Recently someone asked me about investing in mining properties. Mining properties are very interesting and provide a very unique investing option for any avid investor. The main reason for mining properties being so unique is that the rental yields are extremely high. Look below for a typical example that you can find in a mining town.
Moranbah is a town in QLD, where a friend of mine actually went to go work, when he showed me the properties in the town, that is when I initially found it interesting to see if mining towns actually provided a good investment for myself. Firstly here are some details on the town of Moranbah:
- Population of just over 7,000 people
- 200km West of Mackay
- 1000km North West of Brisbane
Basically, it is a small country town, not near anything of any note. And yet there is a 3 bedroom fibro home that is selling for $700,000? This is higher than most suburbs in Sydney, and a similar town that did not have a mine would see the property only sell for around $200,000 if you are lucky.
But look at the rent the mining company is paying for this property, $2,000 per week! Just for comparison sakes, you can get a 5 bedroom house in Vaucluse overlooking Sydney Harbour - LINK
So here you get a gross rental yield of almost 15%, higher than probably anywhere in Australia, and comparable with the returns you can see in the US at the moment. So what is the deal? Well the big draw back with a mining property is the capital gains, or should I say, the lack thereof. There is no capital gains to be associated with this type of property, as soon as the mine has finished up, the town will go back to what it was before, with the property value reducing back down to approximately $200,000. Assuming the mine operates for another 10 more years, well that would be an 11% drop in capital appreciation every year for 10 years.
This is where the big issue is, as soon as the mine is done, your house is done too. Whereas purchasing a traditional property, at least you would hope to see steady capital gains in your property in the long term. This is the advantage with a typical property, the oppurtunity of capital gains, whereas a mining property has next to zero potential for capital gains.
It should also be noted that I do not believe if you purchase a property in the mines, you can rent it out for a year or two, and then sell it for what you paid for it initially. It is typically public knowledge how long the mine will be around for, so as you get closer to this mine closure date, the value of the property will slowly decrease until the mine eventually closes. Of course you may get lucky and be able to sell the property to someone who has not completed their due dilligence and does not realise how long the mine will be there for, and be able to convince them based on the high rental yields.
So when looking at these properties, you need to think to yourself, are you satisifed with the high cash flow despite the negative capital gains on the property? I guess I was curious to see if it was worth it, so naturally I developed a spreadsheet to test out and compare the two scenarios.
By inputing a couple different variables, I was able to compare investing in a mining property based on investing in a mining property. The results from my calculations were as I expected, although the mining property was better in the short term (first couple of years), the traditional property became a much more profitable option. So for me anyway, it seems that investing in traditional property is more lucrative for making money, simply due to the potential for capital gains.
If you would like a free copy of this spreadsheet, please click this link Spreadsheets
If you have any other questions or comments, feel free to email us at StreamlineInvesting@gmail.com
Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.
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