It starts with a cold call. “Would you like to come to a free seminar about investing in property? No obligation, no fees, just information and education”.
Or perhaps a friend invites you – they have a ticket for two and figure you could benefit too.
But once the presenter tells you about the riches to be made from property, they also put forward the best way to get there – and it’s by purchasing their product.
A brand new development with a glossy brochure, in a growth area - and guaranteed rental returns.
It all seems like a great idea, and so easy. You can leverage against your own property, or get started with a small deposit. And you’ll get a big discount if you sign up on the night!
What could possibly go wrong?
Well, a lot. Unfortunately, property spruikers appear to be on the rise in Australia*. Their smooth-talking tactics and overpriced developments can lead everyday Australians into debt they can’t afford, and put their entire livelihoods on the line.
How to spot a spruiker
There are plenty of reputable property investment advisers, who provide valuable advice and education.
Yellow Brick Road’s own Prosperity through Property seminars are a popular way for Australians to learn from local experts. But that’s what it’s about: learning. You’ll never be pushed into a particular property or asked to sign anything on the night: we simply explain the basics of property investing.
By contrast, a property spruiker doesn’t teach you about investment, they sell you a product.
It may not be their own development - they might have a lucrative contract with a developer, and receive a big commission for referring you on. And unfortunately, they don’t need to disclose this to you.
The risk is not with the asset class itself (i.e. property) – it’s with the asset selection (the property you choose).
Imagine you’re buying a TV. You look at product reviews online, speak to the sales staff in a few different shops and compare prices. You wouldn’t walk into the one store, be shown one model and told it’s what you need, then be asked to cough up the money on the spot.
If a spruiker wants you to do that, then alarm bells should ring loudly.
Tell-tale signs to watch out for:
The property is a long way away – if you don’t know the area, it’s hard for you to form an opinion on it. And if you never visit the area, you won’t hear from locals about what it’s really like.
It’s a one-stop shop – the spruiker or developer will want you to use their own lawyer, mortgage broker and property manager. This inflates the commissions and means you won’t get a second, unbiased opinion.
They talk about negative gearing as a way to build wealth-it’s not - it’s simply a way to reduce your tax bill. Moreover, you still need to cover the shortfall from your own pocket as the tax benefit you get only comes after the end of the tax year.
They offer rental income guarantees – this lets them inflate the income for the first year or so, but it can drop significantly after that. Related to the point above, a property may seem positively geared - meaning your rental income covers the costs of owning the property. But if the rent drops because of low demand or even a lack of a tenant, you end up making a loss, and must find that additional money to cover your loan and levies.
They pressure you to sign up straight away – And they fail to tell you that there’s a cooling-off period for purchases like this.
How to get it right
Property can be a great investment, but make sure you stick to the fundamentals of good investing, including:
Take the time to research the market – talk to real estate agents, mortgage brokers, even local residents and business owners. Get a professional valuation if you want a second opinion.
Look at publicly available information – don’t just rely on what a vendor tells you – use resources such as the Australian Bureau of Statistics to line up their claims with official numbers.
Think like a business person – Try to remove the emotion from your purchase. Fear of missing out on a bargain is a poor reason to do a deal.
For more tips on buying an investment property, click here.
Click here to talk to a YBR expert about how you can build your property investment portfolio.