The tenant in my mining town investment has done a runner! Ask Margaret

Hi Margaret,

I bought a unit in Emerald, Queensland and the tenants have done a runner.

Vacancy rates are now high, with minimal chance of getting someone to lease out our two bed unit.

Do you know of any mining or corporate contacts to help, the real estate agents are at a losss and have run out of ideas.

Do you know when some of the anticipated nine mines might start construction stage?

Regards,

Peter

Margaret's answer on the next page. Please click below.

Hi Peter,

The biggest issue when buying property in a mining town is, and has always been, getting the timing right.

When you invest in property anywhere, property price growth is always driven by a range of factors:

• Demand
• Availability of land
• Growing population
• Provision of the services to support that growing population so that people don’t move away
• Suitable infrastructure planning and provision
• The existence of diverse employment to ensure that, if any one industry suffers, residents can easily retrain and transfer to another without having to leave town.

All of these factors rely on one another to create the right kind of economic underlay.  Where any one of the above factors is absent,  it becomes like the missing link which then upsets the entire chain and makes it weak.

Where mining towns are concerned, virtually every one of the factors which drive growth are constantly at risk of being impacted in some way.  For example:

• Mining towns with fly in, fly out workers tend to have weak underlying economies as the money earned by workers flies out with them – hence they usually have little in the way of significant infrastructure projects
• The populations of mining towns tend to be extremely itinerant and this includes those not working in mining jobs – most other jobs, such as those in retail and hospitality, still require mining to be in existence. An itinerant population usually means rentals are good when the main industry is good and not so good when it isn’t. It also means there is big demand from renters but little demand from buyers.
• Investor sentiment becomes the biggest driver in a mining town as investors rush in to take advantage of rising prices when mining is lucrative, and rush out when it has a downward trend.  In fact, investor sentiment is probably the most significant driver in any mining town and so it has a far bigger impact than it would on an area where other drivers are in abundance.

This all means that timing becomes critical. 

Either you invest in a mining town knowing that it is likely to be very good and very bad, in cycles, and you are prepared to hold through those cycles, or you invest there in an attempt to time the market – you buy in before it takes off, then you sell just prior to the peak to someone else who has been watching the growth and has decided, too late, to buy. 

The former strategy requires you to be able to support negative cash flow when rents are low, which you can probably do by stockpiling that positive cash flow when it’s high. The latter requires you to have either insider knowledge of which projects are coming up and when, or psychic abilities to be able to read the future.

As I possess neither, and I have no industry contacts who can say when those projects will come on line. All I can do is provide some strategies for managing the situation you are now in and a warning for future investments. 

For now:

1. Work out how low you can go in your rent to keep you in the market – how much negative cash flow can you support for now?  Then drop the rent to this level as soon as you can and hopefully attract a tenant from that dwindling pool.  Get an accountant help you to assess the deductions and take those into account. As with an income tax withholding variation, you can claim those deductions weekly and they may help your cash flows.
2. Seek out some alternative avenues for advertising – possibly find out where the majority of workers come from and look at advertising to them in publications they might read and,
3. Start offering incentives such as rent free periods, or 12 months for the price of 10 etc.  Incentives work, and although they may cost you a little, a small amount of lost rent is better than no rent.

As for the warning, no property investor, except for those with money to lose, should ever buy in a mining town. 

I am not suggesting for one moment that you cannot make money from a mining town as I know you can. 

I am suggesting though, that the risk is significantly higher than investing in an area which possesses all of the drivers. While a mining town has the capacity to make a lot of money for you, it has an equal capacity to lose a lot too. 

This experience is a perfect example of how it is not where the property is that should be your number one consideration, it is matching a property to your personal circumstances that matters most. 

Once you have a sound portfolio of properties which are performing pretty well and receiving a sound return, then it may be time to start looking at these higher risk ventures.