We have one student loan of $20,000 to pay off, and earn between $80,000 and $120,000 between us.
We would like to start a family but feel the need to get into the housing market before we have dependants. The bank looks at us as more of a liability than we already are, with no guaranteed income.
We expect to go down to one income of approximately $70,000 for the first year after we have a child.
We don't want a mortgage of more than $230,000 - less ideally - and have found an area we could end up living in that we could afford.
We are thinking of buying a house in this area and renting it out until we are ready to move there ourselves, meanwhile enjoying our inner-city living and concentrating on getting rid of the student loan.
What do you think?
A. Your first step is easy. Use some of your savings to pay off the student loan.
I assume you are paying the standard 7 per cent on your loan. Unless you can safely earn 7 per cent after tax on your savings - and you can't - you are better off getting rid of the loan.
Also, your bank will look upon you more kindly when you apply for a mortgage - although, once the banker sees your current impressive savings rate, raising a modest mortgage shouldn't be a problem.
Beyond that, I suggest you stay in your rental property, and perhaps hold off on having kids, for the next two or three years.
The rent sounds low, you're handy to work and, importantly, you enjoy inner city living.
The hard question is whether you should:
* Buy a rental property in the meantime, and pour your savings into it, or; * Continue saving as you are - although I would put the money in term deposits, which will probably earn you more interest than a cheque account.
At first glance, the issue seems to be: which move will find you better off in, say, three years, when you start your family and move into your own home?
Lately, house prices have grown much faster than bank savings. But that may not continue.
Property is riskier than term deposits. And you'd be hard pressed to find an impartial expert who would recommend investing in property for just three years or so - especially if you're borrowing to invest, which raises the risk.
Over the short term, people sometimes do badly in property, as recent history shows. Auckland area house prices fell from the end of 1997, and didn't regain their 1997 level until the first quarter of 2002, according to Quotable Value NZ.
Economists aren't expecting a repeat of that any time soon. But they have been wrong before.
When we stop to think about it, though, you're not really looking at a three-year investment. You will probably live in the house for several more years, or at least trade it for another house in the same market.
If you buy a house now and its value falls - or grows only slowly - over the next three years, you can relax in the knowledge that over the long term it will almost certainly grow more than term deposits.
And if house prices continue to rise, you'll be glad you got in now, rather than waiting.
In light of that, it's actually less risky for you to buy a rental than not.
A warning, though: the house you want to live in later may not be a good rental property.
Generally, houses outside central Auckland don't rent as readily. Check the rents and availability in your chosen suburb - and not by asking a real estate agent. Perhaps you should pose as would-be renters in the area.
I would concentrate on buying a place that will be easy to rent out. You can always sell it and buy your dream home later.
A few more points:
* Good on you for avoiding a big mortgage. Too many New Zealanders are saddled with huge home loans.
* You're quite right about housing in some areas of Auckland being much cheaper than in the central city. And the price rises in different areas have varied widely.
According to Quotable Value NZ's provisional figures, the median sales price in Auckland City in the quarter ending June 30 was $380,000, up 20 per cent from the year before.
For the North Shore it was $335,000, up 16 per cent.
For Manukau, $277,000, up 12 per cent.
For Waitakere, $225,000, up 10 per cent.
And for Papakura, $238,000 - not a great deal more than half the Auckland City price - and up 11 per cent.
* Regular readers may be surprised that I'm recommending buying a rental property.
But my biggest gripe with rentals doesn't apply to you. You won't be owning your own home and a rental property at the same time - a position that is too undiversified unless you also have other non-property investments.
I do hope, though, that you're prepared for the expenses and hassles of being a landlord.
Q. My son is due to start high school next year and I have made the decision to relocate from the suburb where we live to a more central area to get him in the zone for the college I have chosen.
I have signed up an apartment from the plan, but it is not due for completion until September next year, so I will have to rent within the zone from January until September.
I am unsure whether I would be better off to sell my present home at the end of this year and invest the proceeds in the interim, or to rent it out until closer to settlement date on the apartment.
I have had the rental potential assessed at around $380 to $400 a week. Insurance and rates total $1650 per year.
Alternatively, if I sold now I would realise capital of around $280,000 to $300,000 (after repaying a mortgage of $50,000).
I noted in the Herald Money section that it is possible to achieve 8.08 per cent on a six-month term deposit with Capital+Merchant. How risky would you consider this type of investment to be?
My preference is to sell, so that I don't have the all the normal worries of being a landlord - keeping the house tenanted, having to deal with possible damage and not knowing whether the house market will be as buoyant in another 9 months as it is at present.
If there is little financial advantage in keeping the house I would prefer to sell.
My taxable income is $46,000 and I have no other debts.
Can you tell me what you consider the wisest option?
A. When you boil it down, your situation is surprisingly similar to the previous correspondents'.
You, like the couple above, will be renting the place you live in. And, like them, you're wondering whether to own a rental property or put your money in some form of savings.
In your case, though, I'm against the rental idea.
That's largely because yours really will be a short-term investment. There are too many unknowns, particularly - as you say - what will happen to house prices.
I'm also swayed by your reluctance to be a landlord. And keeping tenants and worrying about damage is only the half of it.
Have you ever sold a tenanted house? Tenants and real estate agents don't always see eye to eye about access, tidiness and so on, and the owner cops it from both sides. Believe me, I've been there.
You'll have a lot else going on, with two moves, your son's new school and decisions to be made about your new apartment. You don't need further stress.
Note, too, that your mortgage interest won't be tax deductible against your rental income. That's because, when you originally borrowed the money, it was to buy your home, not an investment property.
There are ways to get around that, but they wouldn't be worth setting up for less than a year.
All in all, then, your choice seems clear.
Promise me, though, that if house prices do continue to rise at a giddy pace through 2004 - and that's quite possible - you won't regret your decision. Just concentrate on the lower stress. It's worth lots.
Now, where should you invest the house proceeds?
Not long ago (June 14, 21 and 28), this column covered investments in Capital+Merchant and the like in some depth.
In summary, they are quite a lot riskier than bank term deposits.
With an 8.08 per cent return, your $300,000 would earn $8120 after tax in six months.
You can get 5 per cent for six months at a couple of banks (see www.interest.co.nz). That would pay you $5025 after tax. And, given how large your sum is, you may be able to get a higher rate from a bank.
Is it worth an extra $3000 to risk $300,000?
You could reduce the risk by spreading your money around several finance companies. But there's still a fair chance you could lose more than the interest you earn. I would stick with a bank.
Q. I'm a financial adviser, and I've got lots of clients in TeNZ and MidCap.
I get about 100 calls like your correspondent of last weekend.
My standard comment is to say, as you did, that stating management fees as a percentage of income is not a very flattering comparison.
I add further that if all managed funds had to disclose their fees on this basis, we wouldn't have a managed fund industry as we know it today.
A. Them's fightin' words! For those who missed it, last week's man was concerned that the management fees on his investments in TeNZ and the MidCap fund were about 7 and 14 per cent (respectively) of the dividends paid by the funds.
I pointed out that fees are calculated as a percentage of each person's investment, not of their dividends. And his two funds, which are index funds, charge considerably lower fees than other share funds.
Now comes your comment. I doubt if you're actually advocating presenting fees as a percentage of dividends. That would be quite unfair.
Returns on shares are made up of dividends and gains in the share price when you sell.
Some shares pay low or no dividends. But that may be because the company needs to keep its profits to fund rapid growth.
All going well, the value of those shares will rise more than the shares in a company that is not growing much.
To judge a share fund by its fees as a percentage of dividends would be like judging a rental property by its expenses as a percentage of rental income.
On some rentals, expenses are higher than rent, and on many they are not much lower.
The investor hopes to gain from selling the property for more than she or he paid for it. Same with shares and share funds.
Still, I appreciate the point I think you are making - that fees on many managed funds are too high.
* * *
* Mary Holm is a freelance journalist and author of Investing Made Simple.
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