Media

The Sunday Age

When the real vice is advice- beware who's giving it

When I penned the very first 'Property Planner' column back in January 2007, the property market was about to awaken after several years of peaceful slumber.

I predicted that as the groundswell of investors increased, a questionable breed of property advisors would begin to emerge from the woodwork to take advantage of their enthusiasm. In my view, they were not really advisors, but people selling a particular property or investment strategy under the guise of advice.

Three years later, I'm sorry to say, little has changed. Now, at the beginning of the next property upturn, I'm forced to repeat the message, in the hope that a new crop of investors will take heed.

Despite several federal and State government inquiries in recent years, a lack of regulation allows many practitioners providing questionable advice to go about their business unchallenged.

Although investors make up 30 per cent of the market, and borrow hundreds of thousands of dollars to purchase their assets, the federal government still has not amended legislation to recognise residential property as a financial product.

It remains unprotected by the same provisions as investment vehicles like direct shares, managed funds and superannuation. Residential property advisors are not required to undertake due diligence before providing advice. They don't have to ascertain their client's investment goals, financial situation, investment timeframe or risk tolerance. And they don't need to tailor their recommendations to this knowledge.

Until this deplorable situation is remedied, the onus remains squarely on you, the investor, to keep your eyes open for investment strategies or recommendations that may be nothing more than selling under another guise.

First, be sceptical of 'one-size -fits-all' investment strategies. People who claim that a particular strategy or type of property is best for every investor fail to acknowledge that each investor comes to the party with different personal and financial circumstances, investment goals and tolerance levels for risk. The investment strategy or property that is appropriate for you may not be appropriate for someone else.

To keep you on the alert, here's a rundown of the most common 'one-size-fits-all' strategies:

• Positive cashflow. This strategy encourages investors to buy cheap properties and use rental income to buy subsequent properties. But if you buy cheaply, you may well sell cheaply too. And if you already have a tax problem, a positive cashflow strategy may compound it.
• Negative gearing. This strategy relies on tax breaks to improve cashflow. Whilst negatively geared properties tend to achieve higher capital growth, you have to pay money out of your after-tax wage or salary to meet the difference between rental income and expenses. If you lose your job and can't meet the loan repayments, you may be forced to sell prematurely for minimal or no profit.
• Development. Some residential developments hold strong profit potential, but the risk is equally high. If labour shortages or bad weather blow out the construction timeline, can you afford the higher costs? Market timing is also crucial-what will buyer demand be like by the time the project is complete?
• Buying for tax benefits. If you buy new residential property, you can claim substantial depreciation. However, the property may have a low land-to-asset ratio. The building component, which depreciates, makes up the majority of the purchase price. Buying according to this strategy increases your risk of negative equity, at least in the early years.

Second, be wary of free advice. In the investment world, nothing is truly free. If someone offers you free advice about a particular investment strategy or property, chances are that a third party is paying them to do so. And if you don't pay them a fee, how can you expect them to be accountable for their advice?


TIP BOX

• Poor regulation encourages poor property advisory practices
• Property spruikers come out in force when investors enter the market
• Be sceptical of one-size-fits-all strategies and free advice.


Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au