The Great Investor Rip Off

There are any number of “investment” or “wealth creation” companies operating in the real estate market today indulging in fairly questionable activity from an ethical perspective, this article aims to assist investor buyers in discerning the wheat from the chaff. Such advisers will present all sorts of facts and figures as factors to consider when buying an investment property but generally ignore the most important, price. For the reasons explained below the glaring conclusion is: never get investment advice and an investment property from the same source. Read on to find out why.

As the chart just below indicates, buying a property at market value is a little like buying a new car. Due to the costs involved your net relative value position suffers the moment you take possession whereby your equity position reduces in direct proportion to the costs involved in buying, the Stamp Duties, Fees and Charges and the Commissions paid by Vendors, Developers or Builders to Agents, Financial Planners and Wealth Advisers that are included in the bottom line. However, as the yellow bar illustrates, under normal conditions, it normally takes two to three years to break into positive equity and from there on it is your equity that is improving and compounding and its easy to see the amount of capital gain at the end of the 10 year period which is only a relatively short time in real estate investing.

In comparison this chart indicates what happens if a 50K over the market value is paid, you have the stamp duties plus the selling costs and commissions along with the 50K over market value price paid to purchase the property. The yellow bar now indicates a five year period before positive equity is achieved while the delay has a serious impact on the capital growth result over the same period. The other consideration to think about is the reality that there are other issues that can affect the quality of any property investment the primary one being government policies that can affect values, as does employment levels among other important economic indicators, so as they say in the classics, past performance is no indicator of future performance, there is always the element of risk, and this risk increases substantially if you pay too much for an asset. This is where its important to consider the structure of the company you are buying through.

Conflict of Interest

  • In normal agent/principal relationships the primary duty of care and loyalty should be the interests of the principal (the person paying the commission), this cannot happen when an adviser purports to act in the investor’s interest but is paid by another party be they a developer or builder.
  • Financial advisers and wealth creation companies that offer “free investment education” or advice to investors do so as a means to attract new custom for their business. The aim is usually to impress the potential investors with all sorts of facts and figures and ultimately sell them a property. Investor buyers, quite rightly need to do an analysis on a proposed purchase, considering such statistics as forecast and historical growth, vacancy rates, rental return, depreciation schedules, amenities and infrastructure both planned and existing, lifestyle appeal, job availability, the general affluence in any given area and any other factor that might generally impact capital growth over the long term. This approach is basically common sense and usually the information required is either freely or very economically available over the internet, no need of an expert, there’s no rocket science involved!
  • Investor buyers are often unaware of the excessively generous commissions paid to advisers due to a lack of transparency inherent in a business model that has no defined priority regarding the best interests of the investor, as opposed to other stakeholders who would appear to have a far greater claim to an adviser’s first loyalty.
  • In this business model, objective investment advice is limited to the projects the adviser has access to, while the wider established market or competing projects are simply ignored, often to the substantial financial detriment of the investor.
  • The price paid, often cited by good advisers as being a critical factor is also ignored by many property spruikers. The old adage that the profit is realized “when you buy the property rather than when you sell” is not an apparent consideration, this fact becomes self evident when you consider that most wealth generation companies deal exclusively in new projects or on new house/land estates which are usually sold at premium prices in comparison to re-sales of near new properties. Whenever investors pay a premium to purchase overpriced, above market value properties, it creates a significant time lag, often taking years before the property will produce positive equity for the investor. These critically lost years of positive growth when considered in the context of the effect of the law of compounding interest, potentially has a devastating effect on the final results, results that Mum and Dad investors in particular rely on for retirement.

“Price is what you pay, value is what you get”

Warren Buffett

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