Property Investors of the Year Go Up In Smoke

It’s no secret the mining boom has ended. Across the country, towns that were previously roaring given their proximity to Australia’s in demand natural resources, have ground to a halt. The massive influx of workers that swamped those towns pushing up living costs have now disappeared, leaving businesses struggling and real estate without demand.

That lack of demand for real estate has decimated property investors who’d swooped on these previously hot locations. News articles have documented the hundreds of thousands (even millions) of dollars of equity that have been lost on single properties. This has been previously documented here for Gladstone, Queensland and here for Port Hedland, WA.

It’s obvious there are some personal financial catastrophes going on, but there hadn’t yet been a face put to any of it, until now.

In 2012 Kate & Matt Moloney were crowned Your Investment Property Magazine’s “Investors of the Year”. Now they’re in serious strife, owing $3 million more on their properties than they are worth.

In hindsight their swift downfall reads like a list of investment don’ts, but even without hindsight their strategy looked like a house of cards built beside a tornado.

The pair moved to Queensland mining town Moranbah in 2010 to beef up their wages in the attempt to become investment property moguls. At the time they already owned 3 properties – two in Victoria and one in Moranbah.

Over the next 2.5 years they bought or built another 9 properties in Moranbah, 1 in North Brisbane, 1 in Townsville, 1 in Miles QLD, 3 in Mackay and 1 in Townsville. They also sold their two properties in Victoria.

Diversification didn’t appear in their vocabulary given the exclusive focus on Queensland and particularly on the town they were living in, Moranbah. For those not aware of Moranbah, it has close proximity to several large coals mines in Queensland. It has a population under 10,000.

For the two and a half years leading up to their award it appeared the concentration on Moranbah was a stroke of genius. In 2010 the Moranbah media house price was $450,000; by 2012 it was nearing $750,000.

Things turned very ugly for the couple in 2013 as the impact of falling coal prices began to put pressure on Moranbah’s real estate market. The median house price fell 50% in a year and by 2015 the Moranbah median was around $200,000.

This type of decline would be bad for any property owner, but in winning their 2012 award they were frighteningly congratulated on the following, “this young couple wowed our judges with their awe-inspiring ability to get together property finance, even in times when they’ve been without savings or equity.”

The couple were playing the magic equity game that is so popular with real estate investors in Australia. Where a property appreciates they get the bank to revalue it, they then pull out the fantasy equity from the revaluation and use that as the basis to buy another property. A bullet proof strategy – as long as the market is going up, the moment it starts declining you’re left full of bullet holes.

This is a cautionary tale about diversification, asset allocation, liquidity, risk and the use of leverage. Yet it’s not totally about real estate. It would have been as equally dangerous to dive headfirst into a handful of coal mining shares on the back of once in a 100 year boom.

The only difference is you would have had to do it with a lot more of your own money and you would have received a margin call as the shares fell.

Try finding a lender willing to give you a 97% loan to value ratio on any share.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

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