10 highly dangerous ‘tips’ investors get

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Margaret Lomas, founder of Destiny Financial Solutions, reveals the most detrimental pieces of advice given to property investors: 

1. Invest in the US

If the property market is so good there, why aren’t the locals snapping properties up? Expect more volatility to come. Those spruiking these properties are on handsome commissions and a lack of good research opportunities has seen many people buying properties worth less than half of what they are paying. 

2. Use your super

Investing using a self-managed superannuation fund is the latest with property sellers taking advantage of the new rules to find additional avenues to sell property. Very few people have enough in super to make this a viable, diversified strategy, the borrowing is complex and costly, compliance is onerous and the accounting is complex and also costly.  Unless someone has several hundred thousand dollars in superannuation, this is not a sensible strategy. 

3. Buy into a hotel or serviced apartment complex in a holiday spot

This is usually made on the basis of being able to get some personal benefit from the purchase. Firstly, any personal benefits come at the cost of tax deductions and secondly, these kinds of property may have good yields but usually have poor growth records.  That great holiday place rarely makes a great investing spot. 

4. Buy in one area only

There are thousands of property markets all behaving differently and a diversified approach will help to add stability to a portfolio. 

5. Buy off-the plan during unstable economic times

It’s hard enough to forecast future values and even harder to do so when we are so unsure of the future.  Investors should only ever buy existing property with a known value. 

6. Buy property in an area where there is a single ‘kicker’

People buy because of the ‘new hospital’ or ‘new rail line’ or any other single factor which may provide short term interest but little in the way of long term growth.  It’s the concert of factors (that is, many growth drivers) which makes property grow, not just one single factor. 

7. Buy because of high yields alone

Getting a strong cash flow is important but not unless there are identifiable growth drivers too.  Cash flow may keep you in the market, but you need growth to build net worth which allows you to eventually retire. 

8. Buy to take advantage of a tax ‘loophole’

This includes using complex tax avoidance structures – ‘loopholes’ – such as capitalising interest on investment loans and similar measures. One day these loopholes will be closed off and if the only thing a property has going for it is a tax loophole, then you will be left with a poorly performing asset without the tax advantage. 

9. Invest because you saw a property that looks good 

The decision to become an investor should come about because you decide property is the right asset class for you, and you then do a lot of independent research and get educated. If you first consider becoming a property investor because you saw an ad for a property, or went to a home show, what are the chances that the property you are being shown suits your personal risk profile, personal needs for income and growth, time till retirement AND is also in the best possible area to invest in, at that very moment in time? You should only buy property after you have learned how to do so well, and know what type of property suits you – then you can go out and source it. If you see a property and then decide you should become an investor, it’s highly likely you are buying a property not suitable for you. 

10. Buy a property with a rent guarantee or other scheme of arrangement over the top

You should only ever buy a property because the underlying asset stacks up, not because it has a rent guarantee or a good tax arrangement.  If you find a property with all of the intrinsic growth drivers in place and it also has a guarantee or other arrangement, then it may be okay.

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Comments
  • Gail L says on 19/01/2013 04:49:38 PM

    Americans are not buying property because they can't get finance. Their complex credit score system means if they are foreclosed after a job loss or similar, it can take them years to build up a credit score to apply for another loan. And the banks are now very conservative about their lending (about time!). Americans also do not have the interest in property investing that we Aussies do - it's a different mindset. Property investing in the US for Aussies is a big risk - you need to do your research - physically in the US - not on the internet - and develop the right networks over there. You need to be prepared to set up LLC's, file IRS returns, open US bank accounts, have a mail forwarding service, hire a US CPA, set up asset protection measures for your Aussie assets, educate yourself on US property etc. etc. It's not something you do lightly and at low cost but there are benefits if you do it correctly. We toured the US 2 years ago, bought 5 properties across 3 states which are all returning between 14% and 21% net per annum. There are also great opportunities to keep secure tenants by offering "rent to own" to good tenants who lost their homes in the GFC through no fault of their own and either cannot save for a deposit or do not have a high enough credit score to apply for a loan. It is hard work and things don't always go smoothly but we have found it very profitable and rewarding.

  • Simon says on 19/01/2013 07:58:41 PM


    Reply to 'do not Invest in U.S.'

    I bought in Gilbert, AZ, $31k and sold at $75k after 5 months.
    Bought off bank's foreclosure list for cash.
    April 2012.

    At the time, the local US citizens were too debt laden and with bad credit to buy anything.

    In recession times, cash is king.

  • Roger O says on 22/01/2013 02:35:53 PM

    OK so I am guilty of adopting tips 1, 2, 4, 7, 8 and 9. My SMSF paid $450k cash for 3 houses and 4 duplexes in the USA, the properties have been returning $70k nett.....so I guess I am living dangerously....??

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