All Topics / Help Needed! / Had a conversation with my tax accountant about Melbourne property

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  • Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
    Post Count: 189

    I thought I’d share a conversation I had with my tax accountant.

    The tax accountant has been servicing my parents for over 20 years. Previously I used to do tax myself but since I now have investment property of my own, I prefer to have an accountant to do my tax so naturally my parents made referrals.

    The accountant, having nearly 30 years of experience, has many clients who invest in property, as well as clients who are actually real estate agents and developers, etc… She frequently gets contact by developers / agents when “hidden deals” are available, and based on her past experience, she offered me her thoughts on the matter:

    1. Can’t comment on property market in other areas, but as far as Melbourne market is concerned (particularly CBD market since that’s where her office is located and most of her clients are based at), apartments / units give a much better ROI than House.

    2. Despite Apartments / Units having high body corp fees, at the end of the day, factoring those into consideration, they still give better ROI than House.

    3. So unless we are talking about development and sub-divisions, otherwise if I am only interested in “buy and rent without taking subdivision or building into consideration”, then Apartments / Units within Melbourne CBD makes the most sense. This is primarily because Melbourne CBD is so close to multiple universities and there will never be a shortage of Chinese Overseas Students. Even more so that public transport (Tram mainly) within Melbourne CBD are free, so students can travel freely within CBD. For that reasons, most Chinese Oversea Students prefer to live in CBD and travel for free rather than commute to CBD via public transport during peak hours.

    4. Because of the above, while the capital growth for Apartments and Units might appear to be lower by “traditional experienced property investors”, but they offer very good cash flow.

    5. Since she has clients who are developers, she gets approached by developers and agents from time to time, with projects with great discount before any off-the-plan or new projects commences, and this means opportunities to buy below market value rather than paying for premium price after those projects are completed and the property hits the market. Since she has been working together with my parents for over 20 years, she said she is happy to make referrals to me if such opportunities do come up.

    6. Finally, she mentioned that within her past 30 years of working with different clients, she saw a noticeable trend, where young generations are starting to enjoy big land less and less. Again, she can’t comment on other states and cities, but as far as Melbourne is concerned, it looks like most people who belong to my father’s and possibly grandfather’s generations are still enjoying “houses with big land”, while people who are my generation are about 50/50, and people who are 1 decade younger than me (those who are in their early 20s) prefers “convenience and comfortable living” rather than “having to look after big land”.

    Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
    Post Count: 189

    Basically…

    Some of the opinions she offered, such as “buy apartments rather than House” and “people are starting to not prefer big land as generations go on”, are quite against many suggestions I learned from experienced property investors.

    So I am interested in hearing from experienced property investors as what they think of opinions provided by the accountant?

    Profile photo of Nigel KibelNigel Kibel
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    @nigel-kibel
    Join Date: 2005
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    Hi Steve

    I could not agree less. Apartments especially apartments in the CBD have not been a good investment especially when it comes to capital growth. Also currently funding especially CBD apartments are a major problem with valuations coming well under purchase price. Many apartments in the CBD are tiny. It is important to remember that the property market is driven by owner occupiers not investors.

    So it may be true that younger people may prefer apartments however what they should do is rent an apartment but buy a house or townhouse for investment or a larger apartment in a better location. My experience is when people sell out of a large house they do not want to move into a 7 square shoe box but would prefer a townhouse.

    • This reply was modified 3 years, 12 months ago by Profile photo of Nigel Kibel Nigel Kibel. Reason: spelling

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    Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
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    Hi Nigel

    The suggestion given today is that with Melbourne CBD never have a shortage of Overseas Uni Students, especially Chinese Overseas Students, rental increase has been solid for years and the demand for such “student accommodation” will not die down any time soon.

    So the option of “buy a ‘student accomidation’ and then rent only to Chiense overseas students and collect good cash flow” is one option that come up in our topic….

    Profile photo of TerrywTerryw
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    @terryw
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    Steven, Can’t you see the obvious here?

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    Profile photo of Nigel KibelNigel Kibel
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    @nigel-kibel
    Join Date: 2005
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    Sorry

    I would never recommend student accommodation as an investment. Its a poor investment. As mentioned you want to appeal to owner occupiers. Small student apartments only appeal to investors. Generally the returns are not that good and capital growth is terrible. Perhaps you should change accountants lol

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    Profile photo of StevenSteven
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    @steven1982
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    Hi Nigel

    This is not to say I will do it, but I am trying to put this picture as well as the numbers in my head at the moment.

    The way how she describes how she does it, is due to her advantage of her position and relation with who she deals with. ie: she maintains good relations with developers and real estate agents.

    So when a new project runs into issues, such as a property fails to settle due to marriage break down or due to the buyer unable to finance, and the property needs to be disposed off quickly at lower price, the developers and real estate agents notifies her of the situation, and she then subsequently either buys them herself or refers to someone who she knows wants to invest, to buy those properties at lower value (sometimes ridiculously lower value than if the property is sold conventionally).

    So this way, not only is finance not a problem, but cash flow is also very good compare to if such “student accommodation” are bought in a conventional manner.

    Eventually it gets to a point where she really only needs to look at her rental income because she has so many of them as well as due to her buying at a much lower value, her rental income exceeds her cost, to the point of even if the capital growth is low, so what?

    Essentially she can retire already if she wants to.

    She owns her accounting firm and from what I can see when I was in her office today, her employees are doing bulk of the accounting work for new / random clients and she pretty much only does accounting for clients who have been using her accounting service for a long time (such as my parents, who make use of her service for the past 20 years).

    Now today, she mentioned that she’s happy to make referral to me if she knows such scenario happens again (ie: property fails to settle due to problems mentioned above)…

    Not to say I will definitely do it that way, but just thought it might be an option if this “buy at lower value” really works the way she makes it sound like.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    She is making money off ‘referrals’ like this – likely 10 times what she would make from doing the tax work…

    These types of deals are also often inferior.

    Beware of people recommending new property

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    Profile photo of Nigel KibelNigel Kibel
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    @nigel-kibel
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    I do not necessary think all new property is bad however it depends on what is recommended. Certainly Student accommodation is not good. Look at the finance you get to start with. The banks consider these a risk. Now if your accountant has good apartments that are cheap that may be different. However the CBD, Dockland and Southbank have really not performed.

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    Profile photo of StevenSteven
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    @steven1982
    Join Date: 2017
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    I haven’t drilled too much into details and specifics.

    The way how I was presented those information is like this. It may or may not add up, but at this stage, I am not making any decision nor am I committing myself to anything. I just thought I’d list down that and share those information, that’s all.

    1. When those new apartments are being constructed, she doesn’t buy them, nor does she make referrals to people who she knows, because she knows they will be sold at premium price.

    2. But one way or another, some “problematic apartments” come up, and fail to settle. The reason behind failing to settle can vary, but a lot of the time, this is due to either marriage break down or people who cannot get finance in time (such as now Chinese government are tightening up overseas money transfer so that slowed down and that caused many Chinese buyer to unable to settle).

    3. When this happens, the “initial” buyer more often than not looks to get rid of them quickly, and that’s where bargain are stroke, and this is when she buys (or pass on the information to people who she thinks will be interested).

    4. Whether she makes money in between, I don’t want to guess, but she said for her, it is just a flick of email at her end.

    5. Usually when those properties “fail to settle”, they tend to be re-sold by the initial buyer, but at a lower value. To give an example, the initial buyer might have bought it at 500K because that initial buyer bought it in a “conventional manner” at premium price, but due to failing to settle but needing to get rid of it quickly, they may re-sell it for 400K or less, and that’s how much she pays (or how much I would pay if she refers them to me and I decide to buy it).

    6. Yes, I am fully aware of apartments in places such as Southbank and Dockland are performing crap. I personally know someone who bought apartments in Dockland years ago and now regret buying it.

    7. But then, coming from my personal experience, I know Chinese Students much prefers apartments close to school. I had 2 cousins who studied in Melbourne, 1 went to Melbourne Uni and 1 went to RMIT. They both stayed at my home initially (where I don’t even charge them rent because we are a family) and yet both voluntarily moved out and moved into “student apartments” close to their school despite knowing they pay much higher rent there (they pay something like 500+ per week, which I think is crazy)

    8. I also use a Chinese social app on mobile called WeChat, where there are Social groups that are created with 500 members specifically to talk about overseas students accommodation. There are frequently students who lease term is about to expire and look for the next student to move in, and rather than posting them using conventional methods, they use that WeChat group to advertise and usually those apartments / Units are the first to be taken away.

    For example, I recently purchased a new 5 bedroom home and after my family moved in, we still had 2 spared bedrooms. So I posted the spared bedrooms in that renting group on WeChat, I advertised them for 170 and 160 per week, and they are taken after 3 weeks of advertising, and now I have 2 tenants living together with my family.

    But those advertising in the same WeChat renting group for student apartments close to Melbourne Uni or RMIT or one those universities, they are usually advertised at between 500K – 650K per week (crazy in my opinion), and yet they are always gone in less than 1 day.

    So it is very interesting to see at one hand, rooms are taken by new tenants very quickly in social apps like this, and yet “statistically” they don’t perform well.

    Basically, Chinese students don’t bother go to real estate agents or anything like that, nor do Chinese landlords. They use WeChat for that purpose when targeting Chinese overseas students market.

    Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
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    Hi Nigel

    Just visited your website and sent you a private email.

    Cheers
    Steven

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
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    Steven

    I tried to read most of this. If your accountant is trying to push you into property, particularly new property, perhaps you should consider a new accountant or respectfully decline and ask them to stick to accounting.

    I would not touch an Apartment in CBD Melbourne or student accommodation.

    Cheers Ivan

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    Profile photo of BennyBenny
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    @benny
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    Hi Steven,
    I applaud that you are keeping an open mind, and are “taking a look” at other options. Certainly, if this person has an “in” to distressed sales, that might have some merit and benefit for you. but hey, as always, it is Buyer Beware (caveat emptor).

    I tend to agree with the others who are guiding you away from accountants recommending real estate, apartments, and student accom. But then, contrarian views can sometimes win out – so long as you have covered off all of the likely problem areas and can still make monmey. Don’t forget though, that aggravation can override some profits – if you are making a profit but it is driving you nuts to do so, do you really want that?

    Anyway, you mentioned your parents having been using this accountant for years. Have they actually taken up any of those “deals” she has mentioned? If so, then you might have the inside running that can help you win as they can show how well those deals have gone for them, and can discuss any failures or concerns.

    Deals are “out there” – if this person has the opportunity to buy at a sizeable discount and can pass on the opportunity to you, then it might be worth a further look. I would want a screaming deal before I bought an apartment in any tower block, and I would want to know a whole lot more about the negatives of renting to students before I committed.

    Good luck with your search,

    Benny

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
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    This is the very definition of being lead down the garden path.

    The accountant is just making money off the referrals which in turn are funded by selling you overpriced rubbish apartments.

    A quick look at poor rental growth, declining values of constructed apartments and huge supply issues with apartments should give you more than enough information to understand whether the accountant was giving you advice for your benefit, or theirs.

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