The true costs of investing without expert advice

Property investment has achieved an almost religious following among a large swathe of the country’s population – zealous in their devotion to building portfolios.

It’s understandable of course. For starters, home ownership is so deeply ingrained in our nation’s psyche that we’ve classed it as ‘The Great Australia Dream’… and this appeal has flowed into the investment realm.

It’s also an aspirational beacon for many Aussies. I’m yet to meet a young couple dreaming of the day they purchase their first tranche of shares, but plenty are keen to become landlords.

There are the perceived social status benefits too. You can lord it over friends and family, casually dropping in titbits of conversation that subtly let one and all know you are successful enough (on paper at least) to own an investment.

For example:

Mate at the BBQ: “Those steaks are burning.”

You: “Yep… they’re as hot as the market since I bought that investment house just up the coast!”

There you go – subtle as a pickaxe.

But here’s what puzzles me. Most people seem to believe that because they live in a house, they know all there is to know about real estate as an asset class.

That would be OK, if the barrier to entry weren’t so low. Assuming they can access adequate funds, most grown adults are allowed to, by and large, participate. They can throw hundreds of thousands of dollars into the hurdy gurdy of the investment market regardless of prior experience or specialist education.

And many can become numb to the numbers. For example, I’ve seen people flinch at the idea of paying a few hundred dollars for professional advice on a property’s market value, but they happily hit up a bank for an extra $50,000 to add a patio, change the carpets and repaint the outside, They justify it will, “Improve the value and increase the rent!’ without actually understanding how it will do either of those things.

It seems to me that plenty of property investment successes result as much from luck as planning.

Now, I don’t want to deny people their unfettered opinions on a range of subjects outside their field of knowledge. I’m OK with that bloke at my local cafe believing he could successfully reorganise the Australian cricket team’s playing roster in a way that would see them victorious against New Zealand.

After all, he does make an excellent cappuccino.

But when it comes to property, there are plenty of incredible experts on hand who can help guide you and from what I’ve seen, ignoring their advice can be very costly.

Here are just some of the costs average Aussies miss when they choose not to rely on professional advice:

 

Opportunity cost

In the simplest terms, opportunity cost is the loss incurred by choosing one investment over another.

For example, you decide to purchase in a near-CBD suburb with the intention of making capital gains. You purchase a unit in a new high-rise project rather than a larger, but older, apartment in a small six-pack block.

Both cost $500,000 and deliver $385 per week in rent. However, over the next five years, the older unit sees its value increase to $575,000, while the new unit only increases to $525,000.

The opportunity cost of choosing the new unit over the old apartment in this scenario is $50,000. A solid chunk of change in anyone’s language.

And an experienced local professional would have likely guided you toward the investment option with the best growth potential.

Opportunity cost is one of those unseen expenses that eat away at your long-term plans, and that can be managed with the right advice from the start.

 

Bad decision costs

Granted, this is a form of opportunity cost – but in this case it’s at the extreme end of the scale.

A great example of this occurred in Queensland’s mining towns during 2012. Investors were seeing outrageous rental returns for what once low-cost housing as mining workers fought it out for accommodation. The head-turning rents drove property prices to heady highs. Homes once worth $80,000 were selling for $800,000 and achieving 10 per cent gross rental return.

But, of course, this was never going to last and those who bought at the tail end of the mining boom got very badly burned.

I’ve heard of very smart people caught up in the greed who lost hundreds of thousands of dollars – and many bought at a time when the advisors I know were warning of a looming crash.

 

Missed deduction costs

This one falls firmly into my field of expertise.

When you own an investment property, it is imperative that you use all legal means at your disposal to increase the return and reduce the tax burden.

Unfortunately, too many landlords rely on their own know how when it comes to tax write offs. They might include some general maintenance and repair costs, interest on the investment loan and management fees – but that’s it.

Far too many are unaware of the substantial upside in commissioning a tax depreciation schedule.

For just a few hundred dollars, a tax depreciation schedule can deliver thousands of dollars in deductions from the very first year of property ownership. Depending on your circumstances, this means hundreds more in your pocket come tax return time.

Perhaps even more tragic, is that by not being quick to organise a depreciation schedule, some potential deductions become irretrievable.

I’ve yet to meet any investors happy with handing over too much tax. Yet that’s exactly what they’re doing by not having a schedule completed.

 

Maximising returns

This cost comes from looking at how you spend your money to improve your investment’s performance.

Many landlords want to improve their investment, but a fair number of them make important choices about what works are done based on personal wants rather than sound economic principals.

For example, if you own a suburban home in a modest outer suburb, don’t have an inground pool and fully ducted air conditioning system installed for the tenants, no matter how nice they are.

For one, the increased rent will not be substantially more than if you spent less money on building a modest patio and installing inexpensive individual air conditioning units in the bedrooms and lounge.

Secondly when it comes time to resell, there’s little chance that pool and ducting will add anything to the selling price like what they cost to install.

Again – finding smart ways to spend on your investment falls firmly within the expertise of professional advisors.

 

I urge you, particularly if you’re new to investing, call on the services of independent professionals to help you navigate the waters.

Utilising their knowhow will yield far greater results with less risk and substantially more piece of mind.

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating. You can visit them at www.mcgqs.com.au Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at https://www.mcgqs.com.au