Anyone who is considering property investment or has already taken the plunge will know that the process is full of potential pitfalls and dodgy characters who will say anything to get you to part with your hard-earned cash.
For many buyers, the capital cities have become unaffordable, so the search for a property must begin further afield, possibly in an area that is just developing.
One decision that investors must make is whether to buy an existing property or an off-the-plan place from a developer.
And once you throw investment firms, brokers, property scouts, and agents into the mix, the choice can soon become overwhelming with so many voices to listen to.
Anna Porter is a property valuer, investment adviser and author. She recently spoke to 702 ABC Sydney to share some tips for avoiding the pitfalls in this severely under-regulated industry.
Beware the sales spiel
Believe it or not, there is no rule that requires investment advisers to be open about any kickbacks they might be getting for a sale.
“This part of the industry is incredibly unregulated,” said Ms Porter.
“[Advisers] will only be offering new and off-the-plan properties.
“They’ll talk all about these great tax benefits, all making it sound wonderful like it’s the only way to invest — new and off the plan.
“The reason why they’re offering you this style of property is that they usually get a big kickback from the developer and it’s typically $40,000 or $50,000.”
The reason why developers offer such generous kickbacks is usually because they’ve oversupplied the market and they are struggling to make sales, explained Ms Porter.
The best way to know where your money is going is to get your lawyer to ask the broker or adviser to disclose any kickback agreements in writing, she says.
Focus on the fundamentals
Negative gearing can offer big financial benefits to investors, but Ms Porter says it should be considered the “icing on the cake” rather than the focus of your search for a property.
“You have to look at how you’re building wealth,” she said.
“You do get better depreciation if you are buying new and off-the-plan than if you buy an older property, but sometimes that can act as a distraction to getting the fundamentals of investing right.”
Anna Porter has just released a new book, Whistleblower, in which she tackles the complexities of property investment, helping investors build wealth and avoid the traps and cowboys.
The book shares how one client, Jenny, lost $150,000 on her investment when she bought a house in Muswellbrook in the Hunter Valley. An investment firm had assured Jenny that the area was a safe bet despite its proximity to mines.
However, when it came to renting the house out, the rent that the investment firm had suggested was unachievable and Jenny had to settle for $200 a month less in order to find a tenant. She also discovered that the re-sell value was much lower than what she’d paid.
The lesson is not to get too drawn in by everything the salesperson is offering you, and to try to look at the situation rationally.
Find out who you’re REALLY buying from
Do some background checks on your “agent” or “adviser” to find out how qualified they really are.
According to Ms Porter, many agents in the business don’t have a degree but have simply completed a three-day course before going into business.
And anyone can label themselves an adviser having racked up a few success stories for themselves. It shouldn’t take much digging to find out whether they really have any experience or qualifications.
Check out vacancy rates
Watch out for suburbs which seem to have heaps of empty apartments or houses as this can be a sign of oversupply in the rental market. If you’re competing with a lot of other investors, you’ll end up having to lower your rents to secure a tenant.
Ms Porter warned of cities which were “constantly” experiencing this kind of oversupply – namely Brisbane, Melbourne and tropical east Queensland – generally caused by people buying off-the-plan properties.
The large migration population in Sydney means that the problem is not as prevalent there, but the Central Coast, western Sydney, Parramatta, Zetland and Wolli Creek are all experiencing a glut of properties, said Ms Porter.
“I’ve got an associate who is working as a tradie [on a development in Zetland] and moved in to rent,” she said.
“He’s the only person on the whole floor because the other apartments had been sold to international investors.”
Research the demographic of an area
Ms Porter tells of another client who invested in a property in Ipswich, south west of Brisbane, having been advised it was a good investment area and a homeowner’s market.
Upon doing further research, however, they found that over 50% of the market was renters.
“You want a nice equilibrium between homeowners and investors,” Ms Porter advises. “Just a small change in the market can affect your investment”.
So, it seems that you really can’t be too careful when it comes to researching things for yourself rather than relying on the advice of someone who is only focused on the dollars they can make.