Money matters: Place at the beach a risky investment

By MARY HOLM

Q. We are a middle-aged couple with two preschoolers who own our own home mortgage-free ($400,000) and have $100,000 or so invested in the sharemarket.

I know that a balanced portfolio indicates more shares are needed, and no more investments in residential property. But we visit family at the beach and note sections there are cheap in comparison to Auckland prices, with good views and size. Prices seem to be rising there steadily.

We are contemplating buying a section, with a view to onselling in a few years or building a beach home.

In the long term, our financial adviser says this is a good move, but we can't see it. We will need to take a mortgage for the full cost of about $175,000 (already okayed) from the bank, as now doesn't seem a good time to sell our shares.

We feel that the costs of servicing the mortgage, the opportunity cost of not having the money in a revenue-earning investment, plus the costs associated with bare land make this a dubious risk.

We are wondering if we haven't understood all aspects of this equation and would be grateful for your hard-nosed opinions.


A. Your worries are well-founded.

Coastal property, as we all know, is scarce. So, the conventional wisdom goes, you can't go wrong investing in it. But that might not be right.

The problem lies in the phrase "as we all know."

In any investment, if everyone knows it has an advantage that is likely to push up future prices, many people are going to want a piece of the action before the prices rise too much.

That leads to strong demand now, which pushes prices up now. And that may be what has happened with many seaside sections. Future expectations may already be reflected in the prices.

It's even possible that our future expectations are too optimistic. Current prices could be too high. I realise you said the section you're considering is cheap compared to Auckland. But such comparisons are pretty meaningless. Location makes all the difference in property values.

I'm not saying I expect coastal property prices to fall over the long term. That's unlikely. But, from now on, they might rise only as fast as other property, or slower.

It's also quite possible, though, that you'll write to me in a few years and say the price of that section is half a million bucks.

All I'm saying is that seaside sections are quite risky - made riskier if all your money is in just one section.

Furthermore, if it's in a holiday area, prices tend to be more volatile than general house prices.

When the economy dips, lots of people sell their holiday homes. If you happened to want to sell at such a time, you might still make a gain, but would it be big enough?

You won't come out ahead unless you cover the mortgage interest and rates you have paid in the meantime. And rates can be well above $1000 a year for a coastal section.

You need to take into account, too, that you'll be paying the interest and rates over the years, but won't get the gain until you sell.

A dollar now is worth more than a dollar later. You can earn interest on it in the meantime, or use it in some other way.

All in all, the value of the section is going to have to rise much faster than inflation for it to be a winner.

One way to view the situation is: Would you get a mortgage to invest in a worldwide share fund? Probably not. And yet that investment is arguably less risky. And you wouldn't have to cover rates as well as mortgage interest.

Having said all this, I have to backtrack if you're serious about building a bach on the land and keeping it for some years.

While that might not be a great investment, it could be a good lifestyle move.

Seeing your home is mortgage-free, it wouldn't be too ridiculous to borrow to build a cheap bach.

If I were you, though, I would save, say, $25,000 or $30,000 as a deposit first, so you're not so heavily geared.

Q. This is in response to a point raised by the graduate doctor about incorporating his student loan into a mortgage and having flatmates help pay it off (last week's Money Matters).

We are a student couple with our own home, which we owned before I was made redundant and became a part-time student and mother. To survive, we have spent the last 2 1/2 years renting rooms to a variety of people.

Our problem was that we bought in a popular area that has since undergone a huge boom in cheap infill housing marketed at investors. Our source of potential flatmates has long since dried up. Fortunately, we are near a popular school, so we now offer homestay to foreign students.

We are happy with our lifestyle choice. When we have a full house we have enough money to get by and we are better off than if we rented or purchased a smaller place.

But it is hard work living with people you don't know (sometimes even harder with people you do know). Our home is our livelihood and as such we lose a lot of things many take for granted - like privacy.

It is not an easy way to make money, and I would not recommend it to anyone who was not prepared to take it as seriously as a business.


A. Thanks for some good points.

It's easy for me and others to say, "Just take in a boarder or flatmate." But we might not find it so easy to do it ourselves.

Now for another response to the same letter:

Q. As regards the newly qualified doctor who wonders if he/she should pay back the loans in pounds. It might work, but a lot of people mistake the current exchange rate for actual value.

I go to Britain a lot on business, and have found that on a purchasing power basis the British pound is worth about $1 in London and perhaps $1.25 elsewhere. No way does it buy you $3 worth or anything near it.

The new doc needs to be aware living expenses would take the same percentage out of a 57,000 income in London as from a $57,000 income here.

It is easy to see jobs advertised at 50,000 and think, "That's $150,000. I'll live off $40,000, and pay off my loan pronto ..." But it's actually like living on much less in New Zealand.

Also ... how about we allow the doc a few skiing holidays? After six or seven years of hard slog he/she should be set up for life. It has to be time to live a little, take an extra year or two to pay off those loans and enjoy some of what has been missed. Might also make for a better doc.


A. Some more good points. What would we do without the collective wisdom of our readers?

Clearly the doctor should think hard before (a) taking in flatmates and (b) moving to Britain.

And I've been persuaded. He should go skiing.

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