Nothing represents the potential of heart ache from real estate quite like Australia’s mining towns – a fact these three real-life investors are all too aware of. The question now is, should they sell up or stick it out?
Aileen Wills purchased properties in Gladstone and Port Hedland:
“Following the GFC I was working for a mining company in Port Hedland and the industry was booming. It was a great time to get in to investment and I decided to buy an old house that I knew would give me great rental returns after a few renovations.
I had to live in the property for six months to get the first home owners grant, and then I spent eight months and $200,000 doing it up. It seems like a lot of money to put in to a property, but it paid off because the value increased from $420,000 to $895,000 and I secured a five-year lease at $2,200 a week.
I was able to use the equity from that property to also secure two more investment properties about six months late, one in the regional centre of Gladstone, Queensland, which is on a 1200 square metre block with the potential to be developed in to five residences.
For three years the two properties were positively geared and rented out at good rates. Then the mining boom reached its peak and began to turn, and it’s been all bad news from there.
My original investment in Port Hedland that was initially bringing in $2200 a week in rent has now dropped to just $580 – almost a quarter of the original rate. There is so much stock on the market you have to drop your prices to stay competitive or risk your property being vacant. I’d rather it be leased at $580 per week than aiming for more and not having any tenants at all. It is still covering itself, but who knows where it’s going to go to from here?
My plans to develop the property in Gladstone have had to be put on hold as well, because there is so much stock on the market there that people are discounting their prices left, right and centre. The market has hit rock-bottom and I’m hoping it might start to come back up slightly now. I’m still weighing up the question of whether to stay or sell.”
Mary and her husband purchased two properties in Newman, Western Australia:
“In 2011we settled on our first investment property in Newman – a two-bedroom unit which was already rented out to a mining company. We were attracted to the area partly because of its sky-high rents, driven by the high proportion of mining workers in the region, but mainly in the hope that we would be able to make a quick capital gain in a short period – enough to pay off the mortgage on our residential home in Melbourne.
In 2013, we decided to purchase a house-and-land-package. Urged on by a very convincing individual who would probably be best described as part-developer, part-property-adviser, we saw the $980,000 property as our key to quick financial gain. Properties like this were renting for $3,000 a week at that time, and we anticipated that it would be worth $1.2 million when we planned to sell it in a year’s time. By the time we had commenced the contract, we had sold our two Melbourne investment properties in order to fund our Newman ventures.
But a lot can change in a year’s time, particularly in a property market driven solely by the volatile mining industry.
Despite our house-and-land package being advertised as having a 16 week building timeframe, it wasn’t actually completed until August of last year. The 16 weeks blew out to 54 weeks, but the builder and developer were supposedly protected by a clause in the building contract which stipulated that the property was to be completed within a much longer timeframe than advertised.
In that time the mining areas started crashing and the rentals started declining. BHP was pulling a lot of their workers out of the houses and into campsites, they were discontinuing contracts and switching to fly-in-fly-out workers, and as a result a lot of things were changing in the town.
On top of paying for a house which we knew would be worth half of what we had paid by the time of completion, the company that had been renting out our other house decided that they didn’t want to renew the lease – so suddenly we were faced with two empty properties, which just totally turned our world upside down.
Despite the four-bedroom house-and-land package being completed in August 2014, it was only tenanted in the middle of 2015. The property that we had been anticipating would pull in at least $3,000 a week is now bringing us $375 a week. Our two-bedroom unit was vacant for over 12 months now, since it was vacated in May 2014.
We are now trying to juggle three mortgages – the house that we live in in Melbourne plus the two investment properties. We’re in total arrears with our mortgage payments, the banks are threatening to take our homes and we’re struggling. The unit, which was purchased for $400,000 on an interest-only loan in 2011, would be lucky to get $100,000. The house would barely fetch $500,000. There’s no point selling them, as all we’d be left with is debt and no assets.”
Eric Brown purchased in Bowen, Queensland:
“When we recently did the numbers on our Bowen house, we realised it was costing us around $18,000 a year to hold on to it. We decided we would be better selling it, because it was just too much of a drain on us financially. But when we approached the agent, they basically said that there are no investors and no developers up there at the moment. So we had to hold it, we’ve got no choice.
It’s slowed down our portfolio growth a lot. There was originally $100,000 tied up in the Bowen property which we could have leveraged for other purchases, but as it stands it’s had no growth.
The plan was to buy it because it is zoned R2, to develop and put between nine and 11 townhouses on there and there’s still potential to do that but it’s just costing a lot of money at the moment.
The property was receiving $350 in rental income per week, which was financially workable, but as the economic conditions have deteriorated in that area we’ve had to adjust the rental to $200 per week. I’ve had to offer really cheap rent in order to keep the place tenanted and make sure it doesn’t fall into disrepair.
At this stage, the only thing we can consider doing is conducting some cosmetic renovations or capital works in order to return the weekly rental to what it once was. Those works will come in the form of either a granny flat or a bathroom and kitchen renovation. We’re currently discussing the costing with our Bowen agent to see whether the numbers stack up, or whether we’ll be throwing more money away.There are no guarantees that the money I spend will get a return.
I sound downcast now, but I do believe that Bowen will make a comeback. I’m not a negative person in general. There are positive signs that a planned coal mine is set to overcome environmental challenges and come online soon. If there is a turnaround in the area’s fortunes I will hold on to the house and go through with the development.”