Beware of Property Investment Spruikers

-crawling out from under the rocks

The further lowering of interest rates (2019) and the signs of an Australian property market recovery has invariably led to property investment spruikers crawling out from under their rocks.

One strategy used by spruikers and associated developers is via an invitation to members of the public to obtain “free advice” by attending a "wealth creation" seminar that normally costs "tens of thousands of dollars".

Property investment promoters, or spruikers, invite people to their 'wealth creation' seminars, often for free, with the promise of investment tips or opportunities.
They typically promote a property investment system or market a specific property development.

ConsumerLaw.gov.au

The Seminar

During these 'seminars', property spruikers often work on our emotions with "excessive emotional manipulation" while they attempt to promote 'wealth gain' through property investments.

The unsuspecting guests think they are attending a free day of information, not realising that most of the day is going to be a sales pitch.

The spruiker may cite an example of how a certain person made a substantial financial gain on their investment in an attempt to work on our own greed and envy. The potential gains spruiked for the investment are often over simplified and the risks and potential losses are glossed over.

Fake Testimonials

The testimonials presented at the 'seminar' regarding the quality of the investment property or development are often made by people affiliated with the property company or directly employed by the spruiker or development company.

Attendees slowly begin to feel worn down during the seminar and this is often when the sales contract for a specific property development is brought out by the spruiker. These sales contracts might offer special deals such as, "sign today and get a 50% discount" or "sign at lunchtime and get a $10,000 cash back guarantee."

Be wary when a salesperson puts time pressure on you to sign anything. Usually these 'cash back' deals and heavy discounts are strategies to encourage the purchase of inferior properties.

When it's easy to invest, people are keener and therefore less careful, and so the spruiker has the chance to push over-priced property in areas with little going for them, where they receive great commissions.

Margaret Lomas in Australian Financial Review (AFR) Investors warned of rising spruiker activity by Nila Sweeney. 21 November 2019.

The Masquerade

Spruikers are often masquerading as qualified property investors. Unfortunately campaigns for regulation of the property investment industry have fallen on deaf ears at all levels of Government for over a decade.

One campaigner, Margaret Lomas, founder of Destiny Financial Solutions, suggests "most people are horrified to know that anyone can call themselves a property investment provider without qualifications, licensing or even a couple of regulations to govern their practices." (in AFR 21/11/19)

We should ask how these 'educational' financial workshops can be offered for 'free', unless commissions are being paid to the 'seminar' providers i.e. spruikers who are financially rewarded for successful referrals to developers or signed sales contracts.

Burnt

Property spruikers do not give advice out of the goodness of their hearts. They stand to make huge commissions out of sales of dubious investment properties.

They will talk about creating wealth but more often than not it is about creating debt.

There are long-standing ramifications for those who have been burnt by investment property spruikers. Many victims buy an investment property to help them with an income stream in retirement.

Tragically many investors end up losing not only their 'investment' but even their own homes due to the debt they incur from being misled or misinformed. This kind of outcome occurs when investors do not do their research or due diligence before purchasing an investment property through a spruiker or property investor agent.

Consumer protection agencies across Australia have found that many property spruikers cannot substantiate the success stories and claims of profits they promote. However, keep in mind the following:

If you've been to a seminar where there was no indication goods and/or services would be sold there you may be eligible for a 10 business day cooling-off period for items valued at more than $100.

ConsumerLaw.gov.au

The Phone Call

Property Investment Professionals of Australia (PIPA) and the Property Investors Council of Australia (PICA) have alerted their members to the re-emergence of unscrupulous operators using industry players to sell their properties. Sydney property groups report that spruiker activities over recent months have "ramped up since building defects and oversupply issues were made public." (in AFR 21/11/19)

Spruikers send hundreds of generic emails to mortgage brokers, accountants, financial planners and established real-estate industry people, who are in turn offered commissions and incentives to contact their listed clients and promote certain properties as investment opportunities.

Successful referral commissions range from 6-13% of the sale price or a flat-rate commission of $50,000 plus a gold Rolex watch to "offload sub-poor stock". One Sydney buyers' agent, Steve Waters, reported that spruikers and developer representatives sometimes offer to do it "off the books", so there is no documentation that such a deal has been struck. (in AFR 21/11/19)

The broader public don't receive these emails but more likely they'll get a phone call from an existing trusted source (such as those mentioned above) who may use their previously established relationship to talk clients into buying a certain investment property.

Lomas claims that "Investors generally trust the advice of their broker, accountant or financial planner and believe the investment must be a good one [and] because there are no laws in place, no one has to know how much money is really changing hands."

What better way to earn a cool $15,000 to $20,000 than simply refer your client to the latest well-paying developer or spruiker.

M. Lomas in AFR 20/11/19

The Wisdom of ASIC

The following is a summary of the advice provided by the Australian Securities and Investments Commission (ASIC) regarding Investment Properties. https://www.moneysmart.gov.au/investing/property

Buying and Managing an Investment Property

Buying a property to rent out is a popular form of long-term investment in Australia. Houses and units are easier to understand than many other types of investments, yet they do have some issues you need to be aware of.

Where and what you buy will affect your return on investment. Here are some tips to help you identify a good investment property.

Where to buy:

• Familiar markets - Consider buying an investment property in an area you are familiar with as it will take you less time to research. Check recent sale prices in the area to give you an idea of what you can expect to pay for local properties.
• Growth suburbs - Look for areas where high growth is expected, where there is potential for capital gains.
• Rental yield - Look for areas where rents are high compared to the property value.
• Low vacancy rates - Find out about the vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area, which could make it harder to rent the property out, or sell it in the future.
• Planning - Find out about proposed changes in the suburb that may affect future property prices. Things like new developments or zoning changes can affect the future value of a property.

Smart tip:

Remember that property values can fluctuate over time. For example, the value of Gold Coast units fell by 17.9% between February 2008 and March 2013 (Source: rpdata - Rismark 2013).

What to Buy

• Attractive features - Look for investment properties that will appeal to as many people as possible, like a second bathroom, lock up garage or nearby shops, schools and transport.
• Wide appeal - Find a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees.
• Low maintenance - Keeping costs down is important, older homes or those with features such as a pool or extensive landscaping may cost more to maintain.
• Property type - Units can be easier to maintain than houses, although you will have to pay body corporate fees.

The Costs of Property Investment

Buying, managing and selling an investment property can be costly and will affect your overall return.

Buying an investment property

Some of the costs involved with property investment include: stamp duty, conveyancing fees, legal costs, search fees, and pest and building reports.

Owning and managing an investment property

When you own an investment property, you will be responsible for such ongoing costs as: council and water rates, insurance, body corporate fees, land tax, property management fees (if you use an agent), repairs and maintenance costs.

If you borrowed to invest, you will also have mortgage repayments, and if your investment is positively geared you may pay tax on your rental income.

Check you can afford the repayments on an investment property loan.

Interest-only loans

Many people use interest-only loans to fund an investment property, although the principal will need to be repaid eventually.

Property Management

You can either manage your property yourself or engage a managing agent to do it for you.

If you manage the property yourself, you will avoid paying management costs but you will have to do everything, from showing the property to tenants to collecting rent and organising repairs. You also need to comply with landlord regulations.

If you use a managing agent to look after the property, the management fees you'll pay are tax deductible.

Insurance

While you don't need to pay for home contents insurance, you will need to organise building insurance which cover you for building replacement if, say, the house burns down. If you buy a unit, building insurance will be paid from your strata levies.

You should also consider taking out landlord insurance. This protects you if your tenant damages the property or if they leave without paying the rent. The cost of landlord insurance is tax deductible.

If you are relying on part of your salary to cover your repayments and expenses, make sure you have adequate income protection insurance. Your ability to earn an income may be the most important asset you have.

Repairs and maintenance

You need to include repairs and maintenance in your investment property budget. If your tenant complains that the oven is not working or the shower starts leaking, you need to fix it straight away. Consider the age of the property when you are working out how much to set aside every month to cover emergency repairs and replacing items like air conditioners, hot water systems and dishwashers.

Only renovate your investment property if you think it will increase the rent you can get, or if it will make the house or unit more appealing to renters. Property improvements are not tax deductible.

Selling an Investment Property

If you decide to sell your property, you will have to pay agent's fees, as well as advertising costs and legal fees. You may also have to pay capital gains tax if the property has increased in value.

Positive or negative gearing

Most people will borrow to invest in property. This is called 'gearing'. Negative gearing is where the income from your investment is less than the expenses. Positive gearing is where your income from an investment is higher than your interest and/or other expenses. See negative and positive gearing for more information.

Work out your income and expenses

Once you have a property in mind, think about the income you expect to receive from it, and what your regular expenses will be. If there is a shortfall, think about whether you can cover it long-term. Also, work out whether you could cover all expenses short-term if you had no tenants for a while.

Don't invest only in property

If you invest exclusively in property, you will have a lot of money riding on one market. If you also own your home, you will have all of your wealth concentrated in the property market.

This is poor diversification and increases your risk. Investments such as managed funds and ETFs allow you to invest in a broader range of assets, which will reduce your overall risk.

Overseas Property Investments

Investing in overseas property is more risky than investing in property in Australia. It is much more difficult to make sure the investment suits your needs if you don't have local knowledge and you can't regularly inspect the property.

ASIC has received complaints about promoters who encourage Australians to invest in the United States property market. If you've been 'invited' to invest in a supposedly 'cheap' overseas property, ask yourself why they need someone in Australia to invest? Why aren't savvy locals investing? Chances are it's a dud investment.

Here are some things to consider if you're thinking about investing in property overseas:

• Distance - Good tenants and good property managers are hard to manage when you're so far away from the property.
• Renovations and repairs - Expensive renovations and repairs may be needed, especially if the property is prone to squatters and vandalism. Buying property sight unseen is also a big risk.
• Hidden costs - You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. There are lots of hidden costs that the promoter may not tell you about.
• Exchange rate - Changes in the exchange rate could affect the amount of income you receive.

The Final Word

The Australian Securities and Investments Commission (ASIC) offers the final word on seminars and spruikers.

Investment property advisers

Property investment seminars

These events often use high-pressure sales tactics to rush you into making big property investment decisions. Find out how to spot the warning signs of a dodgy investment seminar.

www.moneysmart.gov.au/investing/property

Under the Rock

So if you receive an invitation to attend a "Free Property Investment Workshop" or a phone call from a mortgage broker, accountant, financial planner or real-estate developer offering "wealth creation" through investment properties, do your research to find out what rock the spruiker crawled out from under and what this creature might be trying to conceal behind their masquerade.

You may be astonished at what your research uncovers and as a consequence your due diligence can potentially save you from a world of unnecessary financial and emotional pain.

Researched, Compiled, Composed and Written by Dr Steve Gration – November 2019

Sources and References

Nila Sweeney. Investors warned of rising spruiker activity. Australian Financial Review. 21 November 2019.

Australian Securities and Investments Commission (ASIC)
https://www.moneysmart.gov.au/investing/property

Australian Consumer Law
ConsumerLaw.gov.au