The property situation in Moranbah right now is unprecedented and pretty dynamic in that things are changing on a weekly basis. It keeps us busy sifting through what is rumour and what is fact.

In the many years we have been investing in Moranbah, what is going on right now is unprecedented. This situation has been brought about by a number of factors including:

-      Commencement of rolling weekly strikes by BHP Billiton-Mitsubishi Alliance (BMA) miners. These are predicted to become longer and more frequent as the complex Enterprise Agreements are worked out, and BMA has seized this opportunity to stop leasing as many homes for their workers. “Basically what it means for landlords is that for three months, no long term leases have been signed by the company,” says LJ Hooker Moranbah’s Craig Aitcheson.

-      Limited production in the mines due to a particularly bad wet season (November to April). As the wet season comes to an end, mining companies will ramp up production, which in turn will require more people and hence more rental properties.

-      Owner occupiers are taking advantage of recent price hikes by selling up and moving to the coast. Investors keen to take advantage of the high rental yields have snapped these properties up at an astounding rate, which has flooded the rental property market.

Combined, it doesn’t sound like good news for Moranbah property owners, but I believe there’s no need to fret – and here’s why:

1. Room to move with supercharged yields

The purpose of investing in Moranbah is for cash flow. You need to achieve a 10% yield on the purchase price to make the risk worth it. Given that people have been getting 16% plus yields, or $2,000 per week on a $600,000 property, there’s a long way to go before rents fall below 10%. In fact, the rent could go all the way down to $1,200 on this example and you’d still be getting a 10% yield. It’s important for investors to re-adjust their expectations as the reality is that yields are still strong.

2. Strong long-term returns

While LJ Hooker Moranbah, Mackay and Brisbane Central Director Des Besanko says the rental market is in “a bit of a holding pattern” as people come to grips with what’s happening, he confirms: “Bottom line, the rental market in mining towns will always and should always offer a high return as a regional, remote location – and Moranbah is still offering that.”

3. Rock solid fundamentals

Regardless of current happenings, the fact remains that Moranbah is the site of unprecedented mining activity and growth. It’s similar to what can happen in the share market, when there is a temporary dip in a company’s performance due to the CEO being involved in a scandal, or some such temporary thing. At the end of the day, things should go back to ‘normal’ because the fundamentals of the town haven’t changed.

4. Property cycle swings and roundabouts

In some respects, the Moranbah property market operates more like the commercial property market. That is, the value of the property correlates to the quality of the lease, so as rents come down, so will property prices. But when rents increase again sometime in the future, so will property prices.

5. New mining activity

The best news of all: five NEW mines are currently being built in the region, which will draw in 5,000 additional workers to the area. Construction of one of the mines has commenced and there are four more to come. Miners will live in workers’ camps, but many will reside in the towns. So, from an investor’s perspective, the best could be still to come in Moranbah.

We expect that the mining companies will inevitably start leasing again because the underlying supply and demand situation in the town remains unaltered and it will in fact become increasingly dire once these new mines open.

It does drive home the lesson that when a town is dependent on one industry, no matter how strong the industry is, there is increased vulnerability. That’s why I always advise investors to have a ‘buffer’ in place to deal with at least six months worth of mortgage repayments.

It also highlights how important it is to do your own due diligence, rather than just following the flock. We’ve done our own due diligence on Moranbah and we’re thrilled with our investments there. We’ve enjoyed monster sized yields for the last seven years – and we’re satisfied that the right fundamentals are in place for at least the next five years.

What to do if you:

• Own property in Moranbah…

If it is rented, don’t pursue exorbitant rent increases when your lease expires – hold on until the number of available rentals reduces to around 50 and review your options. If it is not rented, attempt to rent the property privately.

• Are buying property in Moranbah…

Real Wealth Australia recommends that investors wait until rental vacancies fall to around 50 active listings or less, before considering buying.

If you have already bought conditionally, then we recommend that you either pull out of the deal, or renegotiate a price discount that brings the property price down to market value at this time. Our clients have already done this successfully.

• Are selling property in Moranbah

The situation in Moranbah at the moment is volatile and unpredictable, therefore if you can afford to hold financially, pause your plans to sell for the next three to six months.

We recommend that you wait because this situation will inevitably end and the market will stabilise. With five new mines opening up in Moranbah, it has a solid long-term future and investors will return to the market once this situation has passed.

Last year was tough for property investors, as the property market all but faded into oblivion in 2011.

Global economic uncertainty had – and continues to have – many economic pundits and experts concerned about the impact it could have closer to home, which has kept a lid on demand and prompted a slow-down in property buying and selling.

Investors aren’t active. Cashed-up professionals aren’t active. Since the first homeowners grant was dropped from $14,000 to $7,000 in January 2010, first timers aren’t active. And baby boomers, concerned about their finances in retirement, are cautiously saving their cash, rather than dabbling in the property market.

In other words, the Australian property market has been in a sluggish phase of languid activity, which has caused national house prices to plunge by almost 5%. According to the Australian Bureau of Statistics (ABS), an index measuring the weighted average of prices for established houses in eight major cities slid 4.8% in the 12 months between December 2010 and 2011.

Sales of new homes fell 4.9% in December, a report from the Housing Industry Association also shows, which HIA chief economist Harley Dale says was driven by “bad news regarding Europe and question marks over labor market prospects in Australia”, among other factors.

Is the situation set to change in 2012? It’s not likely. We are currently experiencing a soft patch and it won’t turn around in the very near term. There is excessive caution in the market and where confidence is weak, so are results… it’s a self-fulfilling prophecy.

The upside to all of this uncertainty is that Australians are now paying more attention to their finances and saving more than ever, due to cautiousness about the economy. This is great news! It means that we’re not only solidifying our solid cash reserves to deal with financial emergencies, but we’re also building up sizable deposits to invest with, if and when opportunities do arise.

And make no mistakes ­– there are plenty of opportunities to draw profits from in Australia real estate, even (especially!) during a slow market. It won’t stay sluggish forever, which is why I think it’s important for property investors to understand that what we are experiencing in Australia at the moment is nothing like what is happening in Europe.

There is no risk of a recession happening here – we will get through this soft patch and the property market won’t collapse, largely thanks to the mining industry. Strong commodities are driven by the world, not just China, although the Asian markets are enjoying the lion’s share of our mining efforts at present. Minerals investments are locked in for the coming half-decade, so in the median term – for the next five years, at least – property will deliver solid returns.

On a financial note, economic forecasters BIS Shrapnel expect interest rates to increase by quarter of a percent this year and a further 50 basis points in 2013.

Long-term fixed rates are already on the way up so if you’re concerned about the impact a rate hike could have on your budget, then it might be time to fix part or your entire variable rate mortgage. Two- and three-year rates have already started creeping up from lows of 5.99% a few months ago, so if you’re seeking some repayment security, you’ll be best off locking your loan in over the next 12 months.

Until next time,

Happy investing!

Helen Collier-Kogtevs

Have you seen the headline being bantered around? Does it sound too good to be true? For years, property investors across Australia have used the following powerful strategy to convert bad debt to good debt, paying off their home loan in a few short years.

We all know the difference between “bad debt” (those personal debts that are not tax-deductible, such as credit cards and your owner-occupier home loan) and “good debt” (your investment loans that generate fully tax-deductible loan repayments). Obviously, the fewer bad debts you have, the better for your finances and investing goals.

How does this strategy work?

The aim of this strategy was to shift your debt so that virtually every interest expense you incur was tax deductible. The result was often years shaved off your owner-occupier mortgage loan term and conversion of all of your interest repayments to become tax deductible, with no increase in payments.

To make this work, you needed:

• a home loan;
• an investment loan; and
• a line of credit loan to fund interest on the investment loan.

No cash was required from the borrower to pay interest on the investment loan, because the interest was paid from the line of credit, which had no monthly repayment obligation.

Therefore, that interest was capitalised on the line of credit and the borrower deposited all rental income received – say, $350 per week, or $18,000 annually – into their own mortgage. These payments were made on top of regular mortgage payments to reduce the outstanding balance of the owner-occupier (non tax-deductible) home loan more quickly.

WARNING – The ATO now sees this strategy as tax avoidance.

A recent ruling by the Australian Tax Office (ATO) has changed the rules and put an end to landlords employing this strategy. If you are using the following method to maximise your tax deductions, contact your accountant immediately to find out whether the new Taxation Determination TD 2012/1 (Determination) impacts you.

In March 2012, the Commissioner of Taxation issued Taxation Determination TD 2012/1 (Determination) in relation structures such as these, described as “investment loan interest payment” arrangements.

The tax office rejected claims by borrowers that these arrangements are entered into for the purpose of paying their home loan off sooner and determined that these structures breach anti-tax avoidance rules, “designed to prevent taxpayers [from] obtaining tax benefits from blatant, artificial or contrived tax avoidance schemes”.

They caution taxpayers against using this type of mortgage structure and warn that if they do, many of the interest deductions will be cancelled and financial penalties will apply.

Read more about the new Taxation Determination here and if you’re concerned you may be in breach of anti-tax avoidance rules, contact your accountant immediately.

Although in principal this was a great strategy for investors, the rules have changed and you need to be aware of the implications.

I’m a real supporter of helping others by providing rental accommodation for those on lower incomes. We have done this many times. However it needs to be a win-win situation and by that I mean it needs to work for you (financially speaking) and the tenant.

I understand that the NRAS scheme offers investor’s great tax incentives however let me ask you a question. Are you investing in property to grow real wealth or are you investing in property to save tax?

I would hope your answer is not the latter.

The concern I have with NRAS is that as they are government projects, you would be limited to who could rent the property, how much you could increase the rent, who could buy the property when you want to sell and how much capital growth you would gain over a property cycle.

I have no doubt that you would receive capital growth however I question how strong it would be compared to a normal rental property in an area highly sought after by tenants.

My personal opinion is that the NRAS scheme might be a “good” investment however I prefer “great” investments. “Great” investments allow me to continue building my property portfolio due to the strong capital growth that I can access and use to purchase more properties.

Until next time, happy investing!

Helen Collier-Kogtevs

We all know about the incredible opportunities available in mining towns across Australia at the moment – and there are plenty of them – but I’ve been chatting with some investors recently who want advice about buying in capital cities.

Traditionally, capital cities have been considered as the ideal place to sink your cash if you want a property investment that delivers strong capital growth. In the past, the line of thinking has generally been: “If you want capital growth, stay in the city; for positive cash flow, go to the country.”

But if you want to invest for capital growth in today’s market, it’s important to understand that the rules have changed. Buying an inner city house is too expensive, as you're simply not getting the growth that was experienced in the past. The main reason is that fewer people, both investors and owner occupiers, can afford these types of homes. As a result demand shrinks, and when demand dries up and supply remains the same, capital growth not only slows, it can even go backwards.

Meanwhile, the rental returns on offer in capital city markets are reasonable, but not fantastic. RP Data statistics show that rents across all capital cities combined grew by 7.1% for houses and 4.2% for units in 2011, while property values in these same cities fell by 4.3% (houses) and 1.5% (units) for the same period. This rental growth seems impressive on the surface, but when you factor in inflation of 3.1% in 2011, it’s nothing to write home about.

So where does this leave investors who are keen on a capital city investment? Does it mean you need to avoid capital cities altogether, or rather, adjust your expectations?

My advice would be to focus your energy on properties located in growth corridors that are priced within the affordably bracket for both investors and renters alike. This is a great strategy to hedge your bets, because if you need to sell the property in a hurry, you have a wide pool of buyers to market to, while an affordable asking rent means a larger group of people can afford to rent your property.

A philosophy I have always followed is that it’s better to own two properties worth $350,000, rather than one $700,000 property, as it allows you to halve your risk and double your potential tenant/buyer pool.

Let’s say your tenant vacates your property. If you own two $350,000 properties, you will still earn rental income from one property while you source a tenant for the other. Because the home sits in the affordability bracket, you’ll likely find a tenant within a week or two.

On the other hand, finding a tenant who wishes to rent your more unique, higher-end $700,000 property, may take a few extra weeks – and all the while you have to make the mortgage repayments without any rental income.

That’s why I believe an affordable property located in a growth corridor makes the most sense. By “growth corridor”, I’m referring to a location with strong, developing infrastructure, a growing population and good council leadership that favours development and expansion.

You may want to check out the options in Brisbane, while the market is still depressed, or in Melbourne, there are suburbs that are still brimming with opportunity – but infrastructure is the key.

In Tarneit, for instance, a western suburb of Melbourne, there is an oversaturation of rental homes because property spruikers marketed the suburb to out-of-town investors. Unfortunately, although the region is pegged for future population growth, at the moment it’s a brand new suburb with very little infrastructure. Prices have plummeted, with RP Data figures for 2011 showing a decline in unit prices, for example, of more than 30%.

There is no “one size fits all” suburb or city that is going to suit every investor, so as always, I would advise you to do your own due diligence. Create your own personalised buying rules, line up your investment strategy and do your research to ensure that the deal stacks up – and when in doubt, reach out to your team of qualified experts for advice and support. That’s what we’re here for!

Until next time, happy investing!

Helen Collier-Kogtevs