14 Jul Little known co-ownership benefit + How to detect a spruiker
Housing is the single biggest asset class in Australia, worth an estimated $6.5 trillion across 9.6 million dwellings. CoreLogic RP Data released its national Profile of the Australian Residential Property Investor and we catch up with Cameron Kusher as he picks out the highlights.
There are six key questions you can ask to help you identify a modern day Spruiker. Hear about all 6 questions that are detailed in Anna Porters book “Whistle Blower” and also how you can get a copy of the book.
Real estate investing used to be a rather niche industry, confined to the few Australians who had significant reserves of cash and a genuine interest in the property market. These days, you could be forgiven for thinking that everyone is a real estate investor – some much more successful than others. Michael Yardney shares the dos and don’ts of successful investors
With property prices steadily rising, co-ownership of property is becoming increasingly common. Co-owning property has the immediate benefit of increasing your purchasing power while reducing expenses. Brad Beer explains the little known benefits of split depreciation schedules in this case as well.
Pete Wargent says there is a re-bound in population growth and he looks at what this means for our property markets with a special focus on the Victorian market.
Little known co-ownership benefit – Brad Beer
Kevin: With property prices continuing to rise, co-ownership of property is becoming increasingly common. Co-owning property with a friend, a family member, or a business partner has the immediate benefit of increasing an investor’s purchasing power while reducing the burden of corresponding expenses.
Specialist quantity surveyors can supply split deduction schedules by applying methods that substantially increase the depreciation deductions when an investment property has more than one owner. What are some of the methods they use? Let’s turn to our experts in this field, BMT Tax Depreciation. Brad beer joins me.
Good day, Brad.
Brad: Hi Kevin. Great to be here. How are you?
Kevin: I’m very well, thanks mate. Thanks for your time again.
Brad, I wonder if you’d explain the low cost and the low value assets. What are they?
Brad: Yes, absolutely. What happens when items are purchased as part of your investment property for a value of less than $1000, the legislation just allows us to write them off quicker because they are put into what’s called a low cost pool. And it’s anything that has a value of less than $1000.
The low value pool is if it drops down to that value of less than $1000 as you start claiming that depreciation. So it may have been $1200 in the first year and you claimed some of it in the first year, and when it gets down to that lower value, you get to claim these things at higher rates.
Kevin: What’s the accelerated rate of deductions that these items can be claimed at, say, when low value pooling is used?
Brad: What it is, rather than its normal effective life rate, which might be 15% or 20%, it’s actually at 18.75% in the first financial year without a pro rata adjustment and 37.5% in all the following years. Now, 37.5% is a pretty high percentage. It’s much higher than the 15% or the 20% that a lot of things actually get claimed over otherwise.
Kevin: Brad, why is it important to choose a depreciation schedule that assigns the owner’s interest in each asset first before calculating depreciation?
Brad: The simple reason for that is that when you buy a property and you’re buying a whole bunch of things including what we’ll call simple assets, if the asset had a value of let’s say $1600, if you owned half of that asset you’re only actually buying half that asset – therefore an asset worth $800 – meaning you’d get to drop into this low value pool straight away instead of at a later date. And all of the assets get split this way.
Kevin: Okay, yes. That’s fantastic. Then using a cooktop as an example, what’s the difference in the deductions a property owner can claim say with and without a split deduction schedule? Is that possible to tell us?
Brad: Yes, it is. Let’s take a cooktop as an example. Let’s say that cooktop was $1624 in value. Under its normal claim, which is over 12 years, the first year of that cooktop would be a claim of $226. Now, if you just divide that by two, you’d have a claim of $113 each, so $113 would be your claim.
If you owned half of that property and you only owned $812 worth of that cooktop – as in half of it – then you actually go into this low value pool. And in the first full year at that 37.5% rate you’d actually end up with a claim of $248 for your half of that cooktop. As opposed to just dividing your cooktop and getting the $113, it ends up at $248 if it was a year where you had that 37.5%.
When you do this across multiple items, it actually makes quite a difference sometimes to the early years of ownership if you’re a partial owner.
The other place that works really well is when you have things that can be claimed at 100% – if you owned something that’s worth $500 and you own $250 worth of it – you’ll get an instant deduction for that full amount because you’ve actually split the value of the asset as opposed to getting it over years and years.
It makes quite a bit of difference in those early years to maximize those deductions and therefore give you more cash back in your pocket.
Kevin: Yes, that makes a lot of sense. That leads me to another question, then. Talking about joint ownership, is there a minimum percentage of ownership in which a split depreciation can be applied?
Brad: There’s no minimum percentage. The regular is to go 50/50, and then sometimes you see the husband and wife…
Brad: …A low percentage for the person with the lower tax rate. It doesn’t matter if there are three owners, four owners, five owners; you can still split these depreciation schedules up quite easily if you have the software built properly – which we do – so that at your percentage of ownership, you get your percentage of the value of that item and therefore you get your claims. It will always maximize those deductions in the early years for each of these owners in a split-up situation.
Kevin: Of course, we’re into a new financial year now. I guess any time is a good time to be talking about depreciation schedules, not just at the end of the financial year, Brad.
Brad: You’re going to do a tax return soon after the end of the financial year, so once you get to the accountant, it’s best to have your depreciation schedules there ready. When we do one, we actually send a copy to the accountant as well so that when you turn up, he’s had an opportunity to have the numbers in there ready to do it and not have to go back and try to make it happen at a later date.
Kevin: Yes, great information. That’s why it’s always good to deal with a specialist in their field, and that’s why we recommend BMT Tax Depreciation.
Brad Beer, thank you so much for your time.
Brad: Excellent. Great to be here, Kevin. Thank you.
Habits of successful investors Part 1 – Michael Yardney
Kevin: You’d be excused for thinking that it’s only the rich who become property investors, and that’s a lot of the hype that’s around anyway. But that’s not necessarily the case. It’s not also that everyone can become a real estate investor – or that is, a successful real estate investor. Many people try it; many people fail. Why is that? What happens?
I’m going to talk to Michael Yardney from Metropole Property Strategists who hopefully will give us a few dos and don’ts and some of the reasons why some people become very successful at this and why some others fail.
Michael: Good morning, Kevin.
Kevin: Michael, what are some of the dos and don’ts?
Michael: Maybe we should start with the dos that I’ve found important seeing lots of other property investors and their successes. I think the first one is do your homework. It’s important to do the homework and research by getting a system, getting a strategy, and understanding where you’re heading.
Most people who I’ve found buy an investment property – naïve beginning investors – just buy one because they think they know about real estate because they live in a house or rent somewhere. They find something and think, “Ah ha! I know how property works.” That’s not the case at all, Kevin.
Kevin: No, it’s not. I think a lot of people have come unstuck by thinking. The other thing I’ve found, too, is that good people make things look so easy. It does look easy, but there are some systems. One of the things I know about you is that you do actually think long-term.
Michael: Kevin, I think in all elements of life, those people who have a longer term view and are able to delay short-term gratification for long-term success get ahead. In property, it’s delaying short-term cash flow for long-term capital gains.
The lessons you would have taught our kids is yes, you have to go to school, you have to go to university, you have to actually delay the instant gratification of cash and money and lifestyle because later on you’re going to get a career. Thinking long-term is one of the characteristics of all successful people.
Kevin: It occurred to me, too, and you were kind enough to ask me to come along to your retreat at the Gold Coast recently, the Wealth Retreat, and there were a great number of people there, very successful people. When I was talking to them, the thing I noticed is that they all have goals, and one of the reasons why they go to the retreat is to set their goals for the next year.
Michael: Yes, Kevin. That’s one of the dos that all successful people – including property investors – do. You actually have to know where you’re heading. Inside your head, there is a system called your reticular activating system. That’s your own GPS, your pathfinder that will actually point you towards where you’re heading. But if it doesn’t know where you’re heading, it can take you anywhere.
You have to have goals, not just dreams, not just ambitions. Write them down. Know what you’re wanting to achieve, where you’re wanting to go, and then do what you have to do to get there, Kevin.
Kevin: Most people I talk to will say they have goals – and you made a very good point there about writing them down – the moment you say, “Show me,” they can’t because they’re simply not written down. We do know the difference between not writing them and writing them. There’s a huge chasm there.
Michael: Very much so, because we all wake up in the morning, have a shower, have a dream, and think “I want to do this” and “I want to do that,” and then life gets in the way. That’s why having written goals… A lot of people actually find having pictorial goals, having pictures up of their dream home, their dream investment portfolio, or their dream car works well for their reticular activating system, too, pushing them ahead towards achieving those goals.
Kevin: How important is it to reward yourself, to celebrate your successes?
Michael: That’s something I learned from one of my mentors along the way, too. There are challenges so you have to enjoy the journey, otherwise you’re not going to enjoy the destination. Yes, have some little celebrations. Give yourself a little gift. Take the family out. Reward your life partner, as well, because they’re coming along on the journey with you.
Kevin: Keeping your feet on the ground is pretty important, as well, isn’t it?
Michael: Maybe the last two we should discuss is to be realistic – understand why you want to be a property investor, understand what financial freedom is going to mean to you – and then have a realistic timeframe and a realistic goal. Sometimes you read in the magazines to buy ten properties in ten years. That’s too hard and it doesn’t work.
I’ve found most property investors take up to 30 years to become financially independent. They first of all spend the first eight to ten years learning what not to do, and then they have to unravel it, improve themselves and have to spend a couple of good property cycles growing their goals.
Have realistic expectations of what property can and can’t do for you and what you can achieve in life, and then you won’t get disappointed, Kevin.
Perfect investor profile – Cameron Cusher
Kevin: Housing is the single biggest asset class in Australia, worth an estimated $6.5 trillion across 9.6 million dwellings. They’re big numbers. The housing asset class is worth more than three times the value of Australian superannuation funds, which is currently running at about $2 trillion, and more than four times the value of Australian listed stock, at $1.5 trillion.
The profile of an Australian investor (who is that person, where do they live, what do they do, and what turns them on?) has been the subject of a profiling exercise that was carried out by CoreLogic RP Data – The Profile of the Australian Residential Property Investor – and that report is out.
Head of research for Australia, Cameron Cusher, from CoreLogic RP Data joins me.
Cameron, thanks for your time.
Cameron: Thanks for having me, Kevin.
Kevin: What are some of the key lessons from this? There is just so much information in this report, but what were the stand-outs for you, Cameron?
Cameron: As you said, there is lots of information in there, but there are lots of stand-outs. But I think what we really wanted to do is just paint the picture of the size of the investor market and how important it is to the housing market.
I think some of the more impressive figures: we estimated there are 2.6 million properties that are owned by investors across the country and the total value of those properties comes in at $1.37 trillion.
If we look at the split between houses and units, I think that’s where it gets very interesting. Nationally, 26.9% of housing stock is owned by investors but only 17.3% of houses. Compare that to units where you’re looking at 48.1% of units nationally are actually owned by investors. So the investor market tends to have a preference for unit stock.
Obviously there are a few reasons for that. Units tend to be more prevalent in the areas where people are renting. A lot of investors own holiday properties, and units on a holiday location are attractive, as well. Plus, obviously, the buying price for a unit is typically lower than a house and the yields tend to be higher, as well.
Kevin: Given that that’s the case, I would imagine that investment stock is skewed more toward the lower valuation bracket, Cameron. Would that be right?
Cameron: It is. We did it based on the current value estimates, and it showed that 37.3% of investor-owned dwellings had a market value of between $300,000 and $500,000, and the majority of them overall were below that $500,000 value range compared to owner-occupiers where it was only 46.9% sitting below $500,000.
Kevin: What did you find out about where they like to buy?
Cameron: What we found is, obviously, the capital cities are very popular locations. Darwin was actually the statistical division nationally with the highest proportion of investor-owned properties – 42.9%. Then in second place was Gold Coast with 32.8% of properties being owned by investors. Third place was Melbourne, fourth place Sydney, fifth place Brisbane. And if we look at the top 20 list, every single capital city except for Hobart actually appears on that list.
Generally speaking, it tends to be capital city housing markets, coastal lifestyle markets, and obviously also the areas where we saw a lot of investment over recent years – the mining towns.
Kevin: They even did pop up in the mining towns, didn’t they?
Cameron: They did. Particularly in areas like Pilbara, Kimberley, and even the Fitzroy and Mackay regions in Queensland where you do see a lot of mining towns, you still have a high prevalence of investor stock there.
Kevin: Let’s have a look at returns. Obviously investors have enjoyed some pretty strong capital growth in recent times, but the growth in rental income has been a little bit soft?
Cameron: It has. What we’ve seen over really the last 20 years is a fairly consistent downward trend in rental yields, and that’s due to the fact that the value of homes has risen at a much faster pace than rental rates. At the moment, we’re seeing rents falling for the first time in at least 20 years – the weakest rental market on record. What it does suggest is that a lot of the investors have been focusing more so on the capital growth potential rather than the rental return potential from these properties.
Kevin: Of course, lower mortgage rates have offset that burden of low rental yields, haven’t they?
Cameron: They certainly have. What we’ve also seen with the low interest rate environment is when we look at the taxation stats, that the benefits from negative gearing or the value of the losses claimed has reduced quite significantly over the last few years. So net rental losses are down 59% from their peak in 2007 and 2008, and the latest taxation data we have is the 2013/2014 financial year. Interest rates are obviously lower now than they were then. So we expect that the net rental losses will continue to reduce over the coming years.
Kevin: That’s an interesting look at negative gearing and its true impact. In a way, you could argue that it’s actually kept the rents a little bit lower, Cameron.
Cameron: I think that’s right. Because people haven’t been concentrating too much on the rental yield, they’ve been – I guess – more focused on the capital growth. They haven’t had the incentives to try and push those rental rates higher. I guess that’s been one of the key benefits of negative gearing. Obviously it’s a bit different city to city. Rents are still very expensive if you’re living in Sydney or in Darwin, but outside of those cities, rental growth hasn’t been all that strong over recent years.
Kevin: Of course, when and if – and I guess it’s only inevitable that they will go up – mortgage rates start to go up, rents will have to go up as well, wouldn’t they? Those yields have to remain.
Cameron: You’d certainly think so. When the interest rates go up or also when the growth in the housing market finally stops, the investors that are out there are going to have to focus much more on that rental return, so yield is going to become more important. And you would think that means higher rents, but obviously at the moment, when you have record high levels of new housing stock, a lot of it units, a lot of which will ultimately end up as rental stock, it may be a little bit hard for some of these investors to push those rents too far.
Kevin: I think my memory was that you said there were about 2.03 million individual investors in Australia. How many properties do they own on average?
Cameron: On average, they own about 1.2 properties per investor across the country. I guess the point there is that there are obviously some investors that own a lot of properties, but by and large, it’s someone that owns one or maybe two at the most investment properties. It’s not a market dominated by people owning five or six investment properties.
Kevin: Which brings us back once again to the statement that they really are mom and dad investors in the main, aren’t they?
Cameron: They do tend to be. Obviously there are exceptions to that, and I think some of the people nearing retirement probably didn’t have superannuation throughout their working life and have invested heavily in the residential property market. But I think you’ll find most people under the age of, say, 50 who have had their whole working life with superannuation are not going to be out there owning five and six properties – maybe one or maybe two properties.
Kevin: Okay, some of the bottom-line summaries there: concentration of where they are, and they’re predominately in the cities, I guess, in the units. Is that right?
Cameron: That’s right. Primarily in the capital cities and the larger regional towns in the unit market. When we look at the locations, they tend to be around the CBDs. In Sydney, obviously around the harbor there. But also when we look at where these units are located that are heavily focused on the investment segment, you tend to find universities and hospitals are big drivers of people owning investment properties around those locations.
Kevin: Cameron Cusher has been my guest, head of Research Australia for CoreLogic RP Data.
Cameron, thanks again for your time.
Cameron: Thanks for having me, Kevin.
Population growth brings benefit – Pete Wargent
Kevin: Apparently, there has been a rebound in population growth around Australia. What does that mean to our markets? Joining me to bring us the news on that and also its likely impact, Pete Wargent joins me.
Pete: Hi, Kevin.
Kevin: Tell me the news. What’s happening?
Pete: The rebound, as you mentioned, in Australia’s population growth in the last quarter of the year: the fourth quarter is generally a slower quarter for population growth anyway because of the Christmas break, but we saw a decent rebound up to more than 70,000 people in that quarter, which was actually a good increase on the 66,000 we had last year.
I think over the last six months now, we’ve seen that population growth starting to rebound, which is obviously a net positive for the property markets.
Kevin: This is into Queensland, Pete? Is it?
Pete: There are a few different trends going on. At the headline level, Australia’s population growth has picked up again. It was above 325,000 in 2015, so that’s a bit of a rebound over the last six months. But as you mentioned, there are a few different sub-trends going on there.
The strongest population growth is actually into Melbourne. That’s partly net overseas migration, but there has also been record interstate migration into Victoria, which is not something that historically we’ve ever really seen in Australia. That was unprecedented in the December quarter – more than 4000 people moving from other states into Victoria, so they’re following the jobs.
The other noticeable trend from an interstate perspective was this cyclical move into Queensland, which we do see historically: people moving away from Sydney as it becomes more expensive. Interstate migration into Queensland was at its highest level in eight years, so that’s really starting to gather some pace now.
Kevin: Is this into South East Queensland, or is it right across the state?
Pete: It’s largely into South East Queensland. Brisbane is obviously one of the growing markets being the capital city, but also some of those coastal regions. The Gold Coast and Sunshine Coast, those are areas that attract people to live – lifestyle locations – but also with employment opportunities too.
Kevin: People moving into Melbourne, I think you mentioned there that it’s largely to do with employment. Would it also have to do with property prices in Sydney? Is that largely where they’re coming from?
Pete: It’s difficult to narrow it down completely accurately from the official figures. I would say that there’s definitely a drain of people now away from South Australia and away from Western Australia as the mining boom comes off. I think, to some extent, there’s a bit of a brain drain happening from Adelaide, and the population growth rates in South Australia have reflected that and continued to slide.
Melbourne is benefiting from that to some extent, but also population growth in Western Australia – which was the strongest in the nation – is now actually seeing a net outflow towards other states. I think Melbourne is picking up a lot of the benefit from those areas.
Kevin: If Melbourne is picking up the bulk of that benefit, is it likely also to flow to some of the regional areas in Victoria, do you think?
Pete: The most recent figure suggests not so much. Melbourne and Geelong have mopped up the overwhelming bulk of population growth in Victoria. Melbourne’s population is growing at an astonishing pace – faster than 90,000 per annum – and Geelong has picked up about a few thousand, too.
Regional population growth at the moment, at least in Victoria, is not so strong. New South Wales, though, some of those regional economies, the Hunter Valley, Newcastle, and down in Illawara, they’re starting to creating some jobs now so they could see some population outflow from Sydney.
Kevin: That South Australian market’s struggling, isn’t it? You feel that they’re just getting on their feet and then all of a sudden, they cop another blow like this. It’s the same, I guess, with Western Australia, Pete.
Pete: Yes, to some extent, it’s reflective. Obviously, a lack of employment growth is often then reflected in demographic trends. Some of the receivership in Whyalla is a bit of a blow for the state. We’ve been talking about the [4:02 inaudible] closure for years now, but cumulatively, these little blows haven’t really helped.
But that said, the property market has been picking up a bit. People are finding things much more affordable down there than they are in Sydney, so there are some hidden benefits, but it would be really great for Adelaide if we could start to create some employment opportunities.
Kevin: Out of these figures, just in summing up, what do you see as the opportunities for property investors?
Pete: Just looking at the headline numbers, the population growth into Sydney and Melbourne is enormous, so there’s a higher share now in the history of Australia – certainly in modern history. There’s nearly two-thirds of the population growth now going to the two most populous states.
To some extent, you could say that with the centralizing population, there are opportunities there in the capital cities. I would just caution, though, that apartment construction rates are pretty high, particularly in Melbourne but also in parts of Sydney, too, so you want to be a bit careful about the type of property that you buy.
To some extent, Brisbane is following a similar trend. There are a lot of apartments being constructed around the inner city area, a lot of them sold offshore. I’d be a bit disinclined to look at some of their new stock at the moment personally, a lot of supply coming online.
Kevin: Pete Wargent, thanks for your time.
Pete: My pleasure, Kevin.
Habits of successful investors Part 1 – Michael Yardney
Kevin: We’ve given you the dos. Let’s have a look at some of the don’ts. What are some of the things that we shouldn’t be doing or even changing what we’re doing, Michael?
Michael: I think first, just don’t rush into it. I find people get all excited about the concept and then they buy the first property they’re going to see. It’s often close to where they live, close to where they grew up, or close to where they holiday or want to shop. Actually, make an informed strategic decision. There are times when you have to make a quick decision, but it has to be based on the level of information, knowledge, homework, and perspective.
Kevin: Michael, one of the things I know is the reason a lot of people rush into it – and you use the word “strategy” or “strategic” – is because they don’t have a strategy; they don’t have a plan.
Michael: That doesn’t give them the perspective to decide is it or is it not a good opportunity? We’re continuously bombarded with opportunities on the Internet or if you go to open for inspections or estate agents recommending things to you, so it’s best to sit back and evaluate each opportunity based on your personal strategy.
Kevin: What about basing it on the fact that it’s just simply cheap?
Michael: We all want to get a good price, we all want to get good value, but unfortunately, I’ve met quite a few investors over the years who have come to regret buying that cheap property because it wasn’t cheap; it was a secondary property in a bad location, in a regional area that didn’t have growth, or had structural problems.
I remember Warren Buffet’s famous saying, “Price is what you pay; value is what you get.” Don’t buy cheap properties; buy well-priced, good properties.
Kevin: I was talking to someone the other day who made a great statement and said, “We all thought that buying the worst house on the best street was a great idea, but sometimes if you do that, you’re actually going to be paying too much for the worst house on the best street because the value in the area has probably gone up anyway.”
Michael: That’s right, Kevin.
Kevin: It’s interesting – isn’t it? – some of these beliefs that we have. Michael, is there another one?
Michael: Yes, Kevin. Don’t misjudge your cash flows and don’t forget to have the right financial buffers in place. By that, I’m talking about understanding the expenses of owning an investment property, the regular outgoings, so allow for those, and allow for the ups and downs that are going to happen in the world, whether it’s interest rates, whether it’s vacancies, whether it’s unexpected repairs.
That’s why the job of a property investor is to buy themselves time – not just properties – to ride all those ups and downs. Having an offset account or a financial buffer as we sometimes call it, where you have some cash to see you through, is going to make life so much easier and you won’t have that white-knuckle ride of the ups and downs of the property market.
Kevin: I guess it doesn’t have to be a lonely journey either, does it? I’ve heard you talk about building a team, and I guess understanding your cash flow would mean that you’re going to have to have a pretty good accountant on your side, as well.
Michael: An accountant, a good finance strategist, and a good team. That’s another really good don’t: don’t try and do it on your own. Property investment is a team sport and if you’re the smartest person on your team, you’re in trouble. I’m prepared to pay for advisors, counselors, mentors.
Interestingly, that’s one of the common traits of all of the wealthy people. When you see them, they have financial advisors and they pay for them. When the poor, in general, don’t pay for financial advice; the financial advice they get is the free information they get on the Internet – and that, at best, will keep them average.
Kevin: Great talking to you, Michael. Thank you very much for sharing so much information with us twice. We had you twice on this show, so we’re going to have to pay you twice as much, I suppose. Do we?
Michael: That’s one of the don’ts of property investment.
Kevin: Good on you, Michael. Michael Yardney from Metropole Property Strategists. Great talking to you. We’ll see you again next week, mate.
Michael: My pleasure, Kevin.
Finding a spruiker – Anna Porter
Kevin: One of the questions I’m quite often asked is “But how do I know that I’m dealing with a spruiker, Kevin, because it all sounds so good?” Well, you’ll be delighted to hear about a book that’s called Whistleblower that’s devoted to exactly that – helping you identify if you are dealing with a property spruiker. The author of that book is Anna Porter, who is a buyer’s agent and also a former or current – I’m not quite sure – property valuer. We’ll find out in just a moment.
Hi, Anna. How are you?
Anna: Very well today, thanks. How are you?
Kevin: Good. Are you a former valuer or once a valuer always a valuer?
Anna: I’d say the latter is probably more correct: once a valuer always a valuer.
Kevin: Okay. Your company is called Suburbanite, and I’ll tell you how you can get a copy of the book and contact Anna, as well.
Anna, I’m particularly interested in the six questions you say someone can ask to find out if they are dealing with a property spruiker. Firstly, tell me what a spruiker is.
Anna: Yes, certainly. In our books, a spruiker is someone who will come to you as your trusted investment advisor but all along, they’re actually taking a kickback from a third party, typically a developer. They won’t disclose that to you in most cases, and for me, that creates a little bit of a question around who are they working for, and if there’s non-disclosure, it makes you wonder why they have something to hide.
Kevin: Yes. I guess that leads to the first question you’d ask, which is “Who pays the fees?”
Anna: That is probably the first and most important question to ask. I like to think I’m a very ethical person, but if I’m getting paid $40,000 or $50,000 or even $60,000 by a developer when I’m getting someone into a property purchase, I bet that I’m working for the developer more than the person that’s supposedly my client – which is why we don’t do that but most investment advisors out there do.
Kevin: Yes, question number two is “Can you offer me properties other than this new off-the-plan stuff that you’re peddling?” If you go to a seminar and they are selling specific properties, is that when the alarm bells should go off?
Anna: Yes, that is a big red flag. If they can’t offer any investments other than new and off the plan – and new and off-the-plan property is just one way to invest – you have to think, does that suit everyone? Surely it can’t. So If they’re not offering anything beyond that, there’s probably a reason for it, and it’s most likely that that’s the only way they can line their own pockets on the way through the transaction.
Kevin: I guess in a similar vein, you say question number three is “If the property is new or off the plan, ask who the selling agent is for the seller or the developer.” Why would I ask that question, Anna?
Anna: There are some investment firms out there that will still deal with new and off the plan but they might be fee for service. So there will be a selling agent representing the developer and the buyer’s agent will be representing the buyer – and the fees should be according to that.
If they are actually saying they’re working for you, then the developer should have their own internal marketing team or generally a local agent representing them so that it does create two sides to that transaction that are fair and transparent. If they’re acting on both sides, it’s really not fair or transparent.
Kevin: Yes, I guess I’m a firm believer that if you’re going to be spending a lot of money – as you would do in buying a property – you have to do your own due diligence, which leads to the next question which is “Can I have my own valuer put a valuation on this purchase?”
Anna: That’s a really big one. When I was a valuer, we would often see this unfolding, this scenario, where [3:26 inaudible] valuers are inherently conservative, but there are also a lot of cases where you go out and value something, and again and again and again, it may be a new estate or a new development, the valuations just weren’t stacking up compared to what else was selling. It’s because they’re overpricing.
If the developer is giving say $40,000 or $50,000 to the investment advisor on the way through, that money has got to come from somewhere and it usually means the investor is paying too much.
They often will try and mask it or hide it by not letting you get a valuation done. To me, that’s again non-transparent. But we’re seeing some that are really, really, cheeky where they’ve actually had ones where they couldn’t settle.
It might be a financial advisory firm that’s linked into a broker or they might be one of the one-stop shops. They have into settlement, the valuation has in low by the bank. The investor actually wouldn’t be in a position to settle but they’ve gone and bumped up their own home loan, transferred money across, and played with the loan structures to get it to a point where it can settle. But effectively, they’re using more equity out of the investor’s home.
The investor may or may not have knowingly signed off to that. They might be a bit confused with the loan structure or given enough authority over to the firm they’re working with to actually rejig it without them having full knowledge and they’re just trying to hide the fact that the valuation came in low. So you really need to be across that.
Kevin: One really great telling one that I see in your book is question number five that I must admit that I had never thought of but it’s a really good one, and that is asking this person whether they’ll go back to the developer to negotiate the price for you, which is going to be a great indicator, because they won’t do it obviously.
Anna: No, because it eats into their own commission. Once that price goes down, the developer will tell them to start dropping their own fee, and they don’t want to do that.
Developers tend to set the market. If they’re setting it in line with sales in other developments and established stock, that’s fine, but often they’re not.
Kevin: The final one is to ask them about their credentials. I guess if you’re going to be taking property investment advice from anyone, you have to make sure that they are qualified. There’s nothing wrong with asking them what their formal qualifications are, Anna.
Anna: Yes, this is the one I’m probably most passionate about, up there with who’s paying the fee. This one is so critical because the spruikers will often have no qualifications, or they might have done maybe a three-day real estate course. I’m a firm believer… I’ve actually taught the real estate course at TAFE, and there’s not enough in there to make someone have enough knowledge to advise on your greatest asset and investment strategy as an overall whole.
There are also the self-proclaimed experts out there who become advisors. They fill portfolios with a heap of regional properties. They don’t look at diversification, they don’t look at the growth indicators.
We have people walk through our door on a monthly basis who have bought five or six properties in these regional locations, held them for seven, eight, or even nine years, and had no growth or sometimes had the portfolio go backwards. It often comes through either working with a firm that has no formal qualifications and limited experience in that space or someone who’s done maybe a three-day real estate course and often they’re getting paid by the developer.
Kevin: Anna, there’s one other thing that I wanted to ask your opinion on, and that is something that I’ve always warned against, and that is rental guarantees. If they are actually using a rental guarantee to justify the price, alarm bells should definitely be going off.
Anna: I couldn’t agree more. We’ve never had to offer rental guarantees to our investors because we’re in a strong rental market. I met a lady just recently who had a property she purchased where the rental guarantee was $450 a week. That was for the first six months. When that came off, she was struggling to get $250 a week. Now, that made the property unaffordable for her. She’s now trying to sell it, and she’s looking at taking a big loss because she did pay too much for it and it’s in an oversupplied market, which is often the case.
These kickbacks occur in markets that are oversupplied because the developers can’t move their stock. So now she’s in all sorts of financial strife and she really just can’t afford to hold it at the market rent.
If you’re going to go for a guarantee rent, yes, ask why they have to guarantee it. Also get an assessment of the market rent, which is another thing that the valuer will do for you when they do the valuation for the bank. Make sure that you have independent advice from an independent broker and solicitor that’s not part of the one firm because they’ll be across all that information for you.
Kevin: Yes, great advice coming from you in the book, which is simply called Whistleblower. It’s written by Anna Porter who has been my guest. You can get a copy of that book by going to Anna’s website Suburbanite.com.au.
Anna, thank you so much for your time and for writing the book. It’s been great talking to you.
Anna: You’re more than welcome.