AMA - Rentals In A Coal Town

David from West Virginia asks:

Nothing is selling here in the coal fields of WV. However, the rental market is really good. My question is, knowing I can buy cheap and rent with my long term goal being to eventually sell, Is this a reachable goal with our real estate market?

David, this is a great question. My heart goes out to the communities where the main industry is shrinking. The fact is, real estate follows any other free market and must adhere to the laws of supply and demand. Communities connected to coal mining are shrinking because the employment is shrinking.

For better or worse, coal has earned a reputation of being a dirty fuel and many jurisdictions have made the decision to eliminate coal burning for environmental reasons. Some of that reputation is well deserved, some not.

There are some clean coal technologies under development and undergoing trials with the department of energy. If those trials are successful, it’s possible that we may see a resurgence of coal as a viable fuel for power generation. I doubt we will see power plants convert back from natural gas to coal any time soon, but it may enable some domestic power plants to extend their operating life. In particular, there are numerous plants in other parts of the world that may want to license clean American coal technology, or perhaps source clean American for their power plants.

In my opinion, it would take something like a resurgence of coal in order for me to consider investing in an area where there is a dominant industry like coal mining.

In order for me to invest, there has to be population growth, and jobs growth. If the jobs are disappearing, you’re trying to sell a product to somebody with no money. If they have no money, it’s not exactly clear why you would go out of your way to do business with someone who has no money. There might be a social benefit to doing so, or perhaps a humanitarian benefit to doing so, Those are all great things. But if your goal is an investment, then you want to evaluate the investment on investment metrics.

The flow of money is straightforward. The tenants have the money. The way it works, is the tenants give you money at the start of each month. Over time, they help you pay for the property. In exchange, you take the financial risk of buying the property and borrowing the money from the future, along with personal guarantees and collateral to protect the lender’s position in the property. But if the tenants don’t have the money to start with, then the whole system breaks down.

The problem with buying with the intent of selling in the distant future is that you don’t know if there will be buyers. If there are no buyers, then prices fall. It’s exactly the same situation as Detroit, albeit on a smaller scale. If there are no buyers, then prices fall. If there are no buyers, then you don’t have an investment. All you have is a prison for your money.

Keep a close eye on whether clean coal gets adopted and whether it will drive a resurgence in coal mining.