Dangerous giving capital gain cash away in the good times

Retirement village sales are strong at the moment, which is great, but inexperienced managers beware – times can and will change fast. Just ask Philip Lowe, Governor of the Reserve Bank, who got interest rates so wrong.

I raise this because there is a trend to give away percentages, or even all of the capital gain share, to new RV residents in their contracts. Don’t do it.

Why, because village operators do not make cash money for up to 20 years after the first homes sell. And in that time the operator has to reinvest in the village to keep it market acceptable. They need that capital gain share.

It is also the operator reward for investing and maintaining a positive, vibrant community. The stronger the resident satisfaction, the stronger the resale price and bigger the capital gain and share. If you don’t share it, why be concerned on the reputation of the village?

Plus why stay on, supporting the residents as they age. Wouldn’t it be easier to just sell fast and move on, as there is no other profit until the ILU turns over again.

And bad times do and will occur again. It is a certainty. What happens to the housing market if China invades Taiwan or attacks America? All property prices will drop by 50% or more overnight and unlikely move for years, like in the GFC, but worse. Perhaps a bit more realistic, what if more overseas banks fail and our Government tells our banks to tighten up lending to conserve their capital?

Last month was the lowest number of first home loans, only 2,700 given by the banks, since records commenced.

So ask yourself, why give away capital gain percentage share. The answer is most probably sales and marketing people taking an easy route rather than a professional route. Don’t do it.