Investing in the right property scheme

Soaring property prices and low interest rates, in recent years, have given rise to a host of new residential property schemes offering extravagant returns and in most cases, empty promises.

The recent MoneySkills scam caused the loss of many investors' savings and investment experts say you should think twice before investing in these schemes.

"When a return is too good to be true, it probably is, warned Wayne McCurrie of Advantage Asset Managers.

Here's how to determine if the scheme is financially healthy and worth your investment:

The first clue will be the level of return offered or promised, said Charl Kocks, CEO of CA-Ratings. "Anything above 10% a year is extremely suspect," he warned.

Kocks maintained that a return of more than 10% was possible but certainly not in the short-term.

"You cannot believe that returns of around 30% pa in the short-, medium- or even long-term are realistic," he added.

If you can earn 8% pa at the bank and a scheme is offering you 24% a year, something is fundamentally wrong," said, McCurrie speaking on the Moneyweb Power Hour.

It's astounding that you can constantly warn a person that if a scheme is offering a substantially higher interest rate than what is available in the market, there is risk attached to it, said Magnus Heystek, independent financial adviser.

Kocks advised prospective investors to determine if the scheme was listed or regulated.

Usually, you will have access to a lot more information and can determine how realistic the expected return is, he added.

"If the property scheme is unknown, you have to be extremely careful, warned Kocks.

In addition, he advises investors to do their homework, research the property scheme and even consult an independent financial adviser.

"When people enter in to any transaction, without being fully informed and understanding the law, exactly as the regulator interprets it, they run the risk of losing their entire investment," said Kocks.

Stick to the basics and don't put all your eggs in one basket, warned McCurrie.

McCurrie reckoned there was an inherent belief in people that get-rich-schemes exist and that they can easily become millionaires.

It is a combination of greed, stupidity and one-upmanship, said Heystek of people investing in dubious schemes.

Moneyweb visited a few property scheme websites that its readers and listeners had enquired about and found that many offer similar concepts.

Besides glowing testimonials and seminars, most of the schemes operated a networking system where investors would earn commission when referring other individuals to the scheme.

"Anything that states you will earn a return, because you are introducing other people to the scheme is another serious warning sign," said Kocks.

This type of system will give you a return that is not based on your initial investment but on the logic that more people will join and if you understand maths, you'll know that very soon, any return will dry up, he added.

"It may work for the first few investors but eventually, it will end in heartache," Kocks warned.

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