My parents have been talking to a “specialist marketing company” who provide property solutions for investors. I tried my best to listen from the other side of the room during their discussion, and I just was wondering if someone could give their opinion as to whether they would be making a good decision by investing in this company. I don’t want them to be scammed and lose it all!
They are being encouraged to buy an investment property through negative gearing, and use the tax benefits to pay off our family home faster. And after 7-10 years, when the value of the investment property increased, they would then use that equity to purchase a third property.
What the company gives is “long-term assistance and advice… expertise and resources”, and they would take a brokerage-type fee (I think they said). Could this type of arrangement be trusted?
Also, with all this talk about overinflated house prices and theories of the Australian economy following that of the US and other western countries, is now a bad time to get into the property market?
Thanks for taking the time, I’m sure these are all basic questions, but if someone could clarify for me, that would be fantastic.
Rachael
hi rachael
ive been using a similar company called whitehouse securities for about 10 years, they dont ask for a management fee however they do offer a rental garentee and maintanance for approx $30 per week, recently we had a tenant move out and left behind a trail of damage like drawing on walls, holes in walls and stains in carpet, the list goes on, they were also three weeks behind in rent, however with our rental / maintanace garentee, we continued to recieve our rent as usual and damages were repaired for next tanent. we are happy with this arrangement as we dont need to worry about anything…
happy investing…
jason mortimer…Hi Rachael,
I would advise them to do some more reading and speaking to a few more "experts" before deciding on a path for the next 7-10 years/ Especially where the family home is involved.As a starting point:
Buy them a couple of Margaret Lomas books.
Checkout Terry Ryder's "How to get started in property investing" report/paperI have found Margaret and Terry to be the most impartial, practical, level-headed and suitable for "mum and dad" out there. Their approaches are conservative and they have been shown to have fairly reliable predictions when picking places to invest. Most importantly, they are all about educating individual investors on making their own informed decisions about what to invest in. No pressure tactics and no property or developments to sell. They make money by giving advice. In Margarets case, her company, Destiny Financial does make money from mortgage broking as well, but there isn't any requirement for you to use their broking. you could just pay for some of their advice and use another independent broker for the purchasing.
I can't recommend Terry and Margaret enough to give you and your parents the basic to intermediate knowledge. For more advanced knowledge, there is of course, people like Steve McKnight and Michael Yardney. As well as a whole bunch of others, many with very high quality information to share.
Good luck, keep us posted on what you decide to do.
Jason: Thank-you for responding. It helps to know that it is a common practise, that is working for you.
And ’emptyvessel’: Thank-you for your suggestions. I’ve been looking for the Terry Ryder article, but without success. Do you have a link? But I have come across his site, which I’m finding fascinating. I’m just out of high school, and have always put property in the “I’ll figure all that out later” category. But this researching is leaving me quite inspired. So thank-you for your recommendations, and I’ll definitely post any updates as I hear them. I’ve asked if I can go along to the next meeting, as a learning opportunity more than anything.Rachael
rachael dorothy wrote:They are being encouraged to buy an investment property through negative gearing, and use the tax benefits to pay off our family home faster. And after 7-10 years, when the value of the investment property increased, they would then use that equity to purchase a third property.I'm not an expert on this, but based on my understanding of things, here is a thought on this: a negatively-geared property loses money on a day-to-day basis, regardless of the tax benefits. For example, if your parents were in the 30% marginal rate tax bracket and own a property whose expenses outweigh its income to create an overall loss, they will get a tax benefit (refund) of 31.5% (including the 1.5% Medicare levy) of that loss. What this means is that your parents would still need to pay for 69.5% of that loss from their own pockets.
If the company is proposing using 'tax benefits' to pay for the family home in this manner, then it sounds like a self-defeating proposition. Why not buy a positive income or even a positively-geared property so that you're making a net income from the investment property from the get-go, and then use that profit to pay off the family home? The one big reason why I would buy a negatively-geared property is if you forsee that capital growth is likely to far outweigh the loss you're making on a day-to-day basis, and can eventually sell that house for a substantial profit and pay off the family home in one lump sum. The kind of tax benefits available in this case can also vary according to whose name the property is in, particularly if each of your parents are on very different levels of income and hence in different tax brackets.
Someone please correct me if I'm wrong here, but in short, I think the company should be recommending your parents an investment property that actually makes money if you're planning to pay off your family home in the immediate future. Suggesting that you use the equity in an investment property to purchase a third one in 7-10 years time is fair enough on its own, but consider this: in order to 'use' this equity (or the increased value) in the property, you need to take an additional loan out on that property. So you need to be able to have the income to service that additional loan. It is not as straight forward as drawing out say, an increased value of $40K for free and putting that towards a deposit for the third house.
rachael dorothy wrote:Also, with all this talk about overinflated house prices and theories of the Australian economy following that of the US and other western countries, is now a bad time to get into the property market?Well, your guess is as good as anybody else's when it comes to this. There are people on both sides of the argument at the moment and with plenty more in between. The best advice I can give to you and your parents is to read up as much as you can, decide how big and real the risks are, how risk adverse you would be, and then make a plan from there. I'm not going to make predictions here because I'd be very guilty if someone made a mistake based on the said predictions. At any rate, nobody in the right mind should trust one or two 'predictions' they read in a book, let alone an internet forum.
Likewise there are plenty of friends around me who are considering to buy their first home and ask me questions about the process of things. I always tell them what I've learnt in my short life but at the same time warn that there are thoughts that the property market is going to crash and burn. I then leave it up to them to decide whether they want to get involved or not.
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