"Hidden costs and shady business practices in the world of "wealth creation" and property investing"

By James Reynolds

I caught up for coffee with a client at Clandestino in Noosaville last Saturday. We worked on one of the client's projects for an hour or so, caught up on what was going on in his life and right at the end he wanted my thoughts on something possibly disastrous, that happened to their friend during the week.

Our client's friends live in Melbourne. Work good jobs. Have made pretty good financial decisions to date. They even have a financial planner.

They got a call out of the blue from someone who “just wanted to know a few things to see if they qualified for tax breaks” - “Do they own their own home?” “How much is owing?” “How much do they earn?” They were then told that there was a secret that the politicians were keeping to themselves about property and tax, and hence why they had multiple investment properties each!

From there, they were curious and an appointment was made for a face-to-face. At the meeting, they talked about goals, before moving onto the solution: borrowing against their home, using some savings to buy a portfolio of investment properties. They were told “… this [first] house will be the hardest on their way to building their portfolio of four or more!”

I’ve heard similar stories before and this doesn’t end well. To confirm, I asked a few questions “Let me guess? The property is 1 to 2 hours drive west of a capital city? And the property hasn’t been built yet?” “Yep,” he confirmed, “that’s exactly right”.

I asked where they were at with it then, and he told me that they had been talked into signing a contract (at the face-to-face meeting). Our client could see that something was up, but didn’t really know how to approach it.

Without knowing all of the details, it blows my mind that someone could be giving advice on financial matters without understanding the client situation, and goals, let alone disclosing all of the details of the strategy. Anyone would be forgiven for thinking that this was a call from a financial planning firm. However, that’s not the case. These types of "wealth creation" businesses sit in a grey area of the law, and in much of the cases I’ve seen it’s “buyer beware” or to put it another way, if you buy their sales pitch, it’s your responsibility for not asking the right questions. 

I did some research to further arm our client for a conversation with their friends. Here’s what it turned up.

  • Although the business’ website looks professional, it has no details of employees.

  • The website doesn’t confirm if it has a financial planning licence (or any kind of licence like a real estate licence or a credit licence to provide loans).

  • The website information is bare bones and generic, other than an address in what sounds like a nice area.

  • After further research, the sole director of the company has either managed or directed similar companies since 2010 – almost like clockwork every 2 years he’s working at or starting a new company, 4 in total. All of them “specialising” in wealth creation and property investment. All of the previous companies the sole director worked at, had plenty of bad press. And none of them had licences.

Here’s how it unfolds.

1. A hard sell phone call from a company that specialises in cold calls. Their job is to get you an appointment with the “wealth creation" and property investment business.

2. A face-to-face meeting at either their home or flown to a major capital city and put up in a hotel. Lot’s of talk about government, taxes, secrets, politicians, financial freedom, financial security, the future. At the meeting, they look for a signature to apply for a loan to purchase an investment property. All for a one-off upfront fee of $5,000 to $15,000.

3. As well as the fee, the business gets kickbacks:

  • From the developer on the investment property (a payment of 5 to 10% of the purchase price)

  • From the bank on the loan (a commission on the upfront and ongoing value of the loan)

  • From the personal insurance company (a commission on the upfront and ongoing value of the premiums)

Let’s break that down. On a $400,000 property, even on the low-end there’s the upfront fee of $5,000, plus the developer kickback of $20,000, plus the bank commission of $2,240 upfront and $480 pa ongoing, plus the personal insurance company commission of $7,700 upfront and $700 pa ongoing. Including the upfront fee, that's at least $35,420 (for the first property!). 

Property developers and product providers heavily incentivise (with commissions) other people to move their product. However, the commissions are built into your price, meaning you pay for it. If you didn’t have to pay the commissions, you’d be paying a lot less for the investment property, the loan repayments and the personal insurance policies.

What’s the moral of the story? Due diligence is key. Sometimes going slow is a good thing. Understanding details is important, like how people get paid from selling you something. Just because they ask you about your goals, doesn't mean they have your best interests at heart.

Discussing your situation with people who know what's going on in the industry, and only get paid by you, makes all of this easier.  

Take care,

James Reynolds, Adv. Dip. Financial Planning

Director | Financial Adviser

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