There are plenty of great property managers out there who could relieve her of any of the hassles she may incur.
All of you financial commentators should know (including the bearded, grey-shoe-wearing dreary ones) that property is by far the best investment out there and, due to leverage, gives a higher percentage than any other investment on a consistent basis over the long-term.
A. Let me see now: I haven't got a beard - at least the last time I looked - and I don't own grey shoes. So I hope that keeps me off the dreary list.
Business Herald editor Jim Eagles and Weekend Money editor Mark Fryer might have to watch their footwear, though.
Hiring a property manager has its merits, as stated in a recent issue of the Cairns Lockie Mortgage Commentary.
Once you own a rental property you must manage it. This is often far more time-consuming than first-time investors imagine.
In New South Wales, more than 85 per cent of all rental properties are managed by professional property managers. In New Zealand, we believe this figure is about 20 per cent.
If a property investor is finding it too time-consuming to manage his or her property, or the properties are in another town, then a full-time property manager may be the answer.
The only trouble is that any service costs money. The landlord who hires a manager might be relieved not only of hassles, but also of profits.
Rents last month were 1.2 per cent below a year ago, says BNZ chief economist Tony Alexander.
And rental yields are also falling. In the mid-1990s, Auckland rental yields averaged about 7.3 per cent, according to data from Barfoot & Thompson and the Real Estate Institute of NZ.
From 1998 until about May last year, they hovered around 6 per cent. They are now at 5.4 per cent, says Alexander.
And that's before expenses. By the time you factor in insurance, rates and maintenance - to say nothing of mortgage interest - many landlords must be suffering losses on a month-by-month basis.
Add property management fees to the expenses, and the losses might be rather hefty.
But that's okay, you may be saying. I'll get a big capital gain.
If you own the house for a decade or more, you will almost certainly make a gain - although it won't necessarily be particularly big. If you invest for a shorter period, you could suffer a loss.
The chart above shows percentage changes in nominal house prices - the ones usually quoted - and real prices - which are adjusted for inflation. When the percentage change is below zero, the price is falling.
Until the 1990s, inflation was so high that nominal prices never fell. After inflation adjustment, though, prices have fallen frequently in the past 36 years.
Since 1990, even nominal prices have fallen twice, in 1992 and 1998.
And those are national figures. Price falls in the 1990s were longer-running in Auckland. It wouldn't be at all surprising to see nominal prices fall again in the near future. And real prices are quite likely to fall.
You say that anyone who is wealthy parks their money in real estate. It's probably true that almost all rich people own some property - along with shares and other investments - and can afford to keep their property through the bad times.
But that doesn't mean poorer people can do the same.
It's not easy to hang in there if you have to put cash in to keep the investment going and your other income is reduced. And it can be psychologically difficult if house prices are falling.
As for your statement that property is by far the best investment, my response is that it's patchy. Sometimes it's brilliant; sometimes not.
All the independent academic research I've seen shows that, over the long-term, shares tend to perform better.
True, shares also tend to be riskier. But because it is much easier to diversify share holdings than property, for many investors they are not riskier.
Leverage - otherwise known as gearing or borrowing to invest - can indeed give a higher return. But that applies to any investment, in property, shares, truffles or whatever.
Note, too, that leverage can also give a lower return, or a bigger loss. It simply exaggerates whatever happens to the underlying investment.
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Q. Several years ago while still living in Auckland, I wrote to you in reply to your criticism of Gold Coast investment property. My point was that some investors had gone in with their eyes closed, and been duped by slick salesmen. I argued that there was still a sound investment to be made if one did one's homework. We moved to live and work in Queensland three years ago, but not to the Gold Coast. We sold our Gold Coast house this year having never lived in it, but had it as an investment for five years.
All up, after expenses - yes, even capital gains tax - it gave us a return of just on 100 per cent on the funds invested, or about 20 per cent a year over the period. Rather better than the earnings of equities and managed funds during the same period.
I thought I would let you know the outcome. I still think that investment property has a place in a portfolio. But as with any other investment, it requires clear thinking and a bit of maths.
A. Congratulations on a great investment! Would it be churlish of me to point out that a bit more maths might be in order?
You can't just divide 100 per cent by five years and come up with 20 per cent a year because that ignores compounding - growth on the previous year's growth.
Your return was, in fact, about 15 per cent a year.
If you haven't got a sophisticated calculator or computer program, calculating an annual return can be a bit tricky.
But there's an easy way in situations where an investment has doubled, as in your case. You can use the Rule of 72.
It works like this: Your investment doubled in five years, so divide five into 72 and you come up with an annual return of 14.4 per cent. If it had doubled in eight years, the annual return would be 9 per cent. If it had taken 12 years, it would be 6 per cent.
The Rule of 72 is an approximation. It works well for up to about 15 per cent. After that, it's pretty rough.
Having said all that, 15 per cent is still a handsome return. And yes, it's better than in most shares and managed funds during the period.
Note, though, that there are other periods when the reverse would be true. And many properties, on the Gold Coast and elsewhere, haven't performed as well as yours.
Also, while clear thinking and the ability to resist slick salesmen boost your chances of doing well, there's still a strong element of luck in it.
One of my biggest worries about property investment is that most people own just one property, or perhaps two. And there's such a wide range of outcomes on single properties, from wonderful to disastrous.
Be honest: Would you have reported back to me if your investment had not done well?
Human nature being what it is, there's a huge bias towards success stories.
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Q. Mary, I'd like to offer two spreadsheets to your readers, which may augment the one another of your correspondents sent to you before Christmas.
The first one tells you how much regular monthly contributions will grow to over a certain number of years. For simplicity, it is based on a net interest rate after tax and expenses (ie, fund management fees etc).
You fill in how much you will put in each month, the interest rate, your current age and the age when you want to stop saving.
The second one shows how long a lump sum will last as risk-free money in the bank.
You enter the principal amount invested, the "real" interest rate (i.e. after tax and inflation), and then the amount to be drawn down annually, and it calculates everything down to the point where you run out of loot.
As a trustee of a reasonably large company superannuation plan, I come across a few people who are very much risk-averse - who may be in or close to their 60s with quite large accumulations and who would worry themselves to death about any portfolio containing shares.
I give them this and show how a draw-down of capital each year can keep them going for a very long time, and even longer if they reduce their drawings when the state pension kicks in.
I then tell them to seek financial advice and, if they're still worried or unsure after that, perhaps split their capital into three or four equal amounts and put them on term deposit so that each six or 12 months they have one maturing.
They can then draw their needs for the next period from it and then roll the rest back into a new term deposit.
I do stress, however, that I am not a financial adviser (but perhaps they could invest in the Herald to read your column).
Interested readers can get the spreadsheets by emailing me:
ian@aventine.co.nz
.
A. Thanks. Your spreadsheets do look helpful, and not only for the risk-averse.
The second one is quite similar to one offered late last year.
There are also several useful calculators on the Retirement Commission's website, www.sorted.org.nz, and other sites. But it's good to have a wide choice. Different calculators suit different needs.
One note for users: your second calculator assumes you take this year's money out at the beginning of the year.
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