Money: Struggling owner weighs options

By MARY HOLM

Residential property comes under the spotlight again. To let or not to let, to subdivide or not to subdivide, to sell or not to sell ... And this reader has even more questions that need answering.


Q. I'm 45, have an 8-year-old son and I'm on a benefit.

I have property officially valued at $380,000. It is two houses on one title. We have a $55,000 mortgage over the total property, meaning repayments of about $130 a week. I have minimal savings.

I can't make up my mind whether to subdivide and sell.

It would take about $20,000 to subdivide. The front house might fetch $180,000 if sold; the back house about $220,000.

We live in the back house and haven't had the front house let for some time. A letting agency said it would achieve about $210 a week, but at the moment it is very hard to get tenants as there seems to be a surplus of rental properties.

I'm struggling to finance two houses, rates of $1400 and insurance of more than $600 a year. Then there is water and maintenance, e.g. a $600 contribution to a new fence between neighbours.

We have a low income of just over $300 a week, so obviously I'm eating into savings.

Assuming I stay at a low income, what would be my best move? I don't enjoy being a landlord.

If I had $100,000 to invest after paying off my mortgage, would I be better off?


A. It seems to me that you have too much tied up in real estate - especially given your circumstances.

Let's look at your options:

Continue as you are, but lower the rent on the front house so you can get some tenants. If the place has been empty for a while, you're asking too much - regardless of what an agency tells you.

Even with lower rent, your rental income should cover your mortgage payments and a good chunk of your other property-related expenses.

Subdivide and sell one house. You could then pay off your mortgage - an excellent move for you. Depending on which house you sold, you would end up with around $145,000, or $105,000 to invest.

Subdivide and sell both houses, pay off the mortgage and buy elsewhere. Your investment amount would depend on the value of the new place.

The same as above, but sell the two houses as is, without subdividing.

With the first option, in the long run you would benefit by the appreciation on both houses. But you wouldn't gain from having an investment elsewhere.

There's no way to be certain which would make you more money. I'm swayed, though, by your saying you don't enjoy being a landlord.

For all the thousands of words written about rental property versus shares and share funds, enjoyment might be the most important factor in people's choices. If you like bricks and mortar, doing maintenance, and - dare it be said - having a bit of power over other people, landlording can almost be fun. If you don't, who needs it?

In your case, then, I would reject the first option.

The next question is whether you should subdivide. If your $380,000 valuation is close to the market value and if your other estimates are correct, subdivision would bring you $20,000 more but would cost you $20,000. It's not exactly a winner.

But how good are your numbers? I realise you haven't got much money to come and go on. But given what's at stake, I think you should hire a property valuer if you haven't already done so.

For around $200 to $300, the valuer probably wouldn't do a written report, but she or he could give you a good idea of subdivision costs and what the houses are likely to sell for, subdivided or not, says valuer Gary Brunsdon, of Sheldon & Partners.

"There are a lot of hidden costs of subdivision," he says. For example, councils sometimes require improvements to parking space or drainage.

On the other hand, if you sell the two houses without subdividing you're in a limited market. Most buyers of two-house properties are investors planning to rent one or both houses out, says Mr Brunsdon. "In 1996 there were tons of investors in the market. They're not there now."

If, on the strength of what the valuer tells you, you decide against subdivision, clearly you go with the last option.

If, though, you decide to subdivide, you must then choose whether to stay in one of the houses.

Keep in mind that it costs several thousand dollars in commissions, legal fees and so on to sell one property and buy another. So you might as well not move, unless there's a good reason for it.

P.S. It must be hard getting by on $300 a week. I hope you have plans to get a job or training as your son grows older. That will make more difference to your wealth than any decisions about subdivision and house sales. Good luck.

Q. Further to the article in your column last week by a member of the NZ Statistics Police, I agree that not only did you use dodgy numbers when comparing money invested in shares compared with property, you also went on to say your comparison was meant to refer to a person's own home.

Since your column primarily refers to different investment options, don't you think you should have compared rental property? I'm sure that most of your readers were misled.

You carried on to bag property even further in your following article, by saying that in recent times it hasn't been clear to you that investing in a single rental property is less risky than a world share fund.

Most people should realise by now that property is a long-term investment. I'm sure you do!


A. I could get all defensive and say:

The numbers were not dodgy. Armstrong Jones got its data from CS First Boston, Quotable Value New Zealand and the Reserve Bank. Pretty solid sources.

Who said my column primarily refers to different investment options? It's about anything to do with money. And heaps of questions are about home ownership.

But, being a peace-lover, I won't say all that. Instead, I'll just say that if you were misled, I'm sorry.

I do, though, have to comment on your last point. Property is, of course, a long-term investment.

If you're in property for just a short period, there's too big a chance that you could lose money - particularly after paying buying and selling costs.

That doesn't mean that over time the long-term outlook for property won't change.

When inflation was high, in the 1970s and 80s, property was a particularly good investment.

With people's pay cheques soaring, it became easier and easier to pay off mortgages.

Rental income rose fast, and it was common for the prices of houses to double, quadruple or more in not many years.

But in the last decade or so, inflation has been much lower. The mortgage burden hasn't dropped nearly as fast and house prices have risen much more slowly. In some regions, they have fallen.

There's another issue, too. Buoyed perhaps by a spurt in house prices in the mid-1990s, many Aucklanders in particular got into rental property. Also, in the last few years, many apartment buildings have been built.

The result - too many properties searching for too few tenants. In many cases, rents have fallen. Even so, some landlords - such as today's first letter writer - can't find tenants.

With rents failing to cover mortgage payments, landlords are eating into savings to make up the difference. Some, who probably intended to be long-term investors, have been forced to sell their rental properties for less than they paid for them.

If that's not risky, what is?

Q. Perhaps while your correspondent of a few weeks ago is dreaming of $100 a share for Baycorp, spare a thought for me and one of my more memorable dining-out stories.

In 1986, I bought 3000 Baycorp shares at $1 a share.

Eventually, by early 1992, I had 21,970 shares, and my "financial adviser" (big joke) told me to get rid of them, which I did, at 19c a share.

(Really, Mr Retirement Commissioner, I did try to save for my retirement.)

Of course, I also had Brierley shares, and have held on to them. Maybe they'll do a Baycorp one day.


A. All of which goes to show that owning shares in just one or a couple of companies is pretty risky - perhaps even more so than owning rental property.

A basic rule is that if you invest in shares you should hold a variety of them. Unless you've got hundreds of thousands of dollars, the most feasible way to do this is through a share fund.

Another basic rule is to buy and hold. Generally, it's better not to bail out of investments when things go bad.

While it wasn't wise to go into Baycorp in the first place, if you had stuck with those shares your holding would have been worth a tidy sum today.

So let's have our fingers crossed on the Brierley shares.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Mary cannot answer all questions, correspond directly with readers, or give advice outside the column.