Negative gearing can be useful but beware spruikers: Gavin McPherson

The negatively-geared seminar is usually the first type of seminar I see people attend when they become interested in wealth or property investment. Sometimes, people just attend out of curiosity.

From the outset I need to explain, I am a big fan of negative gearing. However the point I need to make is not about negative gearing itself but the product that the promoters are actually trying to sell.

Usually the presentation or pitch opens with something like:

• Are you sick of ‘working for the man’?

• Then the presenter will show some figure that makes it look like that almost 90%+ of people retire on less than approximately $30,000.

• They will then demonstrate that with the tax you currently pay to the government, you could be funding your future! They often use analogies such as “Did you know you currently work Monday, Tuesday and part of Wednesday of each week before you start making money for yourself?”

It’s no more than an attempt to get your interest by bringing your attention to the tax you pay as a problem that needs to be addressed.

• Then they begin to show you the ins and outs of tax offset allowances that the government permits under negative gearing rules. These are the ‘upside’ of the making losses on a property on a month to month basis (mortgages, levies, outgoings, etc).

Once you’ve understood negative gearing

It’s not the notion of negative gearing itself that I have a problem with. But pay attention to the fact that the real reason these people are here, talking to investors in their seminar room, is that they are trying to sell you something.

And guess what, wow, aren’t you lucky, can you believe it? In the nick of time right after they just finished their amazing seminar telling you how much tax they could save you, they also just happened to have the perfect investment property for you as well! Aren’t you lucky? Hardly.

I have been to some fancy shindigs on the back of a negatively-geared property presentation. Some served sandwiches, some served caviar, but the reality is that all of them are serving up the same unbelievably overpriced property. All of them. No exceptions. If anyone can contact me and identify a property at one of these seminars that is great buying and I can’t find 10 better in just one day’s work, I’ll buy the damn property. How’s that for a guarantee?

Research my a$&e!

These people will carry on about how well researched the property investment they have found for you is. They might even pretend to have full-time investment analysts! The reality is, the only analysing these analysts are doing is scoping out which developments they can get access to where they can get generous kickbacks from the developers. Of course, that’s on top of whatever else they might have charged you!

Kickbacks [the property mafia, with their hand in your pocket!]

These kickbacks usually fall into the tens of thousands. For a $300,000 to $400,000 property, they are usually overpriced by between $30,000 and $50,000 to begin with, and this is just for starters.

Example: When the west was booming, I had an email sent to me from a developer for a kickback of $150,000 paid to anyone who could refer them a buyer. Of course, my job description does not permit me to take a kickback. The property was selling for $800,000 and on closer inspection it was laced with profit for the developer. It was just a shame there was nothing for the investor!

Like the example above, this margin is usually significant. Often these spruikers are tied up with the developers who have taken the property from its concept stage. They will tell you that they have the ability to ‘bulk buy’ to give value back to you. In almost 100% of cases this is not correct. They deliver the bulk-buying discount to themselves. This is usually only evident when the properties sell for $50–100k less some 5–7 years later. There are some tragic stories about people losing their life savings over these ‘scams’ – and I do emphasise the word scam. Google the name Henry Kaye and see where that takes you.

Big business

This form of investment and development sales is now a huge industry, and getting bigger, with the huge infusion of investment dollars from China and the Asia-Pacific. The problem is that some of these consortiums are now so huge (and clandestine, with channels through your accountant, financial planners and advisors) that they are looking for local targets as well, and that means you!

Their presentations are becoming more polished year after year. But it doesn’t change the product they are trying to sell. It’s exactly the same.

Right now, you might be confused because I haven’t told you exactly why they are such bad investments. I have only said that they are overpriced. You might think that a ‘discount’ might all of a sudden make them acceptable. Hold that thought and read on. I haven’t finished.

Tip

Only today while penning this chapter, I have a client of mine I recently purchased for [a unit in Sydney] who is sourcing finance for a property he purchased ‘off the plan’ in 2010 for $301,000, before I had met him. A finance valuation was completed in July 2012 and it came in at $230,000. This represents a 30% premium paid for the property in 2010. For those of you ‘off the planners’ who expect the property to increase over two years, have you considered that it could possibly go down! Let me give you a tip, it didn’t go down to $230,000, it was never worth $301,000 to begin with!

Good idea — but from the wrong source

As mentioned, negative gearing is a great strategy and one almost all my clients use … but buying a property through a person or company who taught you the concept of negative gearing is destined for failure.

Worse still, many people who peddle this product call themselves ‘buyer’s agents’, making you think they are acting for you. They are not. I am a true buyer’s agent and I take exception to these charlatans. I don’t have any affiliations with developers, accountants, financial planners, anyone in fact, when I recommend a property, I simply choose the best one for the client. And isn’t it remarkable that it is never a property sourced from one of these pretenders. They are not property experts and they will never make you wealthy. In fact, you’d be hard pressed just trying to avoid a loss over a 7–10 year period.

In the industry they are also called ‘two tier marketing’ (or multi-tier) companies. After recommending you a property development, these people often recommend the solicitor, the mortgage broker and the accountants – all of them on the take. I don’t want to get into the legality of these scams (although I do think many of them skirt the law on a daily basis), because in the end, it is your money. You are entitled to lose it any way you want to. If you are going to buy one of these rip offs regardless, at least save yourself $30 and don’t buy my book. (Apologies if you’ve paid for it already.)

But I know you’re not reading my book to lose money. You haven’t forgotten Warren Buffett’s first rule yet have you?

Rule No. 1: Don’t lose money.
Rule No. 2: Don’t forget Rule No. 1.

Unlike the poor suckers attending the seminars who seem to be ready to give their life savings to the first person to walk into the room in a Hugo Boss suit, I train my client investors to be:

• Interested (yet sceptical)

• Motivated (yet patient)

• Difficult to impress (not easy to impress)

• Keen to learn (but careful to decide) and

• Experienced!

These are the characteristics that you need to start to develop. In fact, scepticism, patience (and discipline), difficult to impress and careful to decide will lead to experience, and this after all is your end goal.

Gavin McPherson is the chief executive of Oasis Property Group. His book, 'Value Investing in Property - What would Warren Buffet do if he was buying property in Australia?', takes aim at the get rich quick property experts and explains instead the sturdy path to wealth through value investing in property.