Just bought in a Mining Town

Hi,

I recently purchased a house in Moranbah, which is in the Bowen Basin.

The purchase price was $535K and it is rented out to a mining company for $1300 a week.  I bought in the Sept, but first started tracking the properties in the area in July at which time the value was about $515K and rents were about $800.

Obviously the success of this investment is directly related to the mining in the area, which is largely coal, although there is natural gas near the coal seam also.  I understand that mining companies can walk away from mines when the price of coal drops, which would reduce rental demand in the area.

The following link lists 4 of the major mines in the area:

http://en.wikipedia.org/wiki/Coal_mining_in_Australia#Major_mines

I have also seen evidence that more are on the way.

Questions:

Clearly forming a view on the future of mining in the area and the price of coal is going to be important.  While I looked into this before purchasing, I would like to know more (as much as there is to know actually).  Would anyone like to share how they go about this?

In Steve's book he talks about price being related to % yield.  If we assumed the rents are going to stay the same and the price rises such that the yield becomes 5%, then this would become a $1.3 mil property.  Seems to good to be true to me - I'm happy enough with the +ve cashflow.  Perhaps the dynamics are different with this kind of property?  Does anyone have a view?

Lastly, I'm sure this kind of investment is not everyone's cup of tea.  There will be people out there who think I have taken on too much risk.  If you fall into this category please feel free express your opinion.

Thanks,

yes I can give my opinion. You will be in much financial pain very soon.
Sorry to bring this bad news, can't make it any better than it is. You got suckered in, you will probably be ruined.
Good luck with repaying your debts the rest of your life.

Bit harsh scamp, but there is a bit of truth in what you say.

I have a problem with isolated mining towns selling houses for iner city type prices. All it takes is a new land release, the mining co to supply housing, the mine to fail etc, for your investment to be almost worthless.

Sure. its a great yield, but it wouldn't take much for it to crumble. $1300/wk for a house just isn't normal or sustainable in the long term. High risk, high return.

I'd sink any profits directly back onto your loan if i were you.

Way too much for a house in woop woop.

I have been investing in mining towns for a few years now and some are not only just reliant economically on mining, there are other industries/ income/ projects on the go.

I am project managing 30 new homes being built in Bowen, have approx 50 tenants on my waiting list and approx 30 investors ready to buy when completed, and some major companies coming in for all differing projects, not just mining related.

I think you need to just time when your in and when your out, but some of the most experienced property people in OZ, China, and NZ are heavily involved now in Bowen, Proserpine, Townsville, Mackay and a few other areas- that are responsible for billions of dollars of investment, Im sure their banks and advisors due a lot more due diligence than any of us could hope to do.

Goodluck to anyone out there giving things a go, and not just thinking the gvt is going to look after their retirement, in life you just have to do your best with all your contacts, knowledge, instict, listen to advice from people out there doing it- not just speaking and doing seminars- they have to be doing it live with their own $$$, and if you fail, get up dust yourself off, and go again. Most successful people have failed many times before they have fully succeeded.

You only fail when you give up and dont try, or sit on your computer judging or scaring others to death, the worst thing about our culture I guess is we do not support and encourage people and bring them up and help them, we try to knock them down, scare them, say nasty things- no wonder all of our good brains and talent have taken off to UAE, USA, UK, Germany.

This blog is to help others, advise, share experience, contacts, knowledge, support, not to be critical, nasty, and rude to people.

Thanks to all who have replied so far.

I was thinking of mentioning your name Scamp when baiting the criticism, but thought it wouldn't be necessary given your other posts.  I do value your opinion actually, and see others have agreed with you on a number of occasions.  If you could take a moment to elaborate on exactly why you think I am going to ruined (appreciating you have probably said it all before) then I'll certainly take the time to read.

It was the intense demand that Kylie alludes to that lead me to make this purchase.  I also appreciate things could change quickly also, hence the post.  What I'm really looking for is more ways to track the what's going on in the mining world so I can time my exit.

Again, all comments welcome.

It is like buying Babcock and Brown or Macquarie Bank at their heights....
The question is : Can the rental price sustain A$ 1300/week for the next 10-15 years?
Sure it is cash flow +ve for now.. but how about in the next 2-3 years.... ???

Dow Jones Future Commodities index took the worse decline in the last 50 years... and Shanghai or Bombay Index also get hammered by 1/2 of their value... lots of talking about booming of BRIC economy.... the truth is they probably will get the worst hits and you can tell the consequence of small to medium mining companies.... remember Poisedon ????

It does not matter what anyone thinks anyway. Scamp has spoken.

Stu macca,

read some of my other posts, especially the one about RBA having dropped the interest rates by 1% and the real reason to do this ( mortgage resets ). AUD has fallen 30% already over the past few months. It will drop more because of the interest rate drop. This is 30% less profit for mining. Also , commodity prices have crashed about the world. This is 20% less profit for mining. Also , recession is hitting, this is another 50% less profit for mining.
In other words, mining is passe. Get out while you still can. Mining is about to come to a grinding halt, and recession will replace it. Visit www.globalhousepricecrash.com - Australian property for all the info you requested.

Yes. Visit that site. It will open your eyes but not through the intelligent converstation.Many many disgruntled younglings that have not bought a house yet and want the market to crash so they can buy in.So they talk it down,cut and paste artical after artical and basically burn investers for destroying house prices for all. Yet they are happy to buy a house of a struggling family in the future with no remorse.Yes go and have a look. If you can filter out the crap that is biased there is actually a lot of good information. Just dont bad mouth there pin up boy Steve keen. You will be flamed very quickly.

Scamp,

explain your logic here

"AUD has fallen 30% already over the past few months. It will drop more because of the interest rate drop. This is 30% less profit for mining. "

If the AUD has fallen by 30% and continues to fall then all other things being equal mining revenue received for contracts priced in $US commodity prices would rise by about 30% . A falling AUD is good news for many Australian mining companies. 

No it's not. It's good for the owners of the mining companies. The shareholders get paid in AUDs.
The money in USD won't come back into ozzie, it will be spent outside of Australia. But I understand that you think it's good for export, I just don't agree with you.

Not to mention that half of the posters live overseas, have no clue of anything here other then the BS they chose to read on the net and only seen this country with the aid of Google Earth. They do have plenty of formulas to prove their point , will fake the occasional bad news story if they can't find one and ban anyone even remotely bullish. A bit like some other knowitall in here who seems to be an expert on everything around Australia, from property investing, RBA policies and even politics without even setting foot here yet.
I wonder if the link is just a crude attempt at recruiting more of their kind because they suffered a few casualties recently. Since the rates started coming down last month a few of the local members who could afford it took advantage of the low prices to become FHBs and have become less active in the movement.

Of which they get 30% more.

Must admit that one confused me Scamp.  Just looks like a straight 30% margin gain.  Reduced demand for steel caused by a recession could be a worry though (lots of coal gets used in making steel).  Still, 80%+ of our energy generation comes from burning coal (unfortunately), and China still seems to have an insatiable appetite - no doubt enjoying the new price (in CNY) after seeing it double in such a short time.

Rents are now $1500/week.  Similar houses selling for $600K.  On the market for about 5 seconds (so you need a buyers agent).

Still no guarantees for the long term.  And yes I am more than the little nervous given what's in the news.  Will conclude that from discussions so far that mining's doing "quite alright". 

Come on Scamp - I can take it! 

1500 per week today. What happens when the mining corporation closes down ?
Then you have a 600.000 mortgage and rental income of 50$ per week ( 200$ per month ).
Good luck with that. You're not investing, you're gambling. There's a big difference there.
And in fact, the odds are against you. Very , very much against you.

S't yeah , hows Bab & Brown eh. I was trading them daily about a year back - can't remember what at and can't be bothered checking but I think it was 25-30ish or where ever they were - could have that off a bit so many since but I did so many good trades on them for awhile there . Hard to believe their where they are now .
Cheers

Stu_Macca

It may be the conservative in me, (and I don't buy in mining towns), however, when house prices there reached $350k I thought it was overpriced.

Be very careful when riding a bubble (and prices in Moranbah) are just that. The intrinsic value is not what you paid for it.

The cash flow is great but what is your medium term plan and exit strategy?

Don't be the guys holding the bag at the end of the line.

Chris White
Prosper Group

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A reduced demand is still better then NO demand.  That 30% gain will give as a cushion against the fall in demand and even allow us to sell at a lower price and gain a bigger share of the market.

It is a bit of a gamble in that if the mining stopped a $600k house could become $150K overnight and rents would go down to $150/week. If the resources are in the ground even if the mine shut downs temporarily, if you can afford to hold on long enough things would eventually pick up again when the mine reopened . On the other hand the mining could continue for 20 years or more and you'd be laughing all the way to the bank.  A good example is Karratha & Port Hedland, been going strong for decades on the back of resources and it will continue to do so for decades to come.
Since you've already bought it its a bit late to be nervous, just hold on to your hat and enjoy the ride.

Hi Stu macca,

Good on you for having a go and investing in property.

I personally think that your timing is probably wrong and I would probably advise you to get out if possible for the time being. It does look like we are heading for a recession that could last at least 5 years, and the international markets are marking the Oz dollar down, which suggests that they think that our dependance upon China to buy our mining output is high risk.

With commodity prices diving and the world economy slowing to a crawl, there is a real risk of some of these mines being put into moth balls very soon.

I would not pay much attention to Scamp. He is a Dutch IT worker, soon to be made redundant in the wave of sackings that is sweeping across the worldwide IT industry like a tsunami. Scamp by his own admission is sitting on large amounts of Euros which he plans to use to buy up loads of Oz property. Sadly, the Euro may not even exist very much longer if the EEC countries cannot get their act together. It may not matter anyway, because poor old Scamp is currently waching his chances of migrating to Australia under the skilled migration scheme evaporate in front of his eyes, as Kevin Rudd threatens to pull the pin on the current high levels of migration.

He has been predicting doom and gloom for years now and it looks like he will be consumed by his own nightmare.

As for that pathetic forum he recommended, Save yourself the trouble, I have checked it out, and would you believe that Scamp is actually one of the more positive posters there. It is a miserable negative site, based upon the expectation (hope) that house prices will crash..

Most of the posters are pimply-faced under-achievers who were too scared to buy houses when they could, and have missed the boat. Now they hope that prices will crash and they can move in like vultures. Sadly, most of them will probably be the first casualties of unemployment, and will quite likely have lost a lot of their deposits in the stock market collapse, if they even have bothered to save a deposit.

Most of that sad lot are doomed to spend their lives living in their parents house.
If prices do crash, its more likely that the grizzled veterans on this site, who have a track record of taking action will be the ones that pounce on the bargains and add to their portfiolios. I know that I will be ,

Thats my two cents worth anyway,
Kev

You know what they say......

Hi stu_macca

I know exactly how you are feeling !!

I recently purchased a property in Moranbah and also bought one in Dysart at the end of January.

I have done extremley well out of both of these properties in terms of both growth and in rents.

I too keep thinking that it is all too easy and too good to be true.  I always said that if things looked a bit shakey i would be outa there in a flash. I actually rang an agent last friday to list them but changed my mind a couple of hours later and withdrew them!!

Im still there but have been keeping a very close eye on the market.

A property was lited in moranbah last wednesday for $450,000 and sold within 24 hours for $465,000.

A rental property yesterday had already received 13 applications at $1,000.00 a week for your basic lowrise 3 bedder and it was only mid arvo.

A friend of mine who bought a 5 bedroom highrise in Dysart 4 months ago rang one of the larger mining companies yesterday to see if they were interested in renting his property (already has tenants, he was just trying to get a feel for how things are going).  They were happy to sign up on a 3 year lease for $1,400.00 a week.

Nothing seems to be slowing down in the Bowen from what I can see.

BMA are still spending big up there and another company just bought a 1.4mill block of land.

I know that this could all change at any time.  But  I have decided to ride out the storm and hopefully not regret it. 

Thats today anyway :-)

Good luck

Fingerscrossed