Mining Hotspots and Not Spots - Part 3
The towns of Port Hedland/South Hedland went to outperform the market and posted huge profits to those property investors who understood the socioeconomic factors driving the market. Much has changed since 2003, including a major global economic fallout and the Port Hedland/South Hedland market is bearable, but no longer sustainable, equitable, or viable.
I am personally not a fan of single market economies unless the entry-level price is very low. The new mining markets of this decade, the “new boom towns”, have high return and low entry points, but many of them are also not solely dependent on commodities and international commodity prices. The GFC proved that single market economies are not sustainable if there is a monumental economic shift and I have seen single mining markets shut down and vibrant communities turn to dust.
The 2012 investor needs to be diverse by thinking of both investing in cities and emerging mining towns. I often get asked by people about Moranbah or Port Hedland as to what I think of investing in these areas. I give them my response and they often do not like what they are hearing. As it is more common than not, an investor with about 12 months property experience is buying the real estate in these areas at the moment rather than market wise more experience investors.
Buying a property in Moranbah today could set you back $750,000…..which is easy to buy into given the returns. But is it easy to sell again?
I think the 2012 property investor could build a more diverse portfolio. I have attached two properties with a combined value of $450,000 – one that is positive cashflow and one that is meant for capital gains and I still have $300,000 of value to play with for another positive cashflow or high capital growth property.
High Returning Real Estate
For most investors, securing cash flow is a sensible means of providing serviceability to their property portfolio. Similar to running a business, a well-managed property portfolio needs cashflow. There are two types of cashflow: passive and non-passive. To put them in their simplest terms: passive cash flow is derived from simply owning a property where the rent is higher than expenses, while non-passive cash flow requires extra work to extract the return.
An example of a positive cashflow property – Located in mining area in NSW $120,000 renting for $230 per week. Note the rental return is much higher than the purchase price and your risk and exposure to the market is moderate given the price. An investor could buy six less expensive positive cashflow properties compared to one over priced property in the “Old Boom Towns”……. One just needs to know where to look!
High Growing Real Estate
Capital growth properties tend to be associated with higher profits. As a general rule, you are more likely to get capital growth closer to economic hubs and large cities. I always ensure that I have a strong capital growth portfolio. Investing your capital in growing real estate markets is your seed for future prosperity. The profit or equity you gain in buying growing assets will become a liquid line of credit, so you can actually cashflow many pieces of real estate in a portfolio for years and still have capital to invest in another property.
Within any market, primary or secondary, there are indicators of the market’s ability to perform. Become familiar with them and you will be able to forecast which areas will grow or trough. The drivers for capital growth are: population growth, economics, demographics, infrastructure, yield variation and supply and demand. Find these drivers and you find a great area for investment.
An example of a capital growth property – Located in Sydney NSW $330,000, Market rent $380 per week. Note the rental return is not as high as the purchase price when compared the Positive Cashflow example. The property has a lower yield variation but high growth expectations.
Today’s complex real estate marketplace requires a focused and segmented approach to buying real estate that will have profitable outcomes. Investors are making up more of the market share of real estate transactions than ever before. I always recommend to buyers to do research before jumping into a deal. The history of an area is usually a good start.
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Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
