21 August 2010

Liberty & West "Premium Property Management"?

21 August 2010 | Grail

I’ve recently been approached here in Canberra by a sales force working for “Liberty and West”. They’re proposing to put together property research, mortgage offers and tax calculations to help me build a real estate portfolio. The sales rep wanted a $200 payment to secure the next meeting where they’d supply a selection of properties they’ve researched that would be in my budget, along with a recommended mortgage to go with that property, mine to choose for the paltry sum of $2000.

The glossy brochure is high on gloss and promise and quotations from motivational speakers that I’ve never heard of. It’s very light on numbers, and the sales guy wasn’t particularly keen to go into detail about how much I’d be paying to whom and when.

Negatives that have my spider-sense tingling include: light on detail, high on hype, pithy quotes from unknown motivational speakers, brochure full of “ownership” and “wealth” imagery, push to get my money from me on the spot (sales rep had the EFTPOS terminal in his bag), and evasion of questions about the service. I cannot find a Product Disclosure Statement anywhere on their site.

While I really like the idea of having some folks out there doing the property search for me, and I’d be willing to pay them handsomely for their efforts, I want to know how many folks out there have had contact with this company, who does business with them and would you recommend them?

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milkman9:52 pm 25 Aug 10

2604 said :

milkman said :

Finally, I would caution people relying on super as their main investment vehicle, unless you are going to access it within the next ten years. By the time I can access my super (several decades), the age at which I will access it will have increased (there’s already talk on minimum age being 67, and this is only going to increase), and I don’t plan on working that long. I realise there are tax benefits to be had, but these can be whisked away with a change of government attitude.

And thanks for the sensible discussion, 2604.

Re the bolded bit, the same thing could be said about negative gearing on investment real estate, which is already costing the taxpayer about $9 billion per year. Anything that is unsustainable will eventually have to stop and for this reason I think that negative gearing will, eventually, have to go. (Probably phased out so that the RE investment market doesn’t go into shock). You and VY have done the right thing by looking for positively geared property rather than relying on negative gearing strategies for the investment to add up.

I guess the lesson is to diversify and have a number of investment vehicles – super, cash, property, equities – and not to put all your eggs in one basket which can be dropped by the government.

Thanks to you for the discussion, as well.

I hear you re the negative gearing, it’s a short term strategy at best. Fortunately, I have no reliance on genuine negative gearing anymore. I wouldn’t recommend that approach to anyone starting now.

As for your lesson about diversifying, well said, I agree completely. In reality, though, I’m probably a bit melodramatic about superannuation because its something I feel strongly about. If you are putting extra into super, paying off your home and saving, that probably puts you ahead of 99% of Australians in terms of financial discipline anyway.

Best of luck!

26048:38 pm 25 Aug 10

milkman said :

Finally, I would caution people relying on super as their main investment vehicle, unless you are going to access it within the next ten years. By the time I can access my super (several decades), the age at which I will access it will have increased (there’s already talk on minimum age being 67, and this is only going to increase), and I don’t plan on working that long. I realise there are tax benefits to be had, but these can be whisked away with a change of government attitude.

And thanks for the sensible discussion, 2604.

Re the bolded bit, the same thing could be said about negative gearing on investment real estate, which is already costing the taxpayer about $9 billion per year. Anything that is unsustainable will eventually have to stop and for this reason I think that negative gearing will, eventually, have to go. (Probably phased out so that the RE investment market doesn’t go into shock). You and VY have done the right thing by looking for positively geared property rather than relying on negative gearing strategies for the investment to add up.

I guess the lesson is to diversify and have a number of investment vehicles – super, cash, property, equities – and not to put all your eggs in one basket which can be dropped by the government.

Thanks to you for the discussion, as well.

milkman7:36 pm 25 Aug 10

DeadlySchnauzer said :

Wow you guys just don’t get it, let me be more blunt. The risk is that something will happen (change of corporate owner, corporate owner going bust, corporate owner having cashflow problems etc etc) that means the so called rental guarantee is not worth the paper its written on. In any of the above situations you can be sure that at the bottom of the pecking order will be individual investors, and your rental guarantees will be the first thing out the window. I will refer again to the link i posted, the last half of the article specifically talks through all the risks with serviced apartment rental guarantees, and has plenty of real world examples of how they blow up: http://www.hotspotting.com.au/index.php?act=viewArticle&productId=11

So getting back to my original point, the higher yield of serviced apartments simply reflects their higher inherent risk. This is why its not correct to directly compare yields with pure residential properties. Its akin to comparing the yield of say greek bonds (high yield) to australian ones (low yield), and saying “hey it’s possible to make good money in the bond market, all you need to do is invest in greek bonds!”.

You’re absolutely right that some serviced apartment operators offer you a guaranteed rental period, after which you get a percentage of the takings. That is not what happens in this example, though. In this case, the operator just rents the unit off you permanently then rents it out when they can. If they don’t pay the rent you get the unit back to rent to someone else. I’ve owned my unit for years, though, and never has the rent been even a day late.

There are a number of business models, and some of them don’t favour the investor. This model seems to work well, though, because everyone seems to be making money. The management company gets upwards of a thousand dollars a week with the current occupancy rates (which have been consistently high for the last several years), and the owner of the unit gets their unit rented by a tenant that maintains it and pays on time each month.

It works weel for me. If you don’t like it, no worries at all, but try to keep an open mind rather than jumping to conclusions.

VYBerlinaV8_the_one_they_all_copy5:41 pm 25 Aug 10

DeadlySchnauzer said :

Wow you guys just don’t get it, let me be more blunt. The risk is that something will happen (change of corporate owner, corporate owner going bust, corporate owner having cashflow problems etc etc) that means the so called rental guarantee is not worth the paper its written on.

Perhaps you don’t understand English. It IS NOT a rental guarantee – it is a NORMAL COMMERCIAL LEASE. I have no other relationship with the management company. Of course the management company could go broke, but it doesn’t really matter because I OWN THE ACTUAL UNIT, not part of a company or cooperative. If the management company goes broke, the unit is mine to do with what I will, they just won’t be be the tenant any more. The situation is EXACTLY THE SAME as if one of my residential investment property tenants stopped paying their rent. Please stop referring to rental guarantees – they have nothing to do with this!

Of course the value of a serviced apartment reflects the risk – it’s a commercial property arrangement. Normal risk management principles apply.

As for the value gain on the units I renovated, it has nothing to do with the land value. I owned the property less than 2 weeks before commencing reno, and had the bank revalue it 8 weeks later. The bank is prepared to value it at about $150k MORE than I paid only 8 weeks previously! The reno was just over $30k. Of course, this worked partly because I managed to buy the property at perhaps $50k under market (distressed seller), and was very prudent about my renovations. But the numbers stand.

To say that you can’t generate value increase through reno without fail simply shows someone who doesn’t know how to make it work. I’m currently looking for another project.

DeadlySchnauzer2:41 pm 25 Aug 10

VYBerlinaV8_the_one_they_all_copy said :

I did such a project on a block of units I bought in Queanbeyan last summer, and in 4 weeks of renovating (costing $30k) increased the aggregate rent by $150 a week and added about $150k equity (from which the reno cost and cost of lost rent need to be deducted).

Just curious, but you say you added 150k equity. Says who? The bank? A professional valuer? Did you actually on sell and realise a 150k gain? If so did you account for increase in the underlying land value since you bought?

We sold recently and spoke to a bunch of people (builders and real estate agents), and without fail the universal consensus was that we should not attempt to renovate to increase price. Every single person said that major renovation was always a net loss (house might sell for more, but not enough to cover the reno), and minor renovation (flooring, landscaping, painting etc) would maybe be able to net 10 or 15k at best.

DeadlySchnauzer2:24 pm 25 Aug 10

Wow you guys just don’t get it, let me be more blunt. The risk is that something will happen (change of corporate owner, corporate owner going bust, corporate owner having cashflow problems etc etc) that means the so called rental guarantee is not worth the paper its written on. In any of the above situations you can be sure that at the bottom of the pecking order will be individual investors, and your rental guarantees will be the first thing out the window. I will refer again to the link i posted, the last half of the article specifically talks through all the risks with serviced apartment rental guarantees, and has plenty of real world examples of how they blow up: http://www.hotspotting.com.au/index.php?act=viewArticle&productId=11

So getting back to my original point, the higher yield of serviced apartments simply reflects their higher inherent risk. This is why its not correct to directly compare yields with pure residential properties. Its akin to comparing the yield of say greek bonds (high yield) to australian ones (low yield), and saying “hey it’s possible to make good money in the bond market, all you need to do is invest in greek bonds!”.

VYBerlinaV8_the_one_they_all_copy8:50 am 25 Aug 10

Perhaps I can provide some clarity here, as I own two units in this complex.

My 1 bedroom unit gets $275 per week. My 2 bedroom unit gets $375 per week. These are both about to increase, which will make these cashflow positive assest (before tax) for me.

Both are bound by a commercial lease, which currently has 12 years to run. Upon completion of the lease, the units become available for a range of purposes (based on zoning), including residential. They don’t automatically become residential only.

The lease is with a large hospitality company, and makes the unit available to them on a permanent basis. The company takes this unti and rents it on a nightly basis, fully furnished. They pay the ‘rent’ monthly, regardless of occupancy, and maintain the furnishings. (I understand they are making a lot of money out of these under this model).

The units are hard to buy, because they are financed as though they are commercial, which is a bit different to mum and dad buying a residential property. Because of the commercial nature of the lease, they are priced as per commercial property, rather than residential (hence appear cheap).

I bought mine several years ago, for the same reason as milkman – they are a long term play. I already have a varied portfolio, and so am happy to take some risk (especially when it pays for itself as per milkman’s description) in return for a strong future gain and solid yield while I’m waiting. I’m happy to wait for my capital gain – I’m getting enough of that from other parts of the portfolio.

GG – although I see why you raised this example, it probably isn’t a good one within the context of this thread, because of its commercial nature. When it comes to standard residential property, the market is definitely high right now (but unlikely to crash back). I’m expecting a period of stagnation now, during which time I’m looking for bargain properties that I can do some renovation to to add value. I did such a project on a block of units I bought in Queanbeyan last summer, and in 4 weeks of renovating (costing $30k) increased the aggregate rent by $150 a week and added about $150k equity (from which the reno cost and cost of lost rent need to be deducted).

It is definitely possible to make money from real estate, but the traditional model of buying a negatively geared property and having short term growth lift you up is not the way to do it right now.

milkman9:11 pm 24 Aug 10

2604 said :

milkman said :

You guarantee it? Really? Do you own one of these?

No we don’t own one, thank goodness. We look for guaranteed returns rather than speculative ones and only invest in super (PSS for me, salary-sacrifice for Ms 2604), cash, fixed interest and paying off our own mortgage. However, if you think this kind of rental guarantee (or any kind of rental guarantee, for that matter) is actually provided by the developer or operator of this kind of scheme other than by charging more for the property in the first place, I’ve got a bridge to sell you!

milkman said :

Not not be rude 2604, but you don’t know what you’re talking about here.

No offence taken. It’s your money and you can do what you like with it. But it seems to me that you’re stuck with an illiquid asset that you’re hoping will become a viable investment because of some future capital gain. Good luck.

Let me be really, really clear: It’s not a rental guarantee. It’s just a long term rental agreement to a company, no different to if I rent a residential property to a private tenant. They pay the rent just like any other tenant. Seriously, give an agent selling one a call and enquire if you don’t believe me. It IS a bit unusual, but this is how it works. I DID NOT buy it from a company, management or other. I bought it from another individual.

The reason I bought it is this: I was able to buy the unit with a 30% deposit, and the interest on the loan is covered by the rent. After tax, it is slightly cashflow positive. This means it can sit there costing me nothing ongoing until the lease expires, at which time the value resets to residential value. If that were to happen today, it would generate about $160k profit (I bought it for under $200k). What this has cost me, in real terms, is having my deposit tied up long term.

I’d encourage you to bear in mind that GG gave this example as a Canberra property which is a viable investment. It’s not the norm, but if you already have a reasonable property portfolio (which I do), something like this is a good long term play. Not everyone wants to get capital gain each year to make them feel good. I’ll concede it’s not very liquid in the shorter term. But the shorter term is not what this asset is about. In 12 years time when the lease finishes it will make me several hundred thousand dollars overnight.

Finally, I would caution people relying on super as their main investment vehicle, unless you are going to access it within the next ten years. By the time I can access my super (several decades), the age at which I will access it will have increased (there’s already talk on minimum age being 67, and this is only going to increase), and I don’t plan on working that long. I realise there are tax benefits to be had, but these can be whisked away with a change of government attitude.

And thanks for the sensible discussion, 2604.

26046:41 pm 24 Aug 10

milkman said :

You guarantee it? Really? Do you own one of these?

No we don’t own one, thank goodness. We look for guaranteed returns rather than speculative ones and only invest in super (PSS for me, salary-sacrifice for Ms 2604), cash, fixed interest and paying off our own mortgage. However, if you think this kind of rental guarantee (or any kind of rental guarantee, for that matter) is actually provided by the developer or operator of this kind of scheme other than by charging more for the property in the first place, I’ve got a bridge to sell you!

milkman said :

Not not be rude 2604, but you don’t know what you’re talking about here.

No offence taken. It’s your money and you can do what you like with it. But it seems to me that you’re stuck with an illiquid asset that you’re hoping will become a viable investment because of some future capital gain. Good luck.

milkman6:35 pm 24 Aug 10

DeadlySchnauzer said :

milkman and georgesgenitals, there is no way that you are getting a guaranteed risk free $275 a week from the parent company. They might say so in all their glossy brochures, but in the fine print there will be all sorts of out clauses and contractual triggers they can pull to get out of the payments. Don’t believe me? Well rather than go into the details I found a website which summarises things nicely: http://www.hotspotting.com.au/index.php?act=viewArticle&productId=11

As they say in investment, If it looks too good to be true then it’s probably high risk. If you truly were able to make a risk free 7% yield plus capital gains with only a ~200k down payment then we would have managed fund and foreign investors flocking to Australia to snap up properties from the amazing aussie serviced apartment market. But we don’t. In fact they tend to be on the market for quite a while and can be hard to move.

I own one, as I said before. I’m not making this up. If you don’t believe me, call the agent selling one them and ask. It makes $275 per week, paid 52 weeks per year.

The issue, as explained above, is that these units are difficult to finance because of the lease arrangement. This means that most investors can’t get finance for them, because significant deposit and/or equity from other assets is required. Accordingly, fewer people can buy, meaning demand is lower leading to lower purchase price.

And these guys don’t have glossy brochures – they are sold privately by existing unit holders to whoever wants to buy them. These are not packaged investments, and are not sold by the management company. They are effectively commercial property that come with a private lease attached.

Again, call an agent and let us know what you find out.

troll-sniffer10:11 am 23 Aug 10

builder said :

Like basketcase said, do your own research. If you really want to make the largest returns possible do the following.

1. Buy your own block of land, make sure you can fit a 4 bedroom home on it (easy to rent) , Land min 400m2. Save on stamp duty.
2. Get a builder to quote to build the house, don’t go for the cheapest quote. Organise carpets, blinds, landscaping yourself.
3. Rent the property out and property manage yourself.
4. Organise a property depreciation schedule and find a competent accountant.

Play your cards right and you could be making 7 to 8 % return on your money, plus capital gains down the track. This system actually works but it involves a little bit of legwork. Once you have done one you can begin looking for your next site. Never pay too much for the land. Avoid apartments, the developer has sucked out the lion share of the profit. Become your own developer and control every aspect of the deal.

There is no bubble. The majority of people buying and building new homes are immigrants. At the recent land auctions/ ballots, every available block was snapped up.

If you can’t find a vacant block than buy a house and land package near infrastructure.

Mate if you can get 7-8% net return on an investment property in Canberra then I know of several international investment funds that would be keen to get involved.

In the real world, the return on an average property in Canberra in an area that would be still able in a downturn would be at best neutral and more likely -2 or -3%.

Consider:

Purchase price of a budget house ready to rent $450000. Rental return $450 per week tops, allow 50 weeks pa. $22,500 pa. Mortgage interest only repayments on $400,000 = $29,000 pa at 7.25% (best to allow for 8% rates at least). Rates, insurance, land tax etc allow $5000 per annum. (any less and you’re kidding yourself)

So, on a rental return of $22,500 pa you have expenses of $34,000, a gross loss of $11,500. If you’re able to negative gear against a tax rate of 40%, you’re still down $6900 per annum or $130 per week. The best most optimistic rate of return you could envisage is therefore -1.5% approx. That’s a far cry from 7-8% return.

If you can post demonstrated verifiable figures that show how you can somehow magically purchase a property in Canberra with investment finance and get a positive rate of return I and a million other investors around the world would love to see them.

Previous generations have done well out of capital gains and the trend may well continue, but when starting out in the property game you need to be aware that it will cost you a massive chunk of your lifestyle money for the first few years and will most likely take 12-15 years before you start to pull ahead of sticking the same money in a good bank account.

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