Hi,
This is a general warning for investors with investment property in mining areas, including regional hubs.
In recent times there is little doubt that a bubble in commodity prices has caused miners to put on extra staff, which in turn has placed huge demand on a shortage of housing. The result has been a massive increase in the yield (return) on such rental properties, and a corresponding increase in price.
However, now that commodity prices have corrected, and that mines are being closed and staff let go (see recent reports about major job shedding by Rio and now BHP), it is reasonable to expect that the previous price explosion will gradually unravel in the months ahead, especially as leases come for renewal.
It's reasonable to expect that landlords will start to discount rents is there is a surplus of property over demand.
If you do have an investment property in a mining area (or regional hub to a mining town), I strongly suggest you re-evaluate your gearing and ability to survive on a lower rent until commodity prices recover (which may be many years).
There is a strong chance that if/as prices correct, lenders may revalue properties and ask for top-up contributions – particularly for commercial property.
Some rules to remember:
* It is better to have a lease with a reputable mining company rather than an individual employee. The employee may be retrenched for you to lose the income stream, but the company will need to go broke. Which is more likely?
* Be prepared to negotiate or compete at a lower rental to renew a lease or attract a new tenant. Work out the amount you can discount your rent and still be cashflow positive (or at least neutral).
* If lower rent or values would place you in a compromised financial position, consider selling to sure up your position (while you can and before the market is flooded with desperate sellers or foreclosures).
Happy to answer questions.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Yes Steve I agree,
I warned this in my posts over the last few months and had personal experience myself of rental properties in towns like Proserpine … when this market turns it will be ugly … we had talks with our overseas advisores today who predicted that there will be a market rally up until June then the mother of a global re correction …
Information is valuable … head the roar of the distant drums.
D
A great book that everyone should read is 'The Great Depression Ahead' by Harry S Dent.
It's a new release and is compelling reading.
The tea leaves of demographic analysis paint an interesting picture.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Just another angle Steve …
What is your advise to students on this site that have bought in such towns that will lose their tenants and won't be able to replace them at all … these properties could drop in value by 70% or more … and create negative equity.
D
Thanks for the heads up Steve,
Don't own any IP's in mining areas. Investigated last year and decided against it.
In fact I saw more safety in, say, Mackay, where although a daily commute was a chore it was achievable if looking at the mining market tenants. As a town with some critical mass, it has other positives going for it with permanent residents, tourism and the like.
I still didn't buy. Sitting on my hands at present and looking for opportunities. As W4L mentioned, the second half of the year will be most interesting and telling. My LVR's are very conservative and I own no stocks currently. Cash may not be king right now as far as return goes but it's safe from the volatility. I don't have an offset to park it in. I've also got two fixed loans coming off this year so hip hip hooray for that
I've invested thru the late eighties and early nineties and survived to tell the tale with recession, high unemployment and very high interest rates. I don't remember such rapidly falling rates however with rising rents (for now) and a reported housing shortage. Interesting times indeed…..
Will the stock market lead the other sectors out of this? What are people's thoughts?
The less dirt on the shovel the less labor… and the less labor, less jobs, less jobs, less houses, the less industry to supply alternative jobs to less laborers means less is not best in mining towns unless they are going quite well.
You should not heed warning unless you are crazy or have good local knowledge and in a different situation.
Roxby Downs to me (during my travels) seemed set to be 'a next broken hill' in term of it becoming a tourist attraction and also a thriving mining town. It was a switched on mining town and a happening thing as an oasis in a baron desert.
Will larger better established mining towns such as Geraldton, Mt Isa and places like Roxby Downs be better positioned to riding out the bumpy road directly ahead?
I watched a very good program on The Great Depression the other day on television and people are very VERY spoilt today if they think we are in for another great depression. It may be categorized as that by economists but it's no where near as bad in this stage of the industrialized revolution.
They had to live in tin scrap tin built shanty's along the beach and give each other food and clothing. Thems were back in the days when they were hunting rabbits to live and stuff.
It was an interesting learning program! Now i know why my dad used to tell me story's all the time about how he would go around the traps for rabbits and carry dozens of pair on his shoulders. Then he'd say he only got one ice cream a week for a treat.
Hi Steve,
Thanks for the heads up.
Any idea how far rents and prices could drop?
I've got one in Moranbah in the Bowen Basin. Rent is currently $1300 p/w. I could sustain $700 at current interest rates.
There's already lot's for sale on Realestate.com.au and has been for past few months. Very few houses made it as far as the website during Q1,2 and 3 last year.
Thanks,
Stuart
P.S Enjoyed the book by the way.
no offense Steve but once again you are closing the gate after the horse has bolted.
commodity prices have been falling for nearly a year. the only reason big mines are not closed is because they had a huge backlog of orders. demand has dropped by 80% and once these back orders are filled the fit will hit the shan.
why did you wait till now to post this?
Rio Tinto announced over a month ago that it was broke (well in big debt actually)
if people follow your advice, who are they supposed to sell to?
who told them to buy into mining towns?
if they cant sell, which they probably cant as there wont be buyers, will you still crow in 6 months?
liquidity in the real estate market has almost disappeared, selling now will be almost impossible, especially in the mining areas.
wealth4life.com wrote:I warned this in my posts over the last few monthswell done for calling this before the event. I believe there were others also….
Thanks Crashy,
Some people have seen my posts as negative in some areas and that is not my intentions, I have been through this before in the 90's and now the market is turning and people will need help.
The most common fault is in determining the difference between an ASSET and a LIABILITY … it's funny as I re read all the rich dad books over xmas and also the science of getting rich (which is free) by Wallace D. Wattles … back to the basics.
Opinions are like belly buttons every body has one … An old friend of mine Peter Spann only invested in high quality areas like Elizabeth Bay in Sydney or within 200 meters from a train station and second hand one bedroom apartments, long term good renters.
Yes you may get a good positive cash flow investment way out in the sticks but what happens to your financial position when the market changes … if it takes America 10 years to fix it's economy where does that leave Australia, your call folks.
The decisions you make will determine your financial destiny … lets see what will happen after June 2009.
BHP down 2000 jobs … ADR close 402 shops … Gerry Harvey is closing stores … you don't need to be a rocket scientest to understand whats happening here folks.
IMHO the best investments are: One bedroom appartments in high quality areas near trains, hospitols, education, shops etc … buying old shitters on FLAT blocks of land and building new houses like Clarendon homes, I am in a JV at 16 Mildred st Warrawee Sydney dead flat bus at the front door 5 minutes to train and shops 400k profit … just to name two … I believe at the end of the day it's about EQUITY or how much cash you accumulate.
D
Hi W4L,
I would be interested in hearing a little more about your Warrawee property. More so about the thinking behind building in the current market. Are you intending to sell the properties now (at depressed prices) or do you intend holding the market starts rising again? If you are holding, are your acquisition and building costs low enough that you will be able to hold the property(ies) cashflow positive or neutral at least?
My wife and I have a couple of old homes on good-sized blocks in the St Marys area (quite a different demographic to Warrawee I would suspect) and we are discussing when we should make the move to develop…….
Craig.
Margater Lomas has been warning for about 6 months on the sky business channel about investing in mining towns……
I don't think Steve owes anyone in this forum a responsibility to pass on his advice, so when he does so, whether it's early or late, I think we should all be thankful that he's doing it. We're not paying for his advice…
I for one appreciate him confirming that the mining ares are unstable at the moment, even if such opinions have been around for months.
Dave.
What it comes down to I think is research and if you are willing to invest so much of your hard earned without doing your own resaerch than you will potentially get yourself in trouble. Any free advice is a good thing.
Thanks all,
1. Dave this whole forum is based on advise which ever way you look at it.
2. Crashy totally correct and even up to 12 months ago when others were saying it would never happen … where are they now.
3. Craig re Warrawee … we put 350k cash into buy the property outright and this is our 9th and have it rented for 520.00 per week … it is now a 2.5 bedroom 2 bathroom oldie owned by an 84 year old one owner and the area is flooded with properties like this. If you do a google street view you can see the bus stop on the other side of the road … so first I ask what do people pay for on the North shore taking into account this is on the West side answer, 5 bde, study, granite kitchen, marble floors on the 3 bathrooms (very cheap) and fully white tiled walls ($22 sq/m) looks out of this world and cheap, media room with french doors, BBQ area, nice out side patio etc.
Next ring 5 agents and tell them you want to buy today (recession) what I have described above on a dead flat block of land that will cost us $1.2 million when completed … will we sell I don't know we will see what the market is doing then, we have been quoted by Knox real estate easy $1,800.00 rent … why in a recession because it's wholesale on the north shore and the numbers work … I can apply this strategy to any suburb as long as you follow the 21 buying cryteria that Philip Sigglekow writes about in his books in fact he is going to use this project as a youtube 10 video how to do it yourself for his next course, making money in your own suburb.
Craig there are bargins in every area, we are looking at old established areas in Campbelltown currently, walk to rail and shops are on top of the list, and old areas are the best to live in because they are quiet with no boof heads and rev heads therefor great for families.
Another sleeping area is West Pymble walk to shops, walk the streets and knock on doors thats what we do and it works … 5 of these over a 12 year period will make 2million dollars and have a bucket load of fun in the process.
I know St Marys it's a lovely area with lovely people, can you put a Champion Duplex or try Westminister Homes they both are very well priced in that area and we have built with them b4 …
Another cheap and very effective idea Philip teaches is to buy 1sq/m of second hand marble or granite ($30.00) = 10 tiles in a box and have this layed in the entrance of the front door (marble entrance)… first impressions count … second don't use corrian bench tops go for 20mm black granite it's cheaper and looks better, women love granite.
Go to your local book shop and ask for 201 startagies and techniques the rich use when buying real estate by Philip Sigglekow distributed by Dennis Jones and associates … one of 3 easy reading books.
Finally when is the right time IMHO at the bottom of a market or in a recession while every body else are crying poor and joining support groups or turning to network 21 "amway" as their last hope … haha
Danielle … I just love research. good luck Craig u can do it.
With all this mining gloom, does anyone have an opinion on the mine opening by the end of the month 20km outside Ouyen. Illuka have received the final approvals and began preparation to begin mining before end of Jan.
Personnally, I still think it is good buying.
Thanks,
JLmy issue with this thread is not so much what Steve said, but the subsequent replies from posters who said this was a "heads up"
a heads up is a warning which is made as early as possible, giving the person sufficient time to avoid the problem.
I would imagine Steve was busy selling this kind of property over the last few months and thats why he waited till now to post this.
just providing a balanced view……
"I would imagine Steve was busy selling this kind of property over the last few months and thats why he waited till now to post this."
That's a big call Crashy… Steve, I would be keen to read a response. Do you own property in mining towns? If you don't, did you? If so, when did you get out?
Cheers
K
I doubt mining companies will close and walk away from massive resources (that they can't take with them)
for very long. People don't seem to consider it is also an investment for the company, you can't easily liquidate the resources,
and buy something down the road.
; "Devil")
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