One of Australia’s big 4 banks, in fact, the biggest of the big 4 – CBA, has been accused of ripping off its customers and then quite deliberately trying to cover up the deceit.
SHOCK HORROR – a money lender being motivated purely by profit. How could this happen ( you may ask ) from one of our oldest and trusted institutions ?
GREED – greed from a bank and financial planners ( within the bank ) driven by the prospect of HUGE commissions – commissions which get paid up front ( regardless of whether the investment ends up making money for the client ). As we have seen, all too often, high return investments can end up being HIGH RISK ( and NO return ) for the hapless investor, who are more often than not, ‘mum and dad investors’ gambling with their life’s savings.
GREED – greed also from these investors. There can be no opportunity for unscrupulous planners and advisers if there weren’t the gullible, being promised unusually high returns, for little or no effort ( other than ‘trust’ ). Rules of investing never change. “If it seems too good to be true, it probably is………”. The reason you can only get 3% on your money ( on bank deposit ) is that it is SAFE – absolutely safe. As the returns offered increase, so does the risk. That’s it. Many of us will remember Pyramid Building Society. Some of you may have lost money ( or know someone who did ) when the society collapsed. And whilst it was very sad that many ‘mum and dad investors’ lost their life savings – again – what were the drivers behind those that invested ? HIGH RETURNS. When banks were paying between 3-5% interest, Pyramid was offering 17% return. 17% RETURN. In hindsight, we all can say, “ well what were they thinking – of course they lost their money. No guarantee. They are not a bank.”
But, as we’ve seen with the recent CBA scandal – where the central investment was the BIG RISK ( and BIG LOSS ) property investor Storm Financial, investing with the advice from a bank also runs risks. And what may you ask did the bank do to the employee at the centre of this scandal after ( not before ) senior staff were aware of what he had done ???? – if you guessed got the sack, nup. If you guessed GOT PROMOTED, congratulations – you have a balanced view of our banking system ( and more importantly, what makes them tick ).
Okay, so what do we learn from all this ? –
#1. The higher the return – the higher the risk
#2. If someone is giving you ‘free’ advice ( they are most likely motivated by the benefit to themselves personally, than the return to you )
#3. Terms like “ the investment strategies of the MEGA wealthy………” / “ only available to a select few……..” / “ you have been selected………” / ………… even as we read them, we know they sound ‘dodgy’ – should be warning to steer clear of what is on offer.
#4. Investing carries risk. Research and knowledge allows one to limit the risk, but the only way to ensure NO risk, is ( as a famous Prime Minister is credited with advising ) “ would be best hiding your money under your bed……” )
#5. My grandfather used to say – “ the closer you are to the fire, the warmer your hands will be “ and the same applies to investing. The more distant you are from the investment, the colder will be your return. So, if you are keen to invest – get involved in the process – do your own research – surround yourself with the right advice – and way up the pros and cons ( yourself ) – because, ultimately, it’s YOUR MONEY>
So does that mean that every investment ( other than putting it in a term deposit account at the bank ) is bogus ? – Not at all. It just means the rules of investing don’t change.
Here’s a couple more Golden Rules:
#1. When buying property, ( house and land ), if the value of the LAND is 50% or more of the purchase price, then your investment has a far greater chance of growing ( and growing at a greater rate than the CPI ).
Why is this so ? Because land APPRECIATES and buildings ( and chattels ) DEPRECIATE. Let’s look at 2 different scenarios –
Scenario 1 – Build a house and land package out in the growth corridor. Land costs $150,000 and the building costs $400,000. Total cost $550,000. Combined value $550 – $600,000. Right ? Nup. Combined value is probably more like $500,000. ( LESS THAN WHAT HAS BEEN SPENT ). Why ? Look at the underlying value ratios – the land is less than 30% of the overall. The land has been overcapitalised and it’s going to take ages to grow. The other driver holding down the growth in the land is SUPPLY. Across the road and around the corner there are dozens of vacant blocks ( and many are being offered for less than paid for ).
Scenario 2 – Buy an old house and renovate. Recently, we assisted one of our clients with this exact scenario. Bought old DHS ( Dept. of Housing ) property at State Trustees auction. Paid just over $160,000. Property is in a regional town, 2 minutes from town centre and on a subdividable block. Clients paid a professional renovation company to manage the reno at a cost of $30,000. At completion of renovations, we called the bank back in to revalue. Property now worth $240,000 and rentable at $240 – $250 per week. All this in 6 weeks. And now, we start to look at subdividing. All being well, the clients will subdivide the block and build a 2 bedroom lowset brick and tile for around $120,000. On it’s own title, the rear property should be worth $300 – 320,000. So let’s look at the math. For an outlay of $320,000 ( incl subdivision and build of new rear home ), the clients now have 2 properties returning nearly $600 per week ( based on $350 pw for new rear home ). Do those sums for an annual rental yield. YEP – 9.8 %. OR – return on investment – for an all up investment of $320,000 they have 2 assets with a total value of $560,000. That’s not doubling your money – but it’s pretty close !!!
SO – is Scenario 2 a fluke ? or a trick ? – well let’s take a closer look. Property originally purchased for $160,000. It was putrid when you walked in the door. The kitchen, bathroom and laundry were unworkable ( it didn’t even have a sink in the kitchen ). When we surveyed the property for our client prior to auction, our research told us the LAND was worth $150 – 160,000. Yep – land component as good as 100%. The house was free. Also, let’s look at what they spent their money on – new kitchen / new bathroom / new plaster walls ( 2 walls were knocked down to open up the kitchen and create a kitchen / family room ) painted the outside and new carpets throughout. They ADDED VALUE to the asset. By changing the asset class, they also changed the ratio of land to house. The land remained at $150,000 – but now the house has a value and the $30,000 they spent created a $90,000 asset. Yep – simple math says that is TRIPLING your money.