Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald January 14 2006
Q&As: Should man, 53, go with bank and seminar rental recommendation?
Young couple ponder buying share of family farm.
should Mary answer all readers' letters?
Question: Recently I went to my local bank to rearrange my finances with the manager. I was quickly attended to. Lo and behold, in perusing my finances the manager noted that with only $15,000 left on my mortgage I had considerable equity in my home.
I was immediately asked if I had considered investing in a rental property, and quick calculations were done as to how much the bank was prepared to lend me.
Being 53 and having grown up with the adage that you pay your mortgage off, and I admit being financially naïve, I was somewhat astounded about what was on offer.
However, my mind has been buzzing ever since.
How do I protect my home in such an endeavour? My partner insists on it for her/our protection. ~et up a trust such as an LAQC? Will the bank lend to such a trust?
At my age do I pay interest only and go for the capital gain or principal and interest?
I attended a meeting of the "Richmastery group" and was again astounded by what was on offer, with yet another radical change in my financial thinking and taking on substantial debt to gain advantages through tax deductions and depreciation and the passage of time coupled with capital gain.
The whole thing is a bit of a cultural shift for me. I'm hesitant to ask the bank manager, as I'm wise enough to know he has a vested interest in me incurring more debt, as indicated by recent staff stop work meetings.
While not being greedy, my mind is agog with the financial possibilities and rewards. But because it is a paradigm shift in my financial thinking my heart is filled with trepidation .
Just what to do I do? Which avenue holds the least risk?
Answer: If you want to avoid risk, forget what the bank manager said, forget what Richmastery said, pay off your mortgage and then save what used to be mortgage money as a fund for retirement.
I'm not saying that rental property is a bad investment. In the recent boom, for many people it has been a superb one.
But even if you were an experienced property investor, I wouldn't recommend getting into the rental market right now. Too many others have been doing it, putting downward pressure on rents. More importantly, every unbiased expert agrees that property prices won't keep rising at recent rates. And most think they are quite likely to fall.
To add to the concerns, you're not experienced. You could well be the classic newcomer who jumps on the bandwagon too late, overpaying for a property sold by a savvy investor who is jumping off the wagon before it starts rolling downhill.
Rental property investment can be made to sound incredibly attractive. But the promoters don't tend to tell the whole story.
All tax deductions apart from depreciation come only because you spent money in the first place. If, for example, you pay $2~~~ in rates, that will still cost you $122~ to $158~ even after the deduction (depending on your tax bracket).
Depreciation, too, is clawed back after you sell the property if you sell at a profit. And if you don't the whole investment is a failure anyway. ~ure, a depreciation deduction gives you the use of the money in the meantime, but that doesn't amount to a huge advantage.
You write confidently about a capital gain, but there's no guarantee of that, certainly over the short term.
True, property prices are highly unlikely to fall over the longer term. But many new landlords these days find the rent doesn't cover expenses, so they must contribute cash each year. Whether your final gain will more than make up for all those contributions - and the interest they could have earned elsewhere - is anyone's guess.
What about LAQCs - which by the way are not trusts but companies? They have tax advantages in some situations, but neither LAQCs nor trusts can turn a poor property investment into a good one.
Unless you are foolhardy, it's pretty unlikely you would lose your home. But you could quite easily end up going into retirement with a mortgage, or having to delay retirement because of it. Who needs that?
We haven't even started on the hassles and worries of rentals. ~ome people enjoy the maintenance work, but the fact that you haven't considered rental property until now suggests you're not one of those born landlords.
Listen to the trepidation in your heart. I reckon the whole thing is just too risky for you. At 33 or 43 you'd have time to recover before retirement if a property investment went wrong. It's tougher at 53.
If you want to take on some risk in the hope of retiring with more cash, I would rather see you putting some of your post-mortgage savings into a low-fee index share fund. You don't need to borrow for such an investment.
Its value will fall sometimes, but stick with it and you will almost certainly have more by your mid-sixties than if you concentrate only on, say, term deposits or investment grade bonds.
If a share fund is too scarey for you, so should rental property be in the current environment.
P.~. I was a bit alarmed, when checking the Richmastery website, to read a section headed "Profit from Property" that went on to say, "This seminar is designed to help you avoid, minimise and eliminate these wherever possible...". I can only assume they changed the heading and forgot to change the text!
Question: My partner and I are both in our late 20s. Our combined income is $95,000. We own a house worth $280,000 with a mortgage of $220,000.
I have been given the opportunity to buy a share in a family farm. A 5 per cent share would cost approximately $300,000.
We would need to borrow the full amount (and have the possibility of using another owner as a guarantor).
The farm has been quite profitable in the past, although this does vary somewhat from year to year and losses have been made in some recent years.
Do you recommend we make the investment?
Answer: There are two questions here: Can you cope? And is it a good investment anyway?
It will certainly plunge you into big debt. Will you be able to pay two mortgages? Maybe you will get dividends from the farm, but it doesn't sound as if you can count on that.
And what will happen if one of you is out of work for a while or wants to take time off to raise children? A family member might help you out, but you should discuss that now, not then.
If that all sounds manageable, we can consider the quality of the investment.
You might think you don't have to do as much homework before investing within the family, as nobody is planning to rip you off. But arguably you should do more. Unless everyone knows where they stand if things go badly, you might lose not only money but also relationships.
I suggest you talk to an expert in farm equity partnerships. Look in the Yellow Pages under Agricultural and Horticultural Consultants.
He or she will know if you are paying a fair price and give you an idea of your likely returns over the years. You also need to clarify how you would get your money out. Who knows when you might want it to start your own business or move overseas?
And before signing anything, I would get a lawyer to check it out. This is a big investment.
~orry if I sound negative. This might well be a wonderful opportunity for you. And, unlike the correspondent above, you have plenty of time to recover if things go badly.
If you've got all the bases covered, go for it!
Question: I would like to make a suggestion in connection with the last paragraph in your sub-column "Holiday Break" just before Christmas.
Referring to the letters that you receive but are not published, as far as the senders are concerned their letters may have simply "disappeared into thin air".
Would it not be easily possible for you to have a supply of standard acknowledgement forms to be sent to the writers of unpublished letters?
I know there seems to be no business ethic to at least acknowledge all correspondence, which I find disgusting, but in view of your very pleasing presentation it would be very appropriate for you.
Answer: I didn't dare to not answer you!
Your idea sounds good. But often I'm not sure whether I will publish a letter for some time. It depends how it fits into the mix. It may be months before it makes it into the paper or the rejects folder. Is there much point in an acknowledgement at that stage, especially when it offers no help?
People sometimes say to me, "Couldn't you just scrawl a quick personal answer?" But most answers need a surprising amount of thought and research. Once over lightly could do more harm than good.
Besides which, I'm a writer, not an adviser. And I do tell everyone, in the footnote below, what the deal is.
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. ~end questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.