Someone asked me why I don’t recommend property as an investment, which is a fair question.
Most Kiwis love property and so often have 60%, 70%, 80%, 90% or even 100% of their money and assets in NZ property.
Most often it is their own home, but often they own a rental property or two as well.
Kiwis love it and many have seen their property increase in value by 50% to 100% or more over 10 to 20 years.
More recently some Aucklanders have been making huge gains on their properties.
Kiwis believe in it 100% and absolutely and resolutely, and they feel property as an investment just “can’t miss”.
And I like property too, just as much as anyone else…
· First of all, most people I meet who want investment advice have enough NZ property already
· NZ sits on an earthquake fault line, and that can really hurt property
· Most people I meet who want financial advice just don’t have enough diversification
· Too many people I meet have it all tied up in property (plus debt) and have no liquid cash for emergencies
· A home or rental property usually involves debt, and debt comes with some serious implications
· Debt adds risk
· Debt adds stress – not always good if you want a decent lifestyle
· Debt has to be paid back
· And interest has to be paid too
· Banks can be ruthless if you can’t pay
“A bank is an organisation that lends you an umbrella when the sun is shining, but wants it back when it starts to rain” - anon
Other property issues
Tenants don’t always behave themselves, and damage and /or rent arrears is not uncommon.
Sometimes properties do not rise in value. Many NZ towns have current property values that are the same as 10 years ago.
So much for one local real estate agent who used to tell everyone “property rises 10% pa.”
Some people get caught with leaky homes and apartments and lose big time.
I feel for these people, as most are just plain unlucky.
So I recommend bonds and shares as well as property
Why? Because quality bonds are low risk and always liquid, so your cash is available anytime.
They are a great foundation in any portfolio. During the 2009 GFC quality bonds held their value and carried on through at about 7% pa return. (And they were liquid every day)
Shares, over time, just like property, make good money (provided you are well diversified on and offshore).
But again, like property, they can take time to increase in value.
But unlike property, shares are always liquid too.
You can get rich slowly, if you are patient. Again just like property.
So should no one buy a rental property?
I have observed many people doing just fine with their own home, a rental, some bonds and some shares.
Borrowed money – how much?
To get into property most of us will need a mortgage, and that has to be paid back.
If it is a rental the tenant pays some of it, and often we have to pay some too, out of our income.
If our income stops due to illness, accident, or redundancy, things can quickly turn to custard, hence too much debt can kill us if we are unlucky.
So how much borrowed money is safe? There is no easy formula but clearly some restraint might be smart.
As we get older
One day we will want to slow down / stop work and so we will not have the income to pay mortgages or top up rental property.
As we move into this stage, bonds and shares have some advantages e.g. No tenants to look after or worry about.
A lot is going to depend on your situation, your age, what you earn, the stability (or not) of your income and so on.
Nothing ventured nothing gained, but you need to be pretty smart if you are going to borrow a lot of money.
What looks good to the over 55’s?
I primarily deal with people around age 50 to 75. As they near retirement or want to slow down a bit, getting rid of debt becomes pretty important.
Access to money is important.
Ease of management appeals to them, not troublesome tenants.
Diversification and liquidity makes sense to them.
Banks, bonds, property or shares? A good spread over them would be prudent.
Where do I fit in?
· giving advice on your overall situation
· looking for things you can do better
· steps to protect yourself against what can go wrong
· Helping you build your portfolio of bonds and shares.
Supplied by Alan Clarke, AFA 26532, financial & retirement adviser, & author.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.