What to do with the house equity?

By MARY HOLM

Q: What to do with our equity? My wife and I are nearing the end of our 30s and we are just about to sell our house.

We are probably going to move down a step in housing to ease the mortgage burden a bit, but I thought I'd drop you a line and see what you would suggest for a couple in our position.

We have two children of 7 and 5. When we sell our house we envisage a minimum amount left of $96,000 of equity for our next purchase or investment.

We are not committed to do anything with this yet. We may buy, or rent and look around for a while. Do you think it would be best to get back into the mortgage situation again and not to rent?

What about renting ourselves, and investing in a rental or two with our equity?

What about renting ourselves, and investing this lump sum in various other investment vehicles?

As far as other investments go, we have an endowment policy which, in 11 years, is predicted to give us around $100,000.

And I am in a company pension scheme, which matches my dollar with one of theirs. The balance there is around $30,000 if I left today.

We are open to all suggestions.

A: I like your attitude and your plans, for several reasons:

* You're selling your house without being under pressure from having bought elsewhere. That means you can hold out for a good price.

* You're thinking of getting a cheaper house. Many New Zealanders put too much money into their house. It does mean, of course, that they live somewhere nicer. But it often leaves little or nothing for other more diversified investment.

* You're open to all sorts of ideas.

So which of your options is best? There's no clear answer.

As I've said recently in this column, renters sometimes do just as well as, or better than, homeowners - provided they invest the difference between their rent and what they would have spent on home ownership.

But there are so many unknowns in the future that we can't be sure whether renters or homeowners will win over the years to come.

One issue I haven't mentioned recently is whether you plan to eventually own a house in the area in which you're currently living.

If you do, you're probably best to stay in the housing market - either through home ownership or owning a rental property - in the meantime.

It's a low-risk strategy. True, if house prices go nowhere much over the next few years, you'll be worse off than if you had rented and invested elsewhere.

But if prices happen to soar more than alternative investments, you won't be left unable to buy as good a house as the one you're in now.

Having children makes a difference, too.

It's hard to get a long-term lease in New Zealand. Your landlord might kick you out, or sell to somebody who wants to live in the place, just when your kids are settled into a school.

If you don't want them to switch schools, you're limited to taking other nearby accommodation. And there might not be anything you like.

Even if there is, you and the kids still have to change homes. That's a hassle, especially when you don't choose when it happens.

The pendulum seems to be swinging towards buying yourselves another home.

If you get a cheaper one than now, and so free up a bit of spare money, you might invest more in your company pension scheme - if you're not already putting in the maximum.

When a company matches your contributions dollar for dollar, that's pretty powerful. It's like getting a 100 per cent return on the first day.

Chances are the scheme is partly invested in international shares, and so hasn't been doing too well lately. But that will almost certainly change, given time.

Highly subsidised company pension schemes are hard to beat as an investment, especially if you can take some of the subsidy with you when you leave the job.

* * *

Q: I have read your column for some time now and find it interesting and constructive, though I don't always agree with your conclusions.

As a New Zealand citizen living in Asia, I see the benefits of a Calvinist mentality of thrift, hard work and sacrificing present for future consumption on a daily basis.

My question is: in giving investment advice to readers, what has been your own track record?

Accountants may be helpful in keeping financial records, but are they any good when it comes to their own financial affairs?

A subject perhaps a bit close to home, but one your readers, in the interest of greater disclosure, should perhaps be entitled to know.

PS: As an aside, in general I agree with your thoughts on property.

Given that London, Hong Kong and New York property markets are already turning down, I would suspect that a similar fate awaits Auckland's residential property market post the America's Cup.

A: Didn't anyone ever tell you that New Zealanders would rather reveal their love life than their net worth? For all sorts of reasons, I'm not going to reveal either!

I can see your point, though. So I'll tell you in broad terms what I've done with my money over the years.

Houses: I've bought and sold enough houses, in three countries, to realise there's a lot of luck in it.

My worst story is a 30 per cent loss in a year, in Auckland after the 1987 crash. My best story is a profit of close to 80 per cent in two years, in Sydney in the 1980s.

Over all, I've probably done as well as most.

Rentals: Years ago, I rented out a property while I was overseas, and learned that being an absentee landlord can be a nightmare.

I've never had rental property since, except briefly once when I had to change cities and my house hadn't yet sold.

My reluctance is not because of the early disaster. Renting sometimes works pretty well if you're Johnny on the spot.

But being a landlord - with all its risks, worries and demands on handyperson skills that I don't have - just doesn't appeal to me.

Also, as a homeowner, I think investing further money in residential property is too undiversified - especially if what you say in your postscript turns out to be true!

Commercial property: In my 20s, at my father's suggestion, I invested in a one-building property syndicate. I wish I had put more into it. It did very well.

Still, I'd never go into a similar investment now - or, for that matter, any commercial property, unless I'd done lots of homework.

This is one area where research seems to make a difference. And for me, life is too short to be swotting up property.

Shares and share funds: I've saved for decades in international index funds.

They attracted me when I first heard about them at the University of Chicago in the late 1970s. And, despite their recent fickle behaviour, I'm sticking with them. My investments are still worth a great deal more than I put in.

I've acquired a few individual shares over the years, from an electricity company, employee share scheme and so on.

But, as I said above about the poor old Tower shareholders, holding just a few shares is too undiversified. So I always sell them as soon as I can.

Short-term savings: I use term deposits and other low-risk fixed-interest investments.

Business: I'm building a business publishing Holm Truths, a quarterly newsletter on saving and investing sold in bulk for employees, clients and members of superannuation schemes.

The seventh issue will be out soon. Holm Truths has been profitable since the third issue.

Debt: I've got none, and I try to keep it that way, saving for trips, renovations and so on before spending the money.

If I do run up debt, I get rid of it as fast as possible.

Shopping: I'm lucky in that I don't like shopping, and I can't be bothered with conspicuous consumption.

Oh dear. This all sounds sanctimonious. I'm far from perfect on things like budgeting. I rather like Robert Frost's quote: "Nobody was ever meant to remember or invent what he did with every cent."

And I certainly make some moves that aren't financially optimal. I reckon that's okay, as long as I realise that I'll be worse off financially, but better off in other ways.

So I guess I'm not quite as sold on Calvinism as you are.

Basically, though, I practise what I preach - which often includes taking into account non-financial issues.

It's worked pretty well so far. Even if New Zealand Super were to disappear, which it won't, I won't retire in the gutter.

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