Resource Town Investing – Risk VS Reward
Mining towns have undergone phenomenal growth over the past decade on the back of the resources boom. With investment levels in projects now softening, growth is returning to more sustainable rates.
Positive property yields in these towns remain at 9% upwards – still among the highest in the country – however, the market volatility has left some mining town investors concerned that their cash flow and capital growth is at risk.
Here are five things Resource Town investors should consider:
- Your property’s yield compared with the market
It is important to remember that falling rents in resource towns are coming down from high levels after a period of rapid – and unsustainable – growth. Even with median rents at lower levels, they are still generating extremely high yields relative to the rest of the market. Certainly, they are outperforming the national average which is currently around 4% for houses.
- Your yield compared with other income-generating investments
Compare your yield with that of other income generating assets. Average yields from stocks for example are currently around 4% or 5%, with the top dividend-yielding shares around 7-8%.
- Your capital growth versus the rest of the market and other investment options
Like rents, house prices have also softened in some mining towns, which are entering a period of correction after years of huge growth. Pilbara towns have outperformed the national market over the past decade returning 18% on average per year compared with the national average of around 6.5%. The share market has delivered around 5.5% growth pa on average over the last 10 years.
If you have enough equity in your current portfolio to purchase another property then consider using it to diversify. Any reduction in your cash flow stream as a result of reduced rent from another property can be offset by a smart investment into another high yield area.This also applies to capital growth. The current market is actually producing some excellent opportunities to maximize returns by buying in to recovering markets at lower values. Cash flow and capital growth is still very achievable if you do your research and seek the right advice. South Hedland and Newman have both maintained steady growth over the past 12 months and Moranbah is also recovering. As growth slows in some towns, it will skyrocket in others, where new industries, such as LNG, are moving to the forefront.
- Reviewing your property manager, interest rates and the tax benefits you are eligible for
All three can have a significant effect on your cash flow. A good property manager experienced in the local market will ensure you achieve the maximum rent and secure quality, long term tenants. Those that have established relationships with large corporates will also help minimize vacancy and negotiate the best possible rent.
With interest rates hitting record lows, there is also the option to refinance and reduce your interest payments, and taking advantage of all tax benefits available to you at tax time, such as depreciation, will also ensure you get the most out of your property.
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