by Scott Pape - June 17th 2011
Every once in a while I get to turn my hand at talkback radio – in the non-ratings period when the real stars are playing golf.
This last week in the host’s chair has reinforced the idea that everyone has an opinion – some good, some bad, and all of them angry with Julia.
Of the hundreds of conversations I’ve had this week, here are three you can learn from:
Girl Power
“You’re a prick.”
I probably deserved that. After all, I’d interviewed Sarah, a confident twentysomething from the Gold Coast, a couple of years prior on my television show – and it was a robust debate. My producer called it ‘car crash television’.
“My financial plan is to own seven properties before I turn 30”, Sarah said at the time. She was so convinced she was on the right path that she began offering tips to my audience on how they too could become financially free by gearing into multiple investment properties.
My advice she could have got from her gran: “Focus on paying off a good amount of your own home before you take on the world. That way if things turn sour you’ve got something to fall back on.”
I left that interview feeling old and boring. Sarah was a bright, enthusiastic young woman who was convinced she had an exciting plan that would see her becoming a millionaire Donald Trump-type.
This week I caught up with her again on talkback:
Barefoot: “How’s the plan going?”
Sarah: “Fine. I now own three apartments on the Gold Coast.”
Barefoot: “Respected independent property researcher Louis Christopher has described that market as ‘a blood bath’.”
Sarah: “Well, I’m getting the taxation benefits from negative gearing.”
Barefoot: “Negative gearing is really just a socially acceptable way of saying ‘I’m losing money’. So how much are you out of pocket?”
Sarah: “About $650 a week.”
Barefoot: “How much money do you earn a year?”
Sarah: “Close to $80,000.”
Sarah is now in considerable mortgage stress. Her properties are all 90 per cent geared, and their value has fallen considerably.
“Property doubles every seven to ten years”, she told my audience, matter of factly.
No it doesn’t. If it did, by the time she retires the average suburban three-bedder would sell for $16 million (and if you held it another seven years it would rise to $32 mllion).
Ever the optimist, Sarah has worked out how to turn her lemon into a tequila shot. “You learn a lot when you take on risks, and given that I now have my financial planning licence, I have the ability to share it with people.” Lick, Sip, Suck.
The Three Talkback Callers
The Press Release Pusher
“We should increase the grant to help struggling first home buyers.”
The Ruthless Numbers Guy
“These people are idiots – they deserve to lose their homes.”
Girl Power
“Property doubles every 7 to 10 years.”
I really enjoyed my time on talkback this week. The listeners were smart, good hearted, everyday types of people. Ironically, the only problem calls I had on a radio show devoted to talking about money turned out to be the callers who were licensed professional advisors.
Tread Your Own Path!
Photo: http://www.flickr.com/photos/gibbons/2294375187/
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42 comments
Of course property doesn’t double every 7-10 years as a rule. And given the current prices it makes it harder to double again.
But property can still be a good investment.
And also it is possible the Gold Coast could bounce back in the next ten years – although of course she has lost time that she could make money with other investments.
Here are a few reasons why Sarah’s ideas haven’t gone to plan.
1. She isn’t diversified. Particularly from having only property in one area, and also from having just property.
If she had bought shares in NAB, Commonwealth and Westpac – any hit to the banking sector would reduce her profits (and borrowing money increases losses).
Sarah could be wise to diversify with shares/property/ETFs, etc.
2. Too heavily geared – She has tried to grow too fast (90% borrowing).
3. Just buying lots of negatively geared properties might not be the best way with property.
Property investment advisors might suggest to do some small renovation work and sell to build profit to reduce your loans.
The lady in question has probably been reading books like the Rich Dad series or one of Peter Span’s books that seem to advocate carrying massive debt and trying to use ‘other people’s money’ to pay off your property portfolio. I have read them too but wasn’t silly enough to get sucked in… I regularly spend a couple of hours at a time on the internet looking for properties that offer a positive return i.e. ones that rent for more than it costs to pay them off and guess what – they are few and far between! I earn more than Sarah and I certainly wouldn’t like to have to fork out six hundred and fifty dollars each week just to make up my mortgage payments!
Be careful young lady and anybody else who is considering going down this path…
Well? what was the tequila shot? very unlike you to leave us in the lurch. This silly girl has mortgaged herself to her eyeballs and we want to hear what gems of advice you provided her (and us!).
where’s the goods Scotty boy?
I’ve recently got a part time job delivering junk mail and was interested to find how many vacant homes there are in the area. Despite often being told that we have a critical housing shortage there seems to be a lot of unused land even in a busy Melbourne suburb close to the city. I guess many of them are probably owned by property developers but nothing seems to be happening…
Scott, I am sorry I think you are “gloating” a little here that “you were right and she was wrong” with regards to Sarah. I too own 2 properties, and just about to buy my 3rd, with a view to get a 4th next year. I think maybe where Sarah has gone wrong, is she has bought Apartments. Apartments on the Gold Coast are a money pit. The minute you want to sell one, there is another 6 for sale in the same building. I would never buy an apartment. I own houses, and maybe the message here to your readers should be, when investing in property you need to focus on buying the land value… I own a house in Brisbane, I bought 6 years ago, the bank valuation is now double what I paid. I own a house on the Gold Coast have had that for 4 years and that has gone up 40%…the GFC has hurt that one. So I think the message should be properties dont always double in 7 to 10 years, but if you buy the right place the capital growth can and usually will exceed the ROI on shares. However, I do also beleive having a share portfolio is important too.
Well, “Sarah” doesn’t think Gold Coast apartments are a money pit and now she has a license to go around telling people how great an investment they are (after all, their value doubles every seven years…). Scott gave a bit of a warning about her investment in their first encounter which she disregarded. Here she is some time later up to her neck and with a bit of paper that allows her to convince others to do the same!
JB, what sort of shares do you have in your portfolio? Do you find them profitable? Am just starting and have lost $ in what would be considered high-risk shares – obviously!
You cannot be serious? If someone who spouts that kind of advice now has a licence to validate their claims, that industry will never get cleaned up.
What a sham and thank you for pointing it out.
Next up, can we do an expose on the blood sucking real estate agents who are also partially to blame for the over inflated housing prices….
I think the property pain has more to come. Prices will halve before they go back up. This whole mess has been created by debt and the debt machine is broken. If you own property then get rid of any debt…
I agree with you Richard, the tide has turned and a Tsunami is on the way. Unemployment going up, inflation up, salaries not keeping up with inflation. How will buy the houses and keep the market going up?
Ah sorry to burst your bubble honey but unemployment in Australia has been on the way down for over a year now and is currently at excellent levels considering the state of the world economy.
Don’t believe everything Tony Abbott tells you.
Jason June 26, 2011 at 10:36 am
¨Ah sorry to burst your bubble honey but unemployment in Australia has been on the way down for over a year now and is currently at excellent levels¨.
Hmmm.
Australia has 500,000 approx unemployed,
while 800,000 approx are on disability pensions.
Nice way to keep the unemployment figures neat.
How many Australians are A: Casual or contract?
B. Not getting as many
hours as they need?
C.Small businesses in
major stress?
How many fully employed can attempt to take
out a house mortgage?
Don´t believe everything Wayne Swan tells you.
So you’re seriously suggesting that for those long term unemployed Centrelink just shifts them over to disability pensions and that those accessing it don’t genuinely qualify?! Clearly you have very little experience dealing with Centrelink then. Most people I’ve met who are currently accessing Centrelink’s disability pension have very disabling conditions and it would be inhumane to just toss them out on the street and tell them to get a full-time job.
And what is wrong with casual or contract employees? Full-time employment does not suit a vast majority of Australians living circumstances in the modern world and the flexibility of casual and contract employment actually increases the labour force participation among young people in school and university, stay-at-home mums/dads and those transitioning to retirement. Both political parties recognise and acknowledge this now.
I’ll name a couple of countries you might want to do a bit of research on before you start whinging about Australia’s unemployment level…USA, Spain, Lithuania, Estonia, Greece, Portugal, Ireland, Hungary, France, Italy, Belgium, UK, Canada, Germany, Sweden, Finland, Israel, Iceland, New Zealand, Mexico…
http://www.bespokeinvest.com/thinkbig/2011/1/14/global-unemployment-rates.html
Unless she has truly learnt and is telling people of the risks associated with negative gearing, else she will be a planner to avoid. Anyone who thinks losing money is a good way to make money is a planner I never want to come across.
Debt only breeds wealth if you pay off the debt, else debt breeds debt.
I thought negative gearing was for the purpose of balancing out at the ATO. But in creating wealth, its to be avoided.
Still as some purpose, not to have all your eggs (everything) in one basket.
So much for Globalization economic.
Oh My God!!!!! This chick has got her financial planning license. Heavan help those people who take this womans advice.
Scott, I wish the internet and yourself were about when I was 19. Im doing well, but if I had the education when I was younger, Things would have been better. Scott Pape for PM!!!!!!
This is why a financial planner’s licence does not mean that the person is necessarily ‘financially literate’.
I work in a high net worth advisory firm Scott and this “advisor” wouldnt get a gig there with this kind of attitude.
As somebody said, what sort of advisor will want their clients to lose money?! Our business model is based on a “win-win” formula, our remuneration is based on the performance of the funds we have under management on behalf of the clients.
97%???? Bit harsh Scott, not everyone in the industry is a blood sucking parasite, some of us do actually want to help people achieve their goals and care for them as much if not more than the amount of money we make for ourselves.
I wouldnt say that those who bought homes are idiots, however as a society we have been fooled into thinking that we deserve everything we want, even though we cant afford it. The obsession with the Great Australian Dream doesnt help, and the greedy banks use this entice vulnerable/misinformed folk. Not a good combination.
Greedy banks? I have never known a bank to come to my door unsolicited and offer to lend me money? Every loan I have ever got has been instigated by me contacting them.
I think its greedy customers and the bank, being a good business (and it is a business therefore its goal is to make money for its share holders), is providing a necessary service. Its the greedy customers who borrow up to the very maximum and then complain about “how dare the bank lend them the money”
The bank, for the most part, only lends if 1) they are confident you can make the minimum payments based on the information you supply (and that is where most fall down as they havent been completely honest) and 2) knowing that the asset secured by the loan should cover the majority of the debt if you default. The interest paid covers the cost of borrowing with a small margin (would you lend money to someone with only a 7% return, that is you give them $100 and they give you $107 back in dribs and drabs over the course of a year?) It doesnt make business sense other wise, just like a store selling things for less than it cost them is a quick way to go out of business, a bank can not afford to lend money for less than what it costs them.
And a final thing, if you think our banks are greedy, through out Europe and the US official interest rates are sitting at between 0-0.25%, the banks are charging upwards of 5% for home loans. That is a 5% margin which seems far worse than our banks even though our interest rates are higher. Im paying only 2.5% above the official rate.
Hi , I live in Ireland and dont know too much what is happening in Austrailia Jb but I don’t think Scott is gloating , This type of situation sounds like the classic symptoms of what happened here in Ireland and as a result the country is bust , Doing our best to come back from the bottom which we will, But people over here who had ordinary office clerical jobs , nurses , postmen on average salaries had similar goals of owning 3 and 4 properties which they accomplished but now have nothing . Be very careful …..
didn’t you hear? “Australia is Different”
Anytime anyone goes on talking about how many properties they own, how property goes up by a certain amount each year yet don’t tell you that they are on negative cashflow or even worse, don’t give you their actual rate of return on invested capital, it’s time to run in the other direction.
Maybe her $34,000/year automatic investment plan might work, but if she loses her job/income, she’s going to be in a world of pain.
Never over stress your budget or you will be over stressed!
Groan Scott – whilst I agree with your comments about focusing on paying of your own home and that negative gearing is an acceptable way to say your losing money (especially on 80k!) your continual slagging of financial advisers is tiresome and it’s the reason why people like Sarah get in these positions. They hear that all advisors are inexperienced, biased and ignorant to their fiduciary Duty and so they ‘tread there own path’ and have a crack at creating wealth themselves, ignoring advice or not seeking any at all, and it ends in tears . The industry is not perfect I admit but it is not wholly tainted as you portray it to be- oh and you do know storm financial was an ‘independent adviser’ model don’t you?
I am Now a fifty something, who along with my husband has basically had to start again! Why? We were sucked into the investment property hype , and when things soured we were left with one huge mortgage all over again on our family home which we almost owned. Wish we had the barefoot advice before we were led down that path by a financial advisor. Good advice Scott to pay off your own home first and keep it safe! Cheers love your work.
Scott, I really have to commend you you for being one of the few financial professionals to urge caution when investing in Australian residential property. As a young person I hope to see your message more widely available to others in the future.
What we are seeing here is no different to what has happened throughout history in markets. Once a boom is underway it becomes more and more difficult to reign in. Price increases are self reinforcing – meaning more participants are drawn into the markets as they go up, it feels good, we feel rich, we fear missing out or not keeping up with the neighbours who have just bought their forth. This stage relies heavily on the increase in credit availability over time.
Now, the higher things go and the more painful it is when prices fall, and the further they fall. Yields on prime residential property in Tokyo now are reaching 6% and mortgages can be taken out at 2.5%. Despite being able to positively gear property it is still largely avoided due to the experience over the last 20 years. Japanese families are still facing negative equity from purchases in the late 80s. As an aside, the arguments that are often thrown around in Australia now about it being different this time, or a new era of prosperity were almost identical to what was being said in Japan in the late 1980s or the US in the mid 2000s.
Bubbles can be good for wealth creation, but be informed and know when to get off the train even if you can’t pick the top of the market. Us Australians have about $3.5 trillion tied up in our real estate market and largely rely on foreign capital to invest in industry and productive investment. Confidence and leverage remains high and this in my eyes is dangerous.
If you want to buy 5 properties with a LVR of 90%+ please go ahead, but do not look to the government for assistance if/when prices decline. Moreover, do not be amongst the masses who will point the finger at the current government as the cause of price declines.
what i find funny is that the financial advisers are on this web site at all, to be looking on here to start with is a joke. go out and buy his book and maybe you can tred your own path too
also here is a good saying givin to me buy a wealthy old man when i asked him to tell me his secret! he said never live above your means and u will always have a good life
Maybe the financial advisors reading this site are actually on here for a laugh at the amazing case studies Scott manages to come across in his work?
Allot of people Sarah’s age have huge credit card debt and are more concerned with buying the latest gadgets and fashion than thinking about longer term investing. Sure she will have to budget carefully but will be much better off in future. I also know of people who pay over $500 a week just on renting a property with nothing to show for it.
Scott, so if you are so ‘right’ where is your contrarian proof ? Property whether it doubles 7-10 years is an investment, I think this girl is at least taking action towards her dreams. You seem very quick to slam her down without even knowing describing her full story. Apart from the two interviews with this girl have you actually talked to her? It sounds like you are making pre judgements and condemning her in order to beef up your profile. If she can manage the debt and pay off her mortgages then what is the problem? She is building up assets for herself and she is young enough to pay them off and do it. Wouldn’t it be better to be on your death bed knowing that you at least took action to build up assets and create a stable financial future for yourself? Regardless of what the market does property investing seems like a sensible strategy if you can manage payments and naturally you would adjust and shift your strategy as you go on. Scott, you seem very quick to point out the negatives but where are your -Top ten tips for how to succeed , instead of what she is doing. From what I have heard and read all you say is-buy your own house and pay it off and that is it? Hmm sounds very old fashioned to me…
Marc: “Regardless of what the market does property investing seems like a sensible strategy if you can manage payments and naturally you would adjust and shift your strategy as you go on.”
Marc, I think your definition of a what constitutes a sensible investing strategy is a little off. With the amount of leverage this girl has taken on, she has very little room to move if she faced redundancy or a decrease in income. Even if she could make repayments, would the lender let her ride out a situation where the value falls 15-20% and she owes more than what the asset is worth??
Speculating is perhaps a more appropriate term for this girl’s activities, and while huge profits can be made from speculation, the direction of the market is absolutely fundamental to success.
To Jack R- I am coming from the angle of- investing, any kind of investing is better than none. It seems that from Scott’s strategy no one should invest until they have their house paid off. Whether you call it speculating, investing, gambling whatever you want, I commend this girl whatever her name is, for taking some action towards her financial future. Most out there don’t have the guts and sit on the fence doing nothing or just condem others for taking ‘the wrong action’. hmmm I respect action takers and I think this girl has the maturity now if not will even more in the future to handle her situation.
Thanks for your reply.
Marc.
just remember we have, for the last decade or so been in the land of speculation and ‘free’ money mode. Not investing in the correct sense of the word. Everyone has been trying to get onto the next ‘get rich quick’ bandwagon rather than hunt out what gives relibale dividends/returns along with keeping its price value. I know two people who lost their house deposit money in the dot.com flop and I can see far more pepole loosing not just thier savings but loosing their future financial well being for the next 20+ years when they have to keep paying for the property crash we are just on the verge of. What will you be saying then? Loosing big time in property right now will not be just loosing some savings, for many it will be a lifetime of strugle and poverty no matter how much they earn right now.
Kinda here ya.
Folks telling me, the 1980′s here in Perth, where Interest rates were 17% and mortgage at $100000. One person bringing in the income was fine. One parent could be a parent to their own children.
Only for the 2000′s yep interest is way down, but the mortgage are like 3x the original. Require both Parent income, and child centre to raise their kids.
The word family, can be seen in the TV shows, Family Ties to … How i met your mom?!!
O’ I better stop.
Marc,
please please come to my next home poker game. even better have the bank lend you 95% on top of whatever you can stump up.
you’ve watched poker on the telly before right? you’ll be fine
SP… mention woolworths. Technically speaking, Wow has by the end of this june, recorded the narrowest of price range for a quarter (Apr-May Jun) since the 3rd quarter of 05′. It will break out significantly in the next 2 quarters.I own WOW. A sound investment. Will watch how it pans out taking on Bunnings at their game. If WOW gets it wrong it could take a bath. Choose your own path indeed. thanks for the great advice.steve
“and given that I now have my financial planning licence”
I’ll never forget when they were giving them out in one of those “call in the next 10 minutes” deals on Mornings with Kerri Anne…
Its true, I have owned geared properties and sold them for double in @ 10years.1 exception,we bought an apartment in Melbourne during the glut and broke even in about 5 years.Timing Timing.Now I sell covered calls on blue chip stocks,much easier return and minimal risk.Homework is essential for investments.Tread Carefully.
i
applaud to sarah for at least trying given her age. a negative outcome pardon the pun could see her learn some great lessons if she survives foreclosure. The finanical planning license is only scary to the unsuspecting people who take advice from these half wits. remember ask them of their net worth (minus debts) and if its at a figure you are wanting to achieve then they may have something interesting to say…of which you are not always obliged to pay for.
great reply JB having a plan of ROI and an exit strategy (when things dont work well) is important in any form of investment…how else do you know what you want, where your at or when to get out. sarah if you ever get mortgage strees let me know and perhaps i can releive you of those investments before the bank does…
I’d like to see the math for the $16 million. $16 million is no-where from I calculate.
Supposing there are 30 more years to retirement and now the average suburban three-bedder is worth half a million.
And I thought I was good in math.
‘No it doesn’t. If it did, by the time she retires the average suburban three-bedder would sell for $16 million (and if you held it another seven years it would rise to $32 mllion).’
My parents were offered to buy their 3 bedder home in the outer suburbs of Canberra for $9k back in 1973. I imagine if someone mentioned it would be worth half a million dollars in 2011, they would have not believed it as well.
I wish I knew then what I know now, I bought into Gold coast property its a pit the regional unemployment is high with cane fields ready fore property harvest… The people sustaining the market were the builders building the houses with the infrastructure for the booming building market… it had to run out of steam and it did…
As for doubling every 10 years..what rubbish just because something has doesn’t mean it will, the growth curve is restricted by income essentially what is being suggested is an ever growing market, I had this lecture from my family when I wanted to exit the idiotic negative gearing idea and shrink to two properties … my plan is don’t be greedy spread the risk between areas only buy where there is a unique aspect and be careful of good advice, BTW any worthwhile financial planner would have made enough money to simply manage their own assests and not be dishing out advice, unless they love managing other people’s money which I doubt, everybody has an idea develop your own with eyes open..
last thing is Coomera is the biggest scam go out there and look at a property they will tell you about the infrastructure that has been pending for 20 years and isn’t expected for at least another 10 years Gold Coast is a money pit!!