Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 10 March 2012
Q&As: A reader's 10 rules on property investment make good sense
- 3 Q&As on the fairness of wealthier people using student loans
- Was the word "renter" misused in last week's column?
- Research centre is looking into issues about overseas pensions and NZ Super
Question: Maybe the reason people think you are against property investment is that you accentuate the risks rather than the rules. Here are some I can think of:
Rule 1: Do not mortgage your home to buy an investment property. Do some saving before you start. We put up a 50 per cent deposit for our first rental.
Rule 2: Equity - keep it at 40 per cent plus and do not over-leverage.
Rule 3: Buy modestly. We have two houses in Manurewa, two in Mangere, one in Otara (now all mortgage-free). Remember that top end property values can fluctuate wildly.
Rule 4: Use a competent Registered Property Manager.
Rule 5: Don't buy at the top of a property boom.
Rule 6: Buy for income - you must be able to cover your outgoings. Make sure rents cover mortgage, insurance, repairs etc. No negative gearing!
Rule 7: Defer treats in favour of paying off mortgage. (Ignore that "Rich Dad, Poor Dad" chappy.)
Rule 8: Don't repair cheap - let every repair be an improvement.
Rule 9: Capital gain - forget it! That's only for traders. Be a Warren Buffett and buy to keep. Property has kept up with inflation over the last 900 years. Gain will happen over time unless you buy in a dying town. So hope for it, but don't count on it.
Rule 10: Finally - be a good landlord. Be proud of your properties and the service you are giving to your tenants (customers).
Try that lot. Difficult but successful.
Answer: I tried it, and I like it.
Your message and mine are actually along the same lines. I tend to say, "Investing in property is often riskier than people realise," while your rules are largely about how to reduce risk. That makes your message more positive. Well done!
Comments on some of your rules:
Rule 2: For those who don't know the jargon, equity is the difference between the value of a property and the mortgage. And leveraging - sometimes called gearing - is borrowing to invest.
Almost everyone who buys a rental property has a mortgage, and the bigger the mortgage, the more likely you will do really well or really badly. So having a small mortgage - which is the same as having lots of equity - reduces risk.
Rule 3: The values of more expensive properties do seem to fluctuate more. For example, a $300,000 house might drop 10 per cent to $270,000 in a downturn. But a $3 million house might drop 33 per cent, to $2 million.
The other advantage of buying lower priced properties is that you can buy more of them, and so diversify. With your five properties, you have good protection against one property suddenly losing value because a gang moves in next door, or a tenant sets up a P lab, or you discover the place is leaky, or it's revealed that there are toxic chemicals in the soil. With four other properties maintaining their value, it's not so dire.
Rule 5: This is a bit unrealistic. Nobody knows when a market is at its peak until later on. But still, would-be property investors should be wary when house prices have risen a lot over a short period.
You comment that your rules are difficult. The main difficulty for many people might be that the rules won't deliver dramatic results fast. Such people won't like your restraint and patience. They'll go on about "wasted equity" (such a false concept!), gear to the hilt, and expect to sell at a big profit within a few years of buying - or at least they did before the recent property price slowdown. Let's just refer them to Aesop's The Tortoise and The Hare.
Question: "Taxpayer Gift" of 3 March seems to think that high earners should not make full use of the student loan scheme.
High earners may do so for good reasons. For example, my daughter has a full student loan even though we can afford to put her through university.
The loan is personal to her and helps her understand the true cost/value of her education. I intend to repay the loan provided she does well at university. If not, it is her liability, and another of life's lessons is hopefully learnt.
In any case the financial benefit is small compared to the more than $150,000 my company, trust and family pay in tax annually.
It is annoying that the Envy Mob seems to only look at one side of these situations. We pay most of the tax that funds our social welfare system.
Answer: And aren't those who put more money in than they take out the lucky ones? I for one wouldn't want to be on the other side of the equation.
Here's another view:
Question: You are right - it is human nature to take all gifts off taxpayers whether you deserve or need them. I am positive the well off family in your article last week received their gift by the use of a simple family trust. Many trusts are set up purely to get student handouts for their children plus aged care subsidies, as you once noticed.
Rather than rely on a most unlikely integrity to see people refuse undeserved taxpayer gifts, the solution is easy. Pass a law that says any family with a family trust gets no government handouts for students or aged care. Easy. But as most government ministers have family trusts I bet they would refuse to pass such a fair law to avoid legal theft from hardworking taxpaying families. Do you agree? can cut next sentence Otherwise the unfair gift goes on in perpetuity.
Answer: Oh no - we are stumbling towards another topic that we have already done to death, that of family trusts.
In short, trusts sometimes give people an unfair advantage, but they are sometimes legit. That's why passing laws is not as easy as you say, regardless of MPs' personal situations.
Let's just say many of us would love to see more government action to make the use of family trusts fairer.
Meanwhile, no, the correspondent discussed last week didn't use a trust to get his "ill-gotten gains". Here's his follow-up letter.
Question: You are right - my student child took a loan for living costs, not an allowance.
Last week's correspondence does, however, touch on some important issues about government subsidies. I make no apologies for taking advantage of such arrangements. If they didn't exist, tax rates could be lower, so using them is simply a means of recovering tax that otherwise wouldn't need to be collected from me in the first place.
I also support the universality of such government support. Look at the last letter last week and measure the probable costs of means testing the Australian pension.
By the way, I don't live in Remuera. I choose to live where I can conserve my financial resources to support my family.
Answer: Fair enough.
Question: Many years ago you and I discussed your flawed use of "freehold".
Now I have to tackle your use of "renter" - it means a male prostitute or a film distributer. What it does not mean is someone who rents a flat or house - they are called tenants. See section 2 Residential Tenancies Act.
Answer: There I was, getting a swollen head after two letters that started "you are right", and then along came you to get things back into balance. Or did you?
Firstly, I didn't use the word "renter", the headline writer did.
Secondly, in half a dozen online dictionaries, I find renter defined as a tenant and also as someone who rents out a property, but I can't find either of your definitions.
Turning to older sources, my 1987 Oxford dictionary has "distributor of cinema films". But my 1977 Webster's has "one that rents". That suggests the Americans used renter to mean tenant before the English did. But it seems to be widespread now.
I get crabby about some changes in the language when we lose something along the way. An example is when people say "disinterested" when they mean "uninterested". The use of "disinterested" to mean unbiased or free from selfish motive is disappearing, which is a pity.
But I reckon we can manage without your definitions of renter.
By the way, check out the spelling of distributor!
Question: While we at the University of Auckland's Retirement Policy and Research Centre can quite understand your unwillingness to open the floodgates re the way people with overseas pensions are treated, the issues are still very real for many people.
Can we suggest that you refer to our website and the material and papers we have published there, and our ongoing work to get improved policies and address the inequities. For details see www.tinyurl.com/retirementresearch
There is a spectrum of complaints in this field that make it very confusing. At the one end there is a very clear anomalous treatment of the spouses of superannuitants who have an overseas state pension. It can be a painful discovery when one's own New Zealand Superannuation is reduced because of who you married, even if you have worked all your life in New Zealand.
Further along the spectrum are issues of deducting pensions from abroad that look suspiciously like coming from savings into schemes akin to KiwiSaver. More murky are the earnings-related state run pension schemes. But then there are the cases where it is clear-cut that a person should not be able to double dip. So no-one should get a full Australian age pension and full NZ Super for example, as your last letter on March 3 illustrates.
Your readers may not be aware of the unfairness of the trans-Tasman arrangements. A wealthy Australian may get full NZ Super by retiring here. Ironically under the Australian income and asset test, this person may not be entitled to an offsetting Australian age pension, so the New Zealand government - ie us as taxpayers - meet the full amount.
Conversely when a wealthy New Zealander retires to Australia, they can't take NZ Super with them, and may also be excluded from the Australian age pension on the basis of the income and asset test.
Win/win for Australia, lose/ lose for New Zealand?
Answer: No wonder I found all this complicated when it last came up in this column. Hence the ban this time. We could fill the column with nothing else for weeks.
But it's great to know you are on top of it all, and pushing for change. Readers affected by these situations should find your website helpful.
* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send 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.