Signed contract - accountant says "Don't do it!"

Panicking!

Enthusiastically purchased our first investment property two weeks ago using the equity in our PPOR. (PPOR worth $227,000, owe $158,000. New IP cost $205 with rental of $230pw. Not high income tax bracket) Still waiting unconditional finance, but looking very likely it will come through in the next couple of days.

Ignorantly did not speak with an accountant about our plans to purchase as I guess I wasn't clear on what his role would be - I thought his role would be more to assist us with finance set up and managing the tax affairs after the purchase.

Mortgage broker recommended I speak with him, so did so today.

He basically looked at our financial set up (the loan arrangement) and said "if they knock you back on your finance, it won't be a bad thing". Could have knocked me over with a feather.

Basically, he has a number of concerns. These are:

• We are borrowing 95% of the loan (though technically could increase our mortgage on our PPOR another $30,000 and then have a 'deposit' which would reduce our borrowing percentage)
• The market is flat and he believes it is likely to go into decline based on what is happening in Japan and USA.
• We will be negatively geared - I work it out to be around $65 a week. Quite affordable for us, but he claims we may be propping up a property that may still decline in value due to GFC.
• He doesn't see that the capital value will necessarily increase at the rate of our negative gearing costs (holding costs) - even over 20 years.
• We have equity of around $67,000 in our PPOR which is what we are utilising as our line of credit to purchase our IP. He said he'd like to see us reduce this loan even further before considering an investment property.
• He's concerned that we (AUS) may be heading for a recession/depression that we may not recover from - so property price could decrease while we are still out of pocket trying to hold onto it. We have a 20 year investment plan, ie, not to sell until retirement and only if necessary.

I am worried, of course, because it means if we go ahead with this purchase, we will be going against his professional advice.

We have the cash flow to hold the property. However, we have seen a $20,000 drop in value (according to bank valuers though) of our PPOR in the last 5 years since we purchased it. It is in the same regional city as our new IP. He used this as an example of what might happen to our IP.

Our IP has potential to subdivide. It also has capital growth potential, but is in a regional city, so CG not as likely to be as significant as capital city or metropolitan areas.

I don't think we can get out of this purchase regardless of what we want to do. If finance comes through, we have to proceed.

He has made me question all the understandings I had about purchasing an IP - all the benefits. I don't mind being challenged and I will listen to him but..... I know he can't predict the future. I know he is being conservative. I know he is telling me what he believes to be true and based on his expert knowledge and experiences. I don't want to believe him but I also want to listen to him IYKWIM.

What to do??? I don't know what information I can obtain that will help make this decision (if there is one left to make) easier.

Can anyone reassure me or will you tell me to listen to him?

newlywed1311 said:

[*]The market is flat and he believes it is likely to go into decline based on what is happening in Japan and USA.

Might not be the same as Japan and USA.

[*]We will be negatively geared - I work it out to be around $65 a week. Quite affordable for us, but he claims we may be propping up a property that may still decline in value due to GFC.

$65 a week is chicken feed as long as the house will increase over a 20 year span you mention. For me this would be not an issue, as long as you can afford it.

[*]He doesn't see that the capital value will necessarily increase at the rate of our negative gearing costs (holding costs) - even over 20 years.

Without knowing the place you have bought, this sounds ultra cautious advice. What place in Australia has been flat for 20 years? Obviously this IP is the same place as you live. You must have faith in the values of you would not live there?

[*]We have equity of around $67,000 in our PPOR which is what we are utilising as our line of credit to purchase our IP. He said he'd like to see us reduce this loan even further before considering an investment property.

Good advice. Is the $65 per week before or after tax? You still could reduce your PPOR loan with your tax refund cheque.

[*]He's concerned that we (AUS) may be heading for a recession/depression that we may not recover from - so property price could decrease while we are still out of pocket trying to hold onto it. We have a 20 year investment plan, ie, not to sell until retirement and only if necessary.
[/LIST]

If we listened to the "advice" we got from accountants, financial planners and family, we would have just our PPOR and have missed out on a lot of capital gain over the years.

I am worried, of course, because it means if we go ahead with this purchase, we will be going against his professional advice.

Does he own IPs? He sounds overly conservative.

We have the cash flow to hold the property. However, we have seen a $20,000 drop in value (according to bank valuers though) of our PPOR in the last 5 years since we purchased it. It is in the same regional city as our new IP. He used this as an example of what might happen to our IP.

Our PPOR has lost a little value too, but no problem unless we wish to sell. That is the way the market is, but it keeps on rising, dipping, staying flat, rising etc etc.

Our IP has potential to subdivide. It also has capital growth potential, but is in a regional city, so CG not as likely to be as significant as capital city or metropolitan areas.

Ability to subdivide sounds fantastic. We are sitting on some IPs with the same ability. It is our little nest egg, but most people thought we were mad to stretch ourselves to buy each one. We just didn't listen because we don't mind taking risks.

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If you did your homework, know the area, and thought this was a good idea before seeing your accountant, then the only thing I can see that has changed is that you have spoken to someone (your accountant) who has a different investing style and/or risk profile than yours.

OMG - tell him to buy a carton of beer and cheer up, the world aint ending.

Would you go to a Cardiothoracic Surgeon to seek advice about Neuro Surgery? Not all accountants understand the property market. Most Real Estate Agents would not have a clue about Taxation.

Does he have a degree in Economics? If so, then he may well be able to advise you on what "he thinks" the economy will do in the next few years.

As far as I can tell, he should advise you on:

We are borrowing 95% of the loan (though technically could increase our mortgage on our PPOR another $30,000 and then have a 'deposit' which would reduce our borrowing percentage)

Click to expand...

and

We will be negatively geared - I work it out to be around $65 a week. Quite affordable for us, but he claims we may be propping up a property that may still decline in value due to GFC.

Click to expand...

But the rest is this:

His opinion.

He is bordering on negligence and should not be advising you to not buy this property based on his personal opinions and speculation.

Regards Jo

My personal experience has taught me that there is two types of accountants - those that understand property and those that don't.

Time to go shopping for a new accountant perhaps?

Sunshine

Congratulations on your first foray into the IP world Newlywed.

Your accountant is not related to Steven Keen are they?

First question to ask your accountant - How may IPs do they have?
If none, just about ignore everything they say.
Second question to ask - what evidence can they produce to confirm their assertions?

"We are borrowing 95% of the loan (though technically could increase our mortgage on our PPOR another $30,000 and then have a 'deposit' which would reduce our borrowing percentage)'
If you're borrowing 95% and supplying 5% deposit via equity of PPOR, then you have 100% lend, fully tax deductable. A good thing.

"The market is flat and he believes it is likely to go into decline based on what is happening in Japan and USA. "
Since time began property has doubled on average every 7-10 yrs. No reason I can see why this should change. Your planned timespan should not be impacted by "likely" short term events.

"We will be negatively geared - I work it out to be around $65 a week. Quite affordable for us, but he claims we may be propping up a property that may still decline in value due to GFC."
Many people have built wealth even through negative gearing. It comes down to your plan. It's Capital Growth over the medium-long term than makes you wealthy not day to day cashflow. I think if it as "buying time".

"He doesn't see that the capital value will necessarily increase at the rate of our negative gearing costs (holding costs) - even over 20 years."
Property is very forgiving over the longer term. I can't understand how CG won't exceed holding costs over 20 yrs - unless you bought a crap property. Work out forwrd estimates for yourself.

"We have equity of around $67,000 in our PPOR which is what we are utilising as our line of credit to purchase our IP. He said he'd like to see us reduce this loan even further before considering an investment property."
Hmm, they sound very conservative. Leaverage builds wealth not savings.

"He's concerned that we (AUS) may be heading for a recession/depression that we may not recover from - so property price could decrease while we are still out of pocket trying to hold onto it. We have a 20 year investment plan, ie, not to sell until retirement and only if necessary. "
He reads too many papers. I'll look at Oz only. The great depression, WW1, WW11, the '70s oil crisis, the '90s recession. We have come out of them all, bigger & better. So has every other country. Why is now any diferent?

"I know he can't predict the future. I know he is being conservative."
You have answered your own questions.

"What to do???"
Sit down, crunch the numbers. Do forward estimates. If you're still confortable, proceed. If not, reconsider. let the facts speak for themselves.

The number of people I have heard lately talking/promoting Doom & Gloom is unbeleivable. There's a contrarian investor saying-"when the shoe shine boy is talking shares, it's time to sell". Now is the exact reverse of this. He who dares, wins.

At the end of the day, it's your money, your choice. Clear "the noise" and listen to the facts. I still read articles and books from years gone by and say to myself, "the more things change, the more they stay the same".

Currently, I see opportunity.

Hope this helps you with your dilemma.

Project 1080.

The project: 10 IPs in 80 mths.

I would ask him what he owns first....

If he replies 20, id listen, if he says 1 or 2, id find a new accountant.

Without knowing the exact property (post a link if youu can and have signed contracts) I cannot comment weather it is a good or bad buy.

Welcome to the world of accountants. A very conservative breed, indeed.
Mine told me to stop buying about 5 IP's ago.
The accountant who helped set up my SMSF told me not to invest in property using the SMSF because house prices could fall by as much as 40%.
Smile politely, thank them for the advice then go and do what your gut instinct tells you to do.
There are a few accountants out there who invest in property and are supportive of folks like us, but they are few and far between.
You're on the right track and you're doing something while others procrastinate or wait for "the time to be right". You will be laughing in a few years looking back on what Player calls the Global Financial Christmas (GFC).

He/she is trying to protect u..................

Sometimes too much coverage isnt good

ta
rolf

Generally when you hear comparisons to the US and Japan it means they're from the Steven Keen flock.

Same with '40%' drop.

Depends what you believe really, but if you believed this, you probably would not have been purchasing in the first place.

Perhaps his/her shares have been wiped out and usually their are two oposing investers those that do IP's and those that do shares, i see it like do you follow qld or nsw in the state of origin,
If they do shares he would be a bit of a D&G atm,

Gee, the post sounds rather hysterical to me.
First to mind is why do people shoot first do then ask questions?
One for spiderman's research analysys.
Did the accountant actually say don't do it, or just point out to the risks involved?
Seems you're not really aware of the risks involved investing in RE.
It is his job to point them out. If he had'nt you be complaining too.

Don't know about your deal thus, won't comment on it.

Have you ever asked your accountant how wealthy he/she is? If wealthy, how what the wealth created?.

A decade ago, when I started in this business I can tell you i knew nothing about it though, I felt the need to do something. My accountant at the time prevented me for buying property. Specially when I told him I was about to fly to sunny SE QLD to see some potential IP's. He started to talk down property and specially property in QLD due to the 2 tier marketing, blah blah blah. Then, I turned to what I thought was my financial adviser. He indicated to me to sell the only IP I have at the time and to put that money in a managed fund with marging lending. Then, every month to invest $500 and margin lend $1000. The year was 1999 and we already know what happened in March, 2000 and more recently in 2008. I'm glad I dismissed the opinion of these 2 professionals.

Accountants are been training to follow accounting rules, financial reporting, tax legislation, etc and Financial adviser are trained to.. well I don't know what they are trained for... The point is that these professional are not really trained to make money otherwise, they all would be many times millioners and almost noone will lecturer the profession at Uni for $40 0r $50 an hour.

Cheers and good luck!

Yeah my first reaction from reading your post is "Does this accountant have any properties of his own?"

Recently - back in January actually, I advised some FHBs in Newcastle not to leave their search too late (when the boost was to be pulled on 30 June 09) as I believed that prices in the $350K category would rise potentially by 5 - 10% and that the good stock would be snapped up first, leaving the sub-optimal property for them to select from. They planned to holiday in Feb/Mar and come back from hols & look then.

I received an irate e-mail back from the husband accusing me, among other things, of trying to be "Nostradamus" when in reality I was just giving them my professional view as I saw it. Well you can guess the rest, they are still searching for the Holy Grail and complaining of 10% price increases and crap properties. Why did I tell you this? Gee if I was accused of trying to be "Nostradamus" with my predictions (which did turn out to be correct), then my goodness, what do we call this accountant of yours?
- The market is flat and he believes it is likely to go into decline based on what is happening in Japan and USA.
- He's concerned that we (AUS) may be heading for a recession/depression that we may not recover from
Why don't we all just quit now? Its all over people, we don't have a prayer!

Look, negative Nelly's can be good for you. It is a test of why you chose the plan of action that you did. If a little negative feed-back like this can throw your course into a wobbly, then perhaps you are not convinced you are doing the right thing yourselves. Be assured that in this life, as soon as you set out to do something that is not the "norm" that you will be challenged, by: people you respect - your family, your partner, your advisors etc. These are the ones it is very difficult to ignore and they pull at the emotions. If you met a bum in the street who yelled out at you "Don't invest in property, it will send you broke" it would be easy to ignore that kind of advice - no so much a close respected family member saying the same thing.

You should have been able to come back with good arguments for each point that the accountant raised, really it was simple (OK simple for me)

My own accountant fought me tooth and nail when I wanted to start my SMSF many years ago. Got good arguments from her and I had an answer for each one. She saw my determination and backed down, even started asking me how I was doing my share selections because the SMSF was doing so well. Then when I said I was going to do options trades in the SMSF I got the same OMG Nooooooo response. Again I won and did well. Anyways we outgrew her abilities and no longer came to respect her conservative views and moved on.

Any of us who have done well in the IP game have had to overcome enormous obstacles sometimes, namely:
- Partners that refused to sign mortgage docs and go into anymore debt
- Lenders that did not want to us lend anymore
- Lenders that did want to lend and their MIs who knocked us back
- Valuers who undervalued our properties and who, when challenged, agreed they got it wrong but would still not change their val
- REAs that gazumped us
- Vendors who got greedy and wanted more $'s after we had agreed price
- Tenants who trash houses and don't pay rent
- PMs who don't do their job
- Tradies who ripped us off and cost us $s and time by delaying the job
I could go on.

But really, you will need to overcome all of this to be successful or you will end up like 80% of investors who buy 1 (yes one) property and sell that within the first 5 years of ownership.

What are you going to do:
When they find termites in your house 6 years from now?
Or a tenant has a kitchen fire and you forgot to renew the insurance policy last week?

Take a concrete pill and harden up or you aren't going to make it
....and I say that in the nicest possible way

With respect to all of Propertunty's post, never a truer word was spoken.

Project 1080.

The project: 10 IPs in 80 mths.

You've missed out a few including dodgy building inspections.
Nobody said it's supposed to be easy except the fast talking dude at the seminar
and the expert on API mag.

The President of the USA has advisers but at the end of the day he makes the decisions based on their advice, his experience and what he thinks is right. Look at all the pros & cons and make a decision on all the facts and figures.

The first IP is always the hardest and buyer's remorse is common. Don't seek advice from anyone who has no IP as most of the time they do not have the full picture to meaningfully relate the issues to your situation. Go to the investor group meeting nearest to you and read a lot on SS relating to your area to firm up your DD. Better still do your sums and then buy on the likelihood scenario with measures to counter all likely risks (see sample calcs in Jan Somers' book).

As to comparing with the situation of Japan, US and alarmist 40% price drop, these issues have been discussed at length on SS. You can look them up and it's a long read. It's a stand-off between gloomers and boomers but will be resolved at the end of this year when either Keen or Robertson will have to do a publicly penance journey up Mt Kosciusko!

All the best. Having done all, if you are spiritual, pray. It is better to be blessed at the end of the day then have refined Noble prize-winning calculations for all the financial risks and lose big ala Lehman Bros, et al.

OK, he may be right. Your new IP could drop 40% just after you buy it, but it will then probably start appreciating again at about conservatively 7%PA. Since you are keeping it for 20 years here's how things work out.

$205000 Purchase Price
$123000 Devalued after the Armageddon of recession
$241960 Value after 10 years of 7% growth
$475971 Value after 20 years of 7% growth

So it looks like to me you are still making money, just not as much as you originally hoped.

Isn't time in the market wonderful.

newlywed1311 said:

Panicking!

Enthusiastically purchased our first investment property two weeks ago using the equity in our PPOR. (PPOR worth $227,000, owe $158,000. New IP cost $205 with rental of $230pw. Not high income tax bracket) Still waiting unconditional finance, but looking very likely it will come through in the next couple of days.

Ignorantly did not speak with an accountant about our plans to purchase as I guess I wasn't clear on what his role would be - I thought his role would be more to assist us with finance set up and managing the tax affairs after the purchase.

Mortgage broker recommended I speak with him, so did so today.

He basically looked at our financial set up (the loan arrangement) and said "if they knock you back on your finance, it won't be a bad thing". Could have knocked me over with a feather.

Basically, he has a number of concerns. These are:

• We are borrowing 95% of the loan (though technically could increase our mortgage on our PPOR another $30,000 and then have a 'deposit' which would reduce our borrowing percentage)
• The market is flat and he believes it is likely to go into decline based on what is happening in Japan and USA.
• We will be negatively geared - I work it out to be around $65 a week. Quite affordable for us, but he claims we may be propping up a property that may still decline in value due to GFC.
• He doesn't see that the capital value will necessarily increase at the rate of our negative gearing costs (holding costs) - even over 20 years.
• We have equity of around $67,000 in our PPOR which is what we are utilising as our line of credit to purchase our IP. He said he'd like to see us reduce this loan even further before considering an investment property.
• He's concerned that we (AUS) may be heading for a recession/depression that we may not recover from - so property price could decrease while we are still out of pocket trying to hold onto it. We have a 20 year investment plan, ie, not to sell until retirement and only if necessary.

I am worried, of course, because it means if we go ahead with this purchase, we will be going against his professional advice.

We have the cash flow to hold the property. However, we have seen a $20,000 drop in value (according to bank valuers though) of our PPOR in the last 5 years since we purchased it. It is in the same regional city as our new IP. He used this as an example of what might happen to our IP.
Our IP has potential to subdivide. It also has capital growth potential, but is in a regional city, so CG not as likely to be as significant as capital city or metropolitan areas.

I don't think we can get out of this purchase regardless of what we want to do. If finance comes through, we have to proceed.

He has made me question all the understandings I had about purchasing an IP - all the benefits. I don't mind being challenged and I will listen to him but..... I know he can't predict the future. I know he is being conservative. I know he is telling me what he believes to be true and based on his expert knowledge and experiences. I don't want to believe him but I also want to listen to him IYKWIM.

What to do??? I don't know what information I can obtain that will help make this decision (if there is one left to make) easier.

Can anyone reassure me or will you tell me to listen to him?

Click to expand...

You mention your property has dropped 8% over the last 5 years. I suspect there wouldn't be to many members here in the same position (I know I'm not), especially in the sub $300k market. You make mention you are buying in the same area. I'd be looking at the area of choice for your IP as CG maybe an issue.
Seems strange that most people are focusing on accountant bashing