For many savvy investors, mining towns can represent huge gains, despite the risks that may be involved. So how do you determine if this is the right strategy for you?
Taking a long-term outlook
As with any property investment, it’s important to take a long-term view when determining whether or not to invest in a mining town.
There has been some degree of panic with tumbling prices in areas like Moranbah in Queensland, which has seen a median price drop from $740,000 in December 2012 to $310,000 in the most recent quarter.
Recent high-profile setbacks like these can cause investors to shy away from mining towns, but this doesn’t always mean that the area will continue going backwards.
While vacancies may be up and property values down in towns like Moranbah, this could be for a variety of reasons which must be examined in further depth before making a long-term assessment.
The resources sector tends to operate in cycles, but it’s important to remember that overall there is always likely going to be a demand for Australia’s natural resources to economies in Asia and worldwide.
As a result, those who panic and don’t look at the big picture are the most likely to lose out on this potentially lucrative sector.
Research is key
To take a closer look at the long-term prospects of a mining town investment, it’s important to research the market both inside and out.
If an area is sliding in value, look at the underlying causes. In some cases, it’s due to a drop in resource demand, while in others it’s a simple case of too much housing stock.
Many developers became greedy and built too many properties, flooding the market.
You need to dig into the heart of the local economy to find out what makes it tick before making any investment.
In mining towns, the property market will nearly always experience big highs and lows rather than a slow period of steady growth that you would see in a city suburb.
Look at the big picture: despite troughs along the way, is the price growth average going up over time? As growth continues in mining towns, will the property market even out once more?
Consider your financial goals
Investing in a mining town certainly isn’t for everyone.
The white-knuckle ride of property market peaks and valleys can be unnerving, particularly for less experienced investors. Do you have the ability to wait out a volatile property market?
Can your wallet handle the temporary stress of a long vacancy period while you wait for the local market to recover?
It’s highly likely you’ll make high capital gains in the long run, but you need to think about your financial goals along the way.
Beware of common pitfalls, be they changing rental yields or a lack of infrastructure. Do your research to compare all options carefully.
You may want to balance out your mining town investments with more reliable investments in city suburbs, for a well-rounded portfolio.
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