Four investing myths

Matt Richardson

There is so much information available to investors at any time that it is now becoming difficult to determine if that information can be relied upon.

I thought it was an opportune time to try and sift out some of that information we believe is a myth rather than a fact.

Myth One

All property doubles every 7-10 years!

If this was the case all property investors would be multi-millionaires and very little research would need to be done prior to purchasing a property.  If you see/hear/read anyone recommending a property investment to you based on property doubling every 7-10 years you should be very careful!

There are many factors that contribute to a strong property investment.  We have continued to direct property investors to Margaret Lomas’ books as a fantastic way to find out what those factors are.

In Margaret’s own words regarding property prices doubling:

“If all property prices doubled each and every seven to 10 year cycle, the average block of land in Sydney that was worth 1 pound in 1776 would now be worth around $18 million.  Yet I have property in my own portfolio which I have had for 10 years which has only gone up by a total of 25% while others in my portfolio I have owned for five years which have gone up by 250%.”

Myth Two

Making a property investment loss is great for my tax!

We hear this far too often unfortunately and there are 2 reasons why we are concerned with this.

  1. Many investors mistakenly believe the amount they claim as a tax deduction, they will receive 100% of this amount as a tax benefit.  In reality they will only receive the value of the tax deduction multiplied by their marginal tax rate (MTR).  If a tax deduction (or investment loss) of $1,000 is claimed and the taxpayer’s MTR is 34.5%, the actual tax benefit will only be $345, not $1,000.  The lower your tax rate, the lower the tax benefit.
  2. Based on point number 1, you are still out of pocket after claiming the tax deduction.  The only way the investment (usually a rental property) can become viable is by making an after tax cash flow profit each year.  To do this you need to increase the rental income and/or decrease the running costs (including reducing interest by paying down debt).  The property eventually has to put cash back in the investor’s pocket for the investment to be successful!

Myth Three

There are “secrets” to successful investing that the general public doesn’t know!

The golden rule with this myth is if you see a full page ad in a newspaper, with a picture of a person sitting in a Ferrari, with aviator sunglasses on and an accompanying story of how they were broke, then uncovered an investing “secret” and are now retired in their mid-thirties, please turn the page and don’t look back!

They normally also state they have helped thousands of people become multi-millionaires and are now prepared to “give away” their secrets to you.  Their special secrets may involve locating cash flow positive properties for you, currency trading, options trading, stockmarket software, buying properties at under market prices, “flipping properties”, etc, etc.

There are always strings attached with these arrangements so be extremely careful.  There will normally be a free seminar first, or a website to register with to receive some “free” info.  You can guarantee you will have to part with some money at some stage for a special “investors conference” or to buy overpriced property where huge commissions are paid.

Do your research first – or better still just turn the page!!

Myth Four

There is no risk in investing in bank Term Deposits!

This is true to a certain extent, because there is no “volatility risk”, however there are 2 factors investors need to be aware of (yes, I have written about one of them before!):

  1. When you take into account inflation, the value of your bank term deposits will continue to diminish year after year.  Secondly, you are also at the mercy of interest rates which over the last 10 years have continued to decline.  So both the “real value” of a term deposit investment and the income it produces has gradually decreased over this time period.
  2. The government bank guarantee only applies to the first $250,000 with each institution in the event of the bank going under.  More information can be found here.

All we encourage investors to do, before they make a commitment with any investment, is to make sure they have done their homework to help reduce any potential risks.

Well researched investors, will nearly always generate better long term results!  Please check with your advisor at Green Taylor Partners if you need any help looking at a potential investment.