An enticing prospect – but how do you improve your chances of good capital growth while minimising the associated risks? Richard Sheppard reports.
With such a strong economy surrounding the resource sector, it’s very tempting to consider investing in a town that seems likely to benefit from the associated economics. But is the risk worth the returns and what should you look out for in order to increase the upside and reduce the risk?
The current economic upside associated with the mining sector is undeniable and this is clearly the strongest performing sector of the economy. There is little doubt that the associated investment will have strong upwards pressure on property in many mining regions that are blessed with resource wealth for many years to come. There is some doubt, however, as to how long it will last and what will happen when the resource boom slows or busts. It’s wise to seek professional advice and to understand how to incorporate this type of property investment into your overall investment strategy. To help bring some perspective to property investment in some of these regions were reported yields in excess of 10 per cent can be achieved, it is worth considering a few key issues to help avoid getting overly enthusiastic about the returns.
In some towns, there are fairly basic four-bedroom homes selling for around $600,000 and renting for approximately $1150 per week, which represents a 10 per cent yield. With interest rates currently as low as six per cent for three-year fixed rate loans, clearly, these properties will be very positive in cash flow for now, even if you borrow all the deposit and costs against other equity you have. Allowing for all costs such as interest, agent fees, maintenance, the net income before tax per week is about $240 (or $12,500 per annum).
This sounds quite enticing, though when you consider what the property could be worth in 10 years time if the resources sector takes a strong decline, it is not as appealing as first thought and this is a big part of the risk. Say, for instance, the property decreased in value to closer to what it may be worth without much of the mining investment. It could actually be worth less than $400,000.That represents a decline in value of $200,000 or more. If you used the positive cash flow for the 10 years to pay the loan, it would be paid down by about $130,000, leaving you with around $500,000 of debt and potentially $100,000 of negative equity. Therefore, clearly, an investment like this is still quite dependant on reasonable long term capital growth, unless you get in and out fairly quickly with at least some form of speculation.
How can you give yourself the best chance of long-term gains and how should you incorporate such an investment into your overall strategy to take the best advantage of the upside while minimising the risks? For long-term capital gains, the two main factors to look for are long-term operation of the majority of the mines in the area, and other economic drivers such as different industries or attributes that will support sound demand for the area for the long term.
Serious consideration of a number of issues that are very different to capital city investment are necessary in order to build a strategy that supports such an investment. These growth and strategy issues generally require a higher level of research and expertise than most of us have ready access to, so it is well worth spending quite a bit of time doing some significant research and/or seeking professional advice. For a free initial consultation and report on Australia’s mining towns, please contact the office.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.