No “happily ever after” for property ‘suckers’

Too often in my line of work you hear horror stories about deals gone sour. 

They usually go something like this…

Once upon a time, there was an inexperienced investor who went to a financial advisor for some guidance.

They wanted to boost their retirement savings and had heard lots of good things about property investment within a self managed super fund.

All their friends were talking about it!

Much to their delight, the advisor not only told them that their idea was exceptionally good, but that he could help them out with the perfect property asset for their investment portfolio.

I wish I could tell you that he then arranged for them to borrow and purchase a wonderful, investment grade property and they all lived happily ever after.

But unfortunately, the advisor turns out to be a glorified sales consultant, receiving a hefty commission worth tens of thousands of dollars from a large developer to push their latest off the plan apartment offering.

The “sucker” sell

Aside from the fact that these “advisors” are being unethical in dressing up what is essentially a sales pitch as impartial advice, and receiving large kickbacks for client referrals, the big issue here is the product itself.

Many of these advisors ride the property waves, surfacing when market sentiment is high and housing finds increased favour with investors.

They then use this buoyant market sentiment to push an inferior product, raking in commissions as high as $50,000 in some instances.

That’s why so many are currently crawling out of the woodwork.

‘Yes,’ they agree with the beginning investor, ‘ you are absolutely right in how well property values are doing right now. Of course real estate is a very reliable and safe commodity!’

And while this is true, the fact is not all property across the many markets within markets in Australia, is appreciating in value with the same vigour.

Not all property is safe and reliable as an investment, particularly when we start talking SMSF ownership structures.

The problem product

The ‘product of the moment’ being pushed on unsuspecting property investors is inner city apartments in monolithic high-rise developments.

A massive glut of this stock is hitting our major CBD precincts in sporadic floods, with local and overseas developers all wanting a piece of Australia’s property pie. 

Alarmingly, many property investors are purchasing these products off the plan, with promises that their asset will be worth more when settlement occurs on completion.

However in an increasing number of instances, valuations are actually coming in below the purchase price.

This isn’t so surprising when you do the math and consider the commissions I mentioned earlier, as well as all the marketing costs including the glossy sales brochures and display suite set-ups, all built in to the contract price.

In a worrying trend, negative equity – where the associated debt with the property is greater than its value – is being widely reported in the new apartment submarket.

Once upon a time, only about ten or so years ago, a very similar trend took hold…

A lot of investors were badly burned

And I’m afraid it’s happening all over again.

Last year the Sydney Morning Herald revealed that some SMSF investors, who had fallen for a slick sales con and snapped up one of these below par properties, had lost up to 75 per cent of their investment sum within two years of purchase.

Rather than boosting their retirement nest egg, they were actually draining its potential.

Ouch!

Not so super

Holding highly negatively geared property in your SMSF, particularly if it crosses over into the realms of negative equity, is really a fool’s game.

Given that SMSF’s are concessionally taxed, any tax benefit from the income loss you claim as a result of holding your negatively geared property investment in this structure is reduced.

Consider the scenario where you have to write off $10,000 of rental income as a loss.

If you paid the average 30 per cent rate of personal income tax, you would get a $3,000 deduction.

Whereas a SMSF that paid 15 per cent tax would only receive a $1,500 deduction, or possibly none at all if the fund was in pension phase.

Doesn’t seem to make a lot of sense, does it?

The perfect “sucker” storm

Legislative changes that have made it possible for investors to borrow for the acquisition of property within their SMSFs has of course, been a boon for these financial advisor ‘wolves’ rugged up snugly in sheep’s clothing.

Then of course there’s all the dinner party conversations hyping up property investment within SMSFs, largely led by financially illiterate ‘armchair experts’ who have been to a glitzy seminar and subsequently bought their own off the plan ‘lemon’.

While there is undeniably a time and place for all types of ownership structures within a property investor’s retirement portfolio, SMSFs can be incredibly complex and costly to establish, not to mention administer.

Remember, a smart property investment is one that makes you money with above average, long-term capital growth performance.

Ideally, an investment grade property within the most appropriate structure for your circumstances will have the potential for you to make equity almost immediately.

You will never achieve this by paying hefty, built in development costs and commissions to so-called advisors

Sophisticated property investors never base their buying decisions on the latest fad, or some advice dished out by their well-meaning Uncle Larry.

Their success is built on a foundation of market education, detailed goal setting and a carefully considered financial and investment strategy that sees them ascend the property ladder with minimum risk and maximum return.

It may not be the latest sexy fad, but the facts and figures speak for themselves.

A final word…

The best way to avoid becoming a ‘property sucker’ statistic is to qualify the information you receive about any investment product, structure or strategy.

I’ve shared  the 7 ‘must ask’ questions to qualify your ‘expert’ in a recent blog here. A must read for anyone who might be thinking of engaging an industry professional to assist with your investment journey
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