Property investors work hard to maintain their assets’ good performance in terms of yield or capital growth, but sometimes things go out of control—from the unpredictable movement of the property markets to the ever-changing factors that determine the state of a particular area—and what once looked like a good choice of a property could turn out to be a poor purchase.
According to buyer’s agent Steve Waters, while property investors who find themselves in such situation are not completely doomed, there are a few options on how one could make their way out of the mess, particularly for those who have invested in mining towns.
“I don't think you're literally stuffed. You've got a few options. You've got to really drill down to which part of the mining sector we're looking at... I don't think there's a lot you can do other than bunker down, look after your cash flow, look for exit strategies," he said.
"If you can sell, make that decision after doing your figures. A lot of these areas you're not going to be able to sell. The debt is going to be far more than what it's worth. You've got to look to other avenues too, perhaps, supplement the income for the mortgage... Hopefully, the rest of your portfolio can help sustain that."
Mining towns were the "big thing" years ago and people have clamored to invest in these areas because of its incredible potential upsides. However, things took a wrong turn—mining has been deemed dead and experts advise investors to avoid waiting for the next boom because there will be none for a long time.
This unfortunate phenomenon in property should serve as a valuable lesson on the importance of diversifying one's property portfolio, according to Smart Property Investment's Phil Tarrant.
"Obviously, these mining towns go through peaks and troughs in line with the resources that they extract from the ground and the needs or demands of those resources on a macroeconomic level. A lot of these mining towns were big during a period when the initial exploration and investment was placed," he said.
"When these mines start hitting maturity, it just turns into a process of extraction... The need for as many workers isn't as great... You've got mum and dad investors who have purchased their first investment property in a mining town and those guys are in a lot of trouble. They've been burned."
While there were sophisticated investors who took risks and were able to flip at the right time, most of those who invested in mining towns find themselves looking for the nearest exit—a property investment lesson learned the hard way.
At the end of the day, Phil advised property investors to be responsible for their own investments instead of getting on a bandwagon just because everyone else is doing the same thing. Upon starting a property investment journey, arm yourself with good education and the best mentorship to be able to steer your way through success in the business of creating wealth.
"Who was responsible for those guys getting burned? Well, I'd say themselves. Everyone makes their own decision. A lot of these people may have been victims to some... spruikers who sold them this great opportunity and dream," Phil said.
"What that comes back down to is the need for education. Everyone's got some great way to make money through property. Making money in property is not difficult. It's the fundamentals. It needs to be simple. It needs to be easy. You need to be able to understand it. If you can't understand it, stay away from it
Steve added: "What people have really got to remember is that, just like any other sector, mining has a cycle. If you can pick the cycle, you'll do well. If you're buying somewhere in the top quarter of a cycle, you’re not going to do well at all. Once again, coming back to education—that's the key."
Finally, and perhaps the most important lesson from this issue with mining towns: Diversify your portfolio.
"Look at diversification of your portfolio, you don't put all your eggs in one basket... It goes back to the fundamentals of property investment. Capital growth, [and] yield—if you can get both of them, absolutely brilliant... [but] you don't always get it. Sometimes, it fluctuates. Sometimes one's over the other, but that's what you need to be looking for," Phil said.
"Investing in mining towns isn't a bad thing to do, but it goes to the fundamentals of any investment anywhere: What are the drivers that are going to influence prices going up in value? There are some great mining towns that have a multitude of different economic forces which encourage employment, encourage business growth, encourage wage growth," he concluded.
Tune in to Steve Waters' episode on The Smart Property Investment Show to know more about his first investment property and his worst investment property, as well the life lessons they taught him and his most valuable "nugget of wisdom."