My hotspot investment is treading water: Should I hang in there or cut my losses?

Hi Margaret,

My husband and I brought a property in Emerald, Queensland in 2008 and resided there while he was working in the town as a paramedic. After we moved on we decided to rent the property out. We understand that with the economic downturn, we have been patiently waiting for things to improve but we're beginning to wonder if and when they ever will.

It's frustrating to hear comments that property owners are seeing great capital returns while we are just treading water. I regularly log on to CQ News to see what is happening in Emerald and it all seems very negative. I have met people who still have family over there and they're saying a lot of projects are still going ahead. My question is do we still hang in there or cut our losses? I know Emerald has not been picked as a hotspot in the past for nothing.

Regards,

Yvette

Margaret's answer on the next page. Please click below. 

Hi Yvette,

One of the inherent dangers of following ‘hotspot’ recommendations (even those I make myself) is that these recommendations can only be based on the available data at the time.  No one has a crystal ball and when we use such data to suggest hotspots we are doing so using the data available at the time.

One of the things I have always tried to do is to suggest a risk rating alongside any hotspot recommendation.  This is because certain types of areas have greater downside risks than others should the hotspot not turn out to be a hotspot at all.

For example, a hotspot which is in a residential area, say a suburb of a capital city, with a diversity of employment, lowering unemployment rates, rising population and improving median household income is one which will either boom soon, rise nicely over the longer term or not fulfil boom expectations, but rather experience the average kind of growth we would expect from a stable market. A buy in such an area carries little risk as you either get a great return, or an OK one.  Investors with lower appetites for risk and a need to preserve capital can buy in these areas confidently knowing that the downside risk is small.

At the opposite end of this scale is a hotspot in a single industry town, such as a mining town.  It will fulfil boom expectations as long as the economy does not turn or an outside influence does not conspire to damage its potential.  As the chance for this is fairly high, only investors who can face losses and who have a big appetite for risk should buy in such areas.

At present, the future of Emerald is impossible to predict.  This is because it is an area which suffers extreme impact from economic circumstances and, as confident as we all feel right now, these remain at high risk of a second downturn.  The information you are reading now about the area is current now, but could equally change as soon as the economy changes and become positive again.

For you, you must consider your entire financial circumstances and ask yourself whether you can withstand the downside risk – will short or medium term values losses impact on your ability to leverage into more property (do you have enough equity to see you through any potential value losses?) and do you have the personal cash flows required to support this property if there is a significant fall in rental returns?  If not, then selling now might be the best choice – although if you do sell, you cannot later look back and bemoan any growth you subsequently missed.  You must instead realise you made the decision that was right for you at the time.  Considering all of these things is something that the person helping you to buy this property (if any) should have done with you in the first place.

If you think you can withstand any storms, Emerald, like all mining towns, is likely to see good times ahead again, although I cannot predict when, so there’s no way of knowing how long this present situation will impact you. Perhaps buy more property in more stable areas so that you don’t watch and focus on Emerald and continue to keep your finger on the pulse of all mining markets.

Regards,

Margaret