By Rolf Howard

The Reserve Bank recently announced a record low level for interest rates in Australia.  As a consequence of this there are many new dangers potentially lurking in this environment that people need to be aware of.

Our practice has experienced several low interest rate environments and acted for people caught up in risky property schemes which in some cases have cost them millions of dollars.

Low interest rate environments bring with them changes to the property landscape. A characteristic of such an environment is cashed up investors, particularly retirees, who have survived the more challenging times and are seeking attractive investment opportunities. Many are wary of the stock market but are looking for investment returns greater than fixed interest returns from low risk bank deposits. A second characteristic is entrepreneurs bringing new investment products to the market.  Some of these people are often charlatans touting highly suspect money making schemes that appear very attractive due to the high returns they are offering.

My experience in this environment is that it can have a significant impact on the property market in a number of ways. Firstly there is room in a low interest rate market for new products as money can circulate faster and risky products have the ability to thrive for a certain period of time. This is why economists contend prices will eventually rise because people are drawn to the many opportunities that will be on offer to them.

Secondly, several new property products will appear attractive but have less than satisfactory business cases. In many instances these may offer better returns relative to other opportunities while interest rates remain low. The foundations of these products have not been tested in a high interest rate environment. Over time many build up reputations for being as safe as banks. This is far from the reality as was highlighted by the collapse of the troubled mortgage fund manager LM Investment earlier this year.

The early 90′s was a time when the economy transitioned from very high interest rates to a significantly lower interest rate environment. Several new investment vehicles were introduced during this period, many of which were not based on strong investment foundations. Typically the types of property schemes considered ‘high risk’ include geared properties, holiday apartments, managed funds and syndicated products from developers.

The seeds for future failure are often sown during historical low interest rate periods. Investors must be vigilant during these times to ensure they do not become a statistic associated with another failed investment scheme. There are plenty of opportunities to be found in the current and future investment environment but caution needs to be exercised. One of Warren Buffett’s golden investment rules is ‘do not invest in a business that you do not understand’. Stick to this principle and it will help inform sound investment choices into the future.

Top tips to avoid risky property schemes:

1)    If it looks too good to be true – it probably is.

2)   Remember in the case of interest rates what goes down will eventually go up.

3)   Research is the key. If you are going to invest in something you must understand what it is, what it         does, how it works and why it makes money.

4)   Remember if a scheme has been registered with the Australian Securities and Investment                         Commission (ASIC) it does not guarantee it is safe. ASIC does not review the financials of all the managed funds and property schemes that are registered with it. Due diligence is needed to check the financial viability of each scheme you choose to invest in.

5)   Understand that investing is very different to gambling or speculating and needs to be based on sound investment principles.

6)    If you are seeking advice from a financial planner ensure they are independent and offer a clear statement of advice for any products they are representing. Also ask how the fees are structured.

7)    Diversification is the key with investing. Ensure your eggs are spread into many baskets to alleviate the risk of losing everything if you make an ill-informed financial decision.

8)    Seek financial advice from a qualified financial planner before investing in a specific scheme.

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