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.