7 things accountants are plain wrong about

Property investors need a good accountant.

It’s easy to assume that any accountant will do, so some investors choose the family accountant or their business accountant.

From working with hundreds of investors here at Opes Partners, we’ve found that this is often a mistake. We’ve seen situations where investors received plain wrong advice from non-property accountants.

It's well-meaning ... but wrong. And it costs investors money in the long run.

We believe in being blatantly honest here at Opes Partners. So, in this article you’ll learn the top 7 things that non-property accountants often get wrong. That way you know what to look out for when working with an accountant on your investment properties.

#1 – They give financial advice

Personalised financial advice is when someone says to you: “You should do this with your money”.

Legally, to do that you need to be a financial adviser.

But there’s an exemption for accountants. So sometimes they’ll give financial advice, even though that’s not their specialty.

That often sounds like: “Don’t buy this property; why don’t you invest in shares instead?”

And they can tell you that without going through the proper process. They don’t have to ask you what your financial goals are, or figure out if that’s the right move for you.

An accountant can run the numbers on your property. That’s what they’re good at. But they don’t specialise in helping you create a retirement plan.

#2 – “It’s a bad investment”

Accountants want to give you advice. That’s what you’re paying them for.

Sometimes non-property accountants will say a property is a “bad investment”. When they say that they often mean it’s cashflow negative.

An accountant’s job is to look at the cashflow of a business. So what happens if you talk to a non-property accountant? They may look at a negatively-geared property and wince.

But what you’ve got to think about is 90% of properties purchased today are cashflow negative. That’s according to Valocity, a data company.

This is due to high interest rates.

So a non-property accountant might suggest investing in shares instead, but that advice ignores the power of getting a mortgage (leverage).

Let's say you plan to take $200 for your investment property top-up and put it into shares. You might get an 8% return on $200 a week.

After a year you’ll have $10,818.

But if you invest in property you might buy a $500,000 property. If it goes up in value by 5% in the first year, you made $25,000.

So using a mortgage (leverage) to buy a property can sometimes give higher overall returns.

#3 – Telling you not to do something (by not giving an alternative)

It's easy to criticise; it’s harder to give a better alternative.

I remember when I was a mortgage broker a lawyer in Kaiapoi gave clients of mine advice. They were keen to buy a property to help them in retirement.

He said, “No, that’s a bad investment.”

Now that guy was about a hundred years old, so he wasn’t going to be around by the time these people were in retirement.

And if they weren’t going to invest in that property for retirement, what was the alternative? They still had to invest in something for their long-term plan.

So they need to give you an alternative on how you’ll create wealth for retirement.

Remember, when you go to your accountant you’ll talk to them briefly about your property, but you’ll only be sharing a very limited amount of information with them.

By the time you’ve found a property you may have spent a few months researching. So you may be better informed, particularly if they aren’t specialised in property.

More from Opes:

• What taxes do property investors need to pay? (Article)
• Trust vs Company vs Own name - How should I own my investment property? (Article)
• Do I have to pay tax under the Bright Line test? (Article)

#4 – Saying “that property has a low yield”

Next thing some non-property accountants say is, “That property has a low yield.”

When that happens your first step is to dig into what exactly they mean.

From my experience here at Opes Partners, accountants often confuse yield and cashflow.

A property can still have a good yield and have negative cashflow. So, ask them: “Do you mean cashflow or do you mean yield?”

If we’re talking about yield, ask them how they know it’s a low yield.

Sometimes accountants base yields on their own experience, for example if they purchased a long time ago.

If they bought 20 years ago, yields were higher and the market was different.

So that experience may be different from what’s realistic today.

#5 – “Buy a commercial building”

If you own a business, your accountant might suggest you buy a property for your business instead.

The strategy is to buy a building and lease it off yourself. Eventually this will save your business money and improve cashflow.

Here, your business accountant is doing their job. They’re trying to save your business money, but this may miss the wider picture on how you’ll build wealth.

I was once working with an investor who owned his own business. He was a mechanic and wanted to invest in a property.

But his accountant said: “Well, you know, you’re paying a hundred grand a year in lease. Why don’t you just buy the building?”

But, then we actually ran the numbers. It turns out the commercial building’s cashflow was going to be much, much worse.

That’s because he would have had to pay the commercial loan back over 10-15 years, but if he bought a residential property he could go on interest-only.

But then I asked him some other questions about his financial future.

Things like, “Are you going to have this business for forever?”

He replied: “No, actually, I think I’ll probably sell it at some stage.”

“Great,” I said. “Can you sell it for someone that will just come in and take over?”

And he said: “Well, no, probably not. I’ll probably end up taking some of my clients to new premises.” That was on a lifestyle block he wanted to live on.

In that case he wouldn’t need that building in 5 years time.

So, while an accountant might suggests this idea to lower costs, from a financial planning perspective you may want assets outside your business.

#6 – “Quit your job and become a freelancer”

This is the best/worst example of what can happen when an accountant steps out of their lane.

This is a true story.

A pair of investors bought a property off-the-plans in Christchurch. They had a year to settle.

They went to their accountant and he suggested the wife quit her salaried job and become a contractor. He said she’d make more money.

It sounded great. She followed through on that advice and started making more money.

But when it came to settling the property, the bank said “no”. It could no longer honour the pre-approval.

She was now a business owner; her income was now variable, and not “provable” in the bank’s eyes, so they couldn’t get a mortgage.

So they were at risk of losing their $100k deposit (10%).

Now, the accountant thought they were giving good advice, but they didn’t see the technical issues about what happens when you do that.

#7 – “There’s no depreciation in property investment any more”

A lot of run-of-the-mill accountants will say you can’t claim depreciation in property. This is misleading.

Once upon a time you could claim depreciation on the building itself. But since the law changed over a decade ago, you can’t anymore.

But, you can still claim chattel depreciation.

That includes depreciation on your driveway, letterbox, patio, curtains and anything not glued or nailed down.

Some accountants miss this.

That change was so widely published it stuck in people’s heads, so accountants who don’t specialise in property forget about chattel depreciation.

That’s a shame, because when claimed correctly, this will save you thousands in tax.

For instance, $50k worth of chattels could save you $16k worth of tax.

How do I guard myself against bad advice?

Sometimes we know just enough about someone else’s job to be dangerous.

It’s the same for us here at Opes Partners.

We’ve got to be careful not to step out of our lane when it comes to advice on Look Through Companies or Trusts.

Everyone is one throwaway comment away from giving some really bad advice, however unintentional.

As an investor you can guard against this by:

• working with a specialised property accountant
• knowing who to get your advice from.

Most property accountants can advise on passive and active strategies.

Matthew Gilligan (from GRA) can still give good advice on passive strategies even though he teaches a property school on flipping.

This is because if you are in the industry you understand that there are a range of strategies.

And the right one is the one that works for the person wanting to do it, based on the amount of time and money they’ve got.

If you’re looking for a recommendation, check out our top 4 property accountants here.