrees to lend you money. It’s almost like saying its a tick of approval for your decision. Of course, banks know what they’re doing, right?
Please allow me to explain…
Investing in a town based solely on only one industry carries a risk which is greater than actually buying property in an area where industry is diversified. Where an entire area extracts its income and employment from one industry or related industries (for example retail and hospitality), a closure of one industry can quickly have devastating effects on property owners.
An investor may go quickly from having a property with a high value and exceptional rental returns to one with no tenant and no buyers. Done right, investing in mining towns from a property investment perspective can be lucrative and may fit with an investor’s financial goals…
Here are the top 10 rules for investing in mining towns:
Choose a town with multiple resource companies and varied industries, in order to reduce reliance on the demand for a single commodity.
Find areas with scarce land and/or high building costs, keeping vacancies low and rents high…
Secure a long term lease (e.g. 3+ years) directly with an established large company or government institution in the town, rather than renting property to transient contract workers. Why?
Because you want to minimise the risk of vacancy and position yourself in a much better or somewhat stronger position from variations in the industry.
Choose a house with land rather than a unit as this avoids body corporate costs and opens up future redevelopment potential, which may mean property outperforms on capital growth over time.
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 rent to assess actual cash flow (positive or negative) the property generates…
Buy for short-medium term, not for the long term. While there may still be a significant lift or run in current mining boom, eventually house prices and rents in mining towns can fall back…either due to increasing housing supply or falling demand for resources.
Never buy site unseen because you don’t know what you are getting into, right? The only time you might consider breaking this rule is if you already have a strong relationship with someone credible, which can be trusted on the ground, and if you first get full detailed reports on the property.
Investing in mining towns provides a false sense of security around property buying and removes any common sense many investors might otherwise use when choosing an appropriate investment that sits nicely within their risk profile.
Investing In Mining Towns