Great opportunity or am I getting ripped off?

November 1, 2018

Rohan Brown

Today’s blog started with a message on my phone at about 8:15pm on a Tuesday from a friend via Facebook Messenger, “Hi Rohan, just wondering if you have heard of…”. After a quick Google I came up with the results of a Gold Coast based advisory business. Initial alarm bells went off and I fired a quick message back, the theme of which centred around the sceptic in me about Gold Coast spruikers.

A few messages later and I thought a phone call was needed. What had led to the discussion was there is a Gold Coast firm visiting Victoria running sessions to sell people into property investments. The advisors have the house and land package ready for you, setup the lending for you, prepare all the tax claim information for you. They also show you how wealthy you will be just sitting back having the tax man assisting in paying off your debts, just like a Kung Foo Holiday (Google the band Redgum).

I already had my sceptic hat on, warned them about property sharks, especially stereo typical Gold Coast spruikers, the sort that get you at that venerable time on holidays thinking ‘this is great, I want to own a bit of it’. At the same time, my friends were keen to hear out session, but were eyes wide open.

Earlier this week I received an email that was presented to them regarding two possible properties. One was just north of Brisbane, a single-story dwelling. Initially I thought ‘this may have some merit, we are not looking at a Gold Coast, strata titled, short term rental unit’. I worked through the proposal and in general terms it looked ok, but I thought what are the catches here?

For any business proposal you should be looking for were the catches:

• What are the assumptions being made? In this case it was CPI rates, asset growth rates, rental, interest rates and that the initial costs and the land and building will the actual market value of the property when completed. Many of these assumptions raise questions themselves which can if adjusted make the overall investments result a lot different.
• What makes the deal look good? The loan on this property was interest only and at the same interest rate for the next 15 years. With the assumptions above in about 4 years the property become positively geared. Will the property value increase and with it the rental return? There is no problem with interest only loans, but you need to understand the pros and cons of them. In particular what will the cashflow issues be if interest rates rise or a finance institution expect Principle and Interest payments in time.
• What is the advisor making out of it? The advisor was set to make a substantial amount out of the borrowing and establishment fees. We also have no idea what they were going to make from the property transaction as well. They may be questions to be raised with the advisor.

At this stage we had not written off the idea, but I left my friends with the question of what if you did this yourself? Remove all the middle men taking a fee out of the opportunity. I Googled house and land packages with reputable builders in that same area to ascertain what you can build for, I suggested they see a bank on what the lending costs may be and ability to borrow.

Another option was if they are in the market to invest in property, consider buying a similar already built property. They then know they are paying market value, can see what they are getting and start getting a rent return sooner.

Also check out what rental property returns can be achieved currently in the area, as from my quick Googling, based on the projected rent the advisor worked on, this property would be at the upper scale of the market asking price for similar properties in the area currently.

The big take away is do your research, take your time and become educated regarding what you are looking to invest in. Don’t rush into a decision or feel pressured. If you need to, get advice from experts, but choose wisely from whom you seek it. Remember there are no free lunches in life.