Finance guru Noel Whittaker’s warning on spruikers seeking to cash in on naive investors
Returns on property are set to increase after interest rate cuts - but not all investors are properly prepared. Noel Whittaker shares what traps to avoid
Interest rates are trending down, and if that continues, both property and shares should deliver strong returns over the coming decades.
But those returns depend on buying value at the start – and most investors simply don’t have the skill to do that consistently.
Share investors, fortunately, can leave decisions to full-time professionals via managed funds or take a low-cost approach by tracking the market through index funds. It’s much harder with property, however.
There are no managed funds offering diversified residential real estate exposure, nor index funds that track residential property prices.
As a result, many would-be investors hesitate, unsure where to begin – and they’re prime targets for property spruikers. These predators make an estimated 50,000 cold calls every week. Their opening line is tailored to appeal: “Would you like to save tax while paying off your home faster?”
Of course most people say yes. They’ve taken the hook, now it’s time for the line: “Can one of our experts call by next week to explain how?”
They are quite sophisticated; after all, each one reeled in is highly profitable. Just this week I received a call from a woman conducting a “survey” with a $1000 prize draw as bait. The questions began innocently – age, income, homeownership – but then came the giveaway: “Did your accountant get you a tax refund of over $5000 this year?”
Clearly, it was just a dressed-up pitch for tax-driven property investment.
No matter how it begins, the goal is always the same: to get a foot in the door. That leads to an office appointment, where victims face hours of high-pressure tactics. First comes a slick presentation on rising life expectancy and looming budget crises. Then dramatic graphs warn of the bleak future awaiting those who don’t self-fund retirement. The message is: “Money in the bank earns nothing, shares are a gamble, and super can’t be trusted because the rules keep changing.”
Then comes the sting. The so-called secret to wealth? Negative gearing into residential property. Next come baffling charts showing how rental income will supposedly pay off your home faster. The clincher? A massive tax refund at the end. Given today’s property prices, most people can’t imagine buying an investment. But the spruikers have the solution: start a self-managed super fund, roll in your existing super, and you’re off. But picking your own property is hard, and they tell you that older properties lack the tax benefits of new ones. The fix? The spruiker finds a block of land and builds a property for you. What they don’t tell you about is their hefty commissions hidden in the price.
There are three things to remember here. First, negative gearing doesn’t save you much in tax. Most people who negatively gear are in the 30 per cent bracket, which means that for every $10,000 in deductions, you’re still out of pocket $7000 while the government chips in just $3000. Sure, some deductions like depreciation don’t involve an upfront cash cost, but you’ll pay the tax back when you eventually sell.
Second, property only works when you buy well – ideally something undervalued, where you can add value. That’s almost impossible with apartments. They don’t improve with age, they just wear out. Which leaves residential houses. But with prices already sky-high and sharp-eyed, experienced investors circling the same ground, finding value is harder than ever.
Third, someone is paying for all those phone calls and meetings; to prepare the glossy brochures, and smooth your path into this investment. And the spruikers hope that someone will be you.
To me, the key to wealth has always been simple: start with your own home. Once the mortgage is manageable, diversify by borrowing to invest in shares. Index funds are ideal – they can never go broke. And if the loan is secured by a mortgage over your home, you can never be caught with a margin loan. Keep it simple, keep it manageable, and don’t take the bait.
Noel Whittaker is the author of Wills, Death & Taxes and numerous other books on personal finance. Email him at noel@noelwhittaker.com.au
DISCLAIMER: Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.
Originally published as Finance guru Noel Whittaker’s warning on spruikers seeking to cash in on naive investors
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