Small Time Dividends – Don’t let them Escape!

Today I got my Abano Healthcare dividend. It was approximately $29 or enough to buy a 6 pack of craft beer and 500ml bottle of something special on the side. Yum! But drinking my profits was never the plan (well one day maybe).

Abano Health share price graph
Its been a fun 6 months or so, I bought in around $6.70, thanks Abano

So no beer for me because I have the dividend re-investment plan activated. My money has automagically turned into 3 more shares. Every 6 months the dividends are used to purchase more shares on my behalf and any remaining money is rolled over till the next 6 months.

Dividend re-investment plans work really well in New Zealand for a couple of reasons.

  1. We currently  have no capital gains tax. This means that these small amounts of money aren’t going to become a pain in your ass years down the track when you need to calculate your capital gains on all the small share buys.
  2. Brokerage fees here are really HIGH! It costs a lot to make a trade so anytime you can buy shares for free is a win in my book.

So if you’ve been wondering what to do with all your little dividends get online and check if the company has a DRP or Dividend re-investment program. Its way better than receiving a cheque (argh so inconvenient!) or having the measly $29 sit in your account doing nothing and not earning its keep. Dividend re-investment is already happening for most of you in your kiwisaver accounts and probably in your index funds as well (unless you checked the dividend pay out box!).

Out of sight out of mind, it happens with out any extra input and that tiny dividend is no longer tempting you to buy some craft beer that your waistline doesn’t need! Make sure your money makes you more money by keeping it invested. It’s the aim of the FIRE game and it will get you the the finish line faster.

 

Frivolous Investments

I guess I must be feeling pretty flush because I just dropped $500 on a share in a craft brewery. As far as frivolous investments go this is pretty high on the list.

Parrotdog put out the call for 2 million dollars to upgrade their brewery to a new location with a taproom and takeaway sales. Being the craft beer lover that I am how could I resist? I love craft beer! Owning part of a brewery is like a dream come true. My share doesn’t quite entitle me to drink for free but I do get 10% off all online and takeaway orders.

However after looking over the share offer I found myself feeling a lot less optimistic about their projected growth than Parrotdog brewery. Their projected sales seem too good to true even with New Zealand’s exploding craft beer scene.

Consider this graph for instance, projections like this usually have me running of the hills! Which hills? I dunno, the safety hills?

Screenshot 2016-08-20 18.21.05

But I still made the purchase because craft beer is a hobby and it brings me joy. The creativity and camaraderie in the New Zealand industry is inspiring and its becoming less fringe and more mainstream by the day.

The investment was made knowing that it might never be worth more than $500 and it might even be worth less! I am at a point in my life where I can afford to throw $500 at a pet project, its like lending $500 to your brother in law to start a business….lets just call it a donation and not worry about ever seeing that money again.

Screenshot 2016-08-20 18.35.50

$500 is currently 0.083% of my current net worth but if I was only just starting the journey to FIRE and $500 was 1% of my net worth I don’t think I would risk it.

With crowdfunding platforms the world over becoming more popular these kinds of private off market listings are a lot easier for everyday folk to find and throw cash at. While its exciting to be part of these smaller businesses and start-ups the risks can be a lot higher and there seems to be less regulation. Its my first time investing in a company off market like this, so I’ll let you know how it works out. In the meantime, please purchase ParrotDog beer!

I’ve Paid off my Maxed out Credit card – Twice!

Some lessons in life are hard to learn. So hard that you have to learn them twice. Credit card management is definitely one of them.

The first credit card I got was handed over to me with little ceremony when I was a student. It was my second year and I’d moved out of the halls of residence and into my very first flat on Cook st.

My campus had a branch of the National bank down by the (man-made) lake (full of huge eels that would eat the baby ducks) and students were eligible for an interest free $1000 overdraft and a credit card with a $500 limit. For a broke student it was just free money, I figured it would be easy to pay back once I graduated and started earning my kick ass amazingly high wage. (Yeah right, turns out science graduates aren’t nearly as in demand as I thought).

Some of the $1000 went on text books, I bought a woolen electric underblankets (it was a cold town!) and heaps of beer, takeways and …….. well I can’t really remember where the rest of it went. It just went! I probably bought CD’s and cool posters for my room.

Poster- Picasso Print

It wasn’t long before everything was maxed out. Each week my student allowance came in plus a little side income from working in a lab downtown. I paid my rent and everything else went into the overdraft but before the next pay day the overdraft was maxed out again. It wasn’t till a I finished university and finally got a full time job that I was able to pay it all back. Each fortnight I had to call the bank and ask them to reduce the overdraft by a measly $50. I learned the overdraft lesson and never used one ever again. The weeks dragging by and the embarrassing calls to my banking manger left a lasting impression.

The credit card however had no such lesson, the payments to visa were to this vague external entity. I never met anyone from visa and I never had to call. In fact I think they even increased my limit once I started working full time.

Fast forward to 7 years later and I was still always carrying a credit card balance. I thought it was normal. By now I had a limit of $3000 and things were getting dangerously close to that limit. The first hint that I wasn’t exactly managing things was when I made my first call to visa. I wanted a limit increase for a trip to vegas “just in case”. Just in case what I’ll never know because they turned me down. I had made a large cash withdrawal the week before. I mistakenly paid too much off the card that fortnight and hadn’t calculated enough reserves to make rent! The bank wasn’t too impressed with my money management skills.

After the trip added even more debt to my card I decided I had to tackle the debt. Each pay day I paid the bills that had to be in cash (e.g rent) then every single left over dollar went on the credit card. No cash left in checking, everything was now on the credit card. It was a huge payment and each payday bought the promise of progress. But I still had groceries and petrol to buy so I would use the credit card. It was a 3 steps forward 2 steps back kind of deal but I got there in the end.

The second time I maxed out my credit card was way worse. It involved spending money on family, spending more than I earned on day to day expenses and having nothing to show for $12,000 worth of debt. Yep twelve grand. It happened over several years. I didn’t buy myself clothes or gadgets or things like that. But I bought movie tickets, takeaway pizza’s, groceries, dinners out and a trip to the Gold coast for my partner and their children. So in the end I had massive debt and no assets to show for it. Deeply ashamed I hid my debt from everyone. I carried on as if everything was normal with this huge debt anxiety in the background.

This time I transferred the debt to a credit card with 0% interest for the first 6 months. After 6 months I transferred to a card with the same bank with a low interest rate (about 1/2 the standard rate). It took me about 3 years to get it under control. During those years I paid my mortgage and invested in kiwisaver. I bought shares but I didn’t mange any cash savings. Once I got the balance down to $1000 I started to save cash. Actual cash reserves. Looking back I was lucky to have a good paying job and to manage the rest of my money so I never got behind in repayments. It never became an “issue” or stopped me from being able to afford rent, power, food etc. It could have been a lot worse.

Now I pay the balance in full on my card every time I get paid. Transfer over enough money to zero that balance and sometimes it hurts the checking account a little because I’ve spent more than I thought. Even now spending on the plastic doesn’t trigger the feeling of spending my own money. Its a future me problem not a today me problem.

So thats my consumer debt story, going through the painful repayment process taught me a lot about money and how I interact with with it. So for that I am grateful. (Obviously I would rather not have spent the money and have it investments but we’ve always got to look for the silver lining).

 

 

 

July Expenses – SPEND ALL THE MONEYS

Oh sweet July, thank you for my tax return which allowed me to pay $4000 off my mortgage in one hit. BEST FEELING EVER.  It was a one off so not accounted for in these totals.

Screenshot 2016-08-03 18.13.44

Everyday expenses, are a little up this month since I was trying to remain in holiday mode (futile). Being back in winter and at work is all too bleak so I treated myself to some things. After about 3 years of buying bugger all clothing I splurged again this month on a couple of jackets, a winter and summer weight one both nice enough for work as well. As for the Household goods category, I replaced a duvet inner that had to be over 20 years old and was starting to fall apart. I bought a space heater for the teens room downstairs as its been pretty cold (ah I’m so nice. She has her very first job interview tomorrow). Car registration was due (annual car tax I guess for those non NZ’ers) it includes medical cover in the case of an accident and road maintenance .

So the odd transport cost because I caught an Uber home from my bosses 65th birthday. Spending money this month was contributing for a gift for previously mentioned boss. (She is awesome, she built her own house!). A movie date with my husband and loads of craft beers. Anyway I feel pretty spendy this month. I am trying to throw some money into my investment properties so I can get some improvements done. The Hamilton property needs heating installed which is planned for next month.

Utilities – I got a bit ahead on the power bill, so I didn’t have to pay much this month.

Screenshot 2016-08-03 10.51.39

As you can see I don’t exactly fall into the frugal category when it comes to spending. Sometimes I struggle with that and beat myself up over it. Other times I really need that little luxury in my life and no guilt over dinner out.  I’m sure it would be a different story if we had consumer debt or student loans to worry about, but thankfully we only have the mortgage to worry about.

8 Reasons I Hate Credit Cards

I can’t believe I said credit cards, plural. I mean who needs more than one credit card? New Zealand credit card users have 2.2 credits each. American users have 3.7 cards each! Actually I can think of a reason to have two credit cards, when my partner and I travel we take two cards (thats one each) from different providers in case a certain brand of card isn’t accepted or on the small chance there is a problem with transactions for one of the companies. People hacking the rewards/points often have multiple cards. I get it, the rewards are nice, its especially nice to be rewarded for your boring every day spending.

I use a credit card but I have a love/hate affair with credit cards. I love that they let me order things from oversea’s and collect airpoints. I hate that I sometimes forget purchases made on my credit card and have to pay more than I anticipated to get the balance back to zero.

  1. Credit cards are very dangerous. Its easy to view that line of credit as “money available to spend” and easier to forget that its not really your money. My online credit card always shows the available balance as $10,000! But that’s not right I don’t have $10,000! Its just $10,000 the bank is willing to lend me. This kind of psychological trickery really infuriates me. The balance should be ZERO.

    Evil credit cards
    Put it on the plastic, worry about it later.
  2. They get away with ridiculous interest rates. 21.95% interest WTF. Yep I’ve seen them that high. Why do we accept this kind of loan sharkery? Somehow this has become the norm. Interest rates around the 20% mark severely punish the inexperienced credit card user.
  3. No one tells the user that they are not supposed to carry a balance. You shouldn’t carry forward any credit card debt from month to month. If you are you should cut up the card NOW. You can’t get ahead paying 20% interest on debt each month.
  4. Minimum payment pfffft whatever. If you pay the minimum you may as well say ” I wanna stay in debt forever” cause paying the minimum don;t do jack towards the debt when the interest rate is 20%. But somehow seeing that minimum figure on the statement and then paying it actually makes us feel good, like we are fulfilling our obligations. More psychological trickery.
  5. The bastards will increase your limit without asking your permission enabling chronic spenders to get even further into debt. I once rang the company and asked them to reduce my limit and I was cooley informed that I better not ever ask for a limit raise as it may not be available to me in the future! Well thanks mate. I guess you don’t want financially responsible customers.
  6. I’ve yet to meet a person who was able to manage their credit card successfully from day one. Everyone I’ve been brave enough to talk to about it has at some point in their life carried a balance, had to pay interest, or let their spending get out of control. That learning curve has got a lot of young people into trouble over the years including me! Getting a credit card at 18 was probably one of the worst things to happen to me (financially that is!).
  7. The fee’s for accepting credit cards are high, much higher than using your regular eftpos/debit card. While the eftpos card transaction are charged at a flat rate per month (usually built into the equipment rental) retailers are paying 1.7% of the transaction in fees and its really hurting smaller retailers with slim margins. So who is really paying for your credit card rewards? Maybe the retailers are bearing that cost, maybe everything would just be a little bit cheaper if there were no credit cards.
  8. Transactions take a few day to show up in my online statement. I have a hard time understanding this as EFTPOS transactions show immediately and I can see where and when I spent my money. With the credit card the balance is updated instantly but the detailed transaction line showing when and where the purchase took place doesn’t show up for a couple of days. It really frustrates me as I like to track every expense and if I lost the receipt on the way home….(trust me this happens I am very disorganised) I have to try remember the exact details and then wait a few days before I can update my spending tracker.

May Expenses – Less than last month so that’s good!

Another month has rolled by and so the time has come to share my expenses with a bunch of strangers on the internet. How exciting for you!

 

Circular graph of may Spending.
May Expenses
~$270 less than last month!

So lets break it down

Mortgage – nothing new here, recent twitter poll suggests I should use my upcoming pay rise to increase the payments. I was more for spending it on beer but whatever.

Savings – Still saving a grand a month. I wish it was more. Once the bloody mortgage is dust I’m gonna be savings heaps!

Groceries – Feel like I spent a lot this month but it works out as ~$75 per person per week. My colleagues think this is about right, but they are also big spenders.  ¯\_(ツ)_/¯ Not really sure how much more I can cut from this category. (Or if I even want to make cuts!)

Everyday expenses – Well I visited my Mum which takes a whole tank of gas. Sorry mum I love you and everything but it costs me $80 a visit. Please move closer. I got an ear infection (fun!) and had to go to the doctors and buy medicated drops. On the winning side restaurant spending was cut by half as I made more of an effort to be organised with food! e.g. Packing lunches and having back up meals in the freezer.

Now I know spending money is kind of a vague category into which everything else just gets dumped but I don’t want a thousand little categories in my budget and I’m gonna tell you all the things anyway. This month I paid to have our teen boarders glasses repaired $45, Mothers day gift for my mum $40, loads of craft beer for a BBQ at my Dad’s house $38, I bought an art print $20 (that I still need to have framed) and I bought a few craft beers at various weekends. A lot of money spent on beer this past month.

Hobbies – I brewed a toasted coconut oatmeal stout, so hopefully that will cut down on the beer spending next month. I do need to get a refill for my CO2 cylinder and thats gonna cost around $4o but it lasts about a year.

Everything else – All pretty normal except for my annual credit card fee. I’m going to ring the bank and see if I can get that waived, I have a lot of lending with them so they make plenty money off me already. I topped up my rental property accounts to make sure there’s enough money for expenses. The household goods category included a new frying pan and an impulse buy of new winter blankets for everyone. Thrilling stuff.

My monthly expenses for May

So there you have it, don’t forget everything is in New Zealand dollars! A very exciting currency from the bottom of the world.

Fees – The Stealthy Kiwisaver Killer

“An investor with $1.00 invested in 1900 would have seen his dollar grow to over $1,000 in real terms, if they had paid the industry average of 3% in management, monitoring, performance and trading fees then the real terminal sum would drop to just $37.40”

The New Zealand sharemarket on average has returned 10.0% p.a from 1900 to 2015 (Yes, we are awesome, send us all your moneys). If you invested $1 in 1900 in shares with no ongoing fees you would have around $64,000 in today’s dollars or $1027 adjusted for inflation. In a fund with fee’s you would only have $37. Staggering difference. Would you rather have $37 or $1027? It’s a no brainer.

If you only read this one line then know this – Fees matter!

I only know this little tidbit of wisdom because Brent Sheather wrote a brilliant opinion piece for the NZ Herald titled “NZ shares vs the rest of the world”, within the article are some sparkling gems of information and the one that stood the most was the topic of fees. In fact the article should have been called “Kiwisaver Fees and how they’re stealing your retirement!” and maybe it would have got a bit more attention.

Kiwisaver accounts (and managed funds) are charging us huge fees for managing our money and fair enough you may argue. Nothing in life is free. But when Kingfisher funds can pay themselves a 1 million dollar performance fee payment on a fund that only returned 4.3% (the sharemarket returned 16.5% over the same period) then something is horribly wrong.

Shadow hoping and praying for ethical money mangers
Hope like hell you have an ethical Kiwisaver provider!

Consumers of investment “products” are not always getting value for money and are not always aware of how the fees are charged. We are all  very trusting of our Kiwisaver providers to do the right thing by us, they are the custodians of our futures, determining by their stewardship just how much money we will have to spend during our golden years. But they are clearly making bank along the way, taking a % cut of our total savings each year.

I’d like to think that the fee’s would only come out of the profits or gains that the fund makes but sadly this is not the case. That scenario could leave providers making zero dollars in recession years. There are obviously baseline costs for administering funds that need to be covered so performance only fees are not entirely fair either, but does it cost anymore to manage $1 million in kiwisaver funds than to manage ten thousand? The money is all going into large generic funds and individuals are not receiving personalised investment services. So shouldn’t each customer pay a flat fee? But this would penalise those with smaller amounts invested. Perhaps percentage fees up till a certain amount invested then a flat fee there after?

I’m not sure what the best way to go is, but I can tell you I’ve had excellent returns from very low fee index funds and like Brent says, the computer managing it has never paid itself a one million dollar performance fee for barely beating inflation.

I checked out Sorted.org’s fund comparison tool and found the lowest fee’s for a kiwsaver fund was 0.31% for the Superlife NZ50 ETF (which returned 12.75% in the last year, nice). The highest fee’s charged are 4.74% for NZ funds Growth Strategy fund (-10.9% return in the last year but to be fair a +22% the year before that). That’s a massive range of fee’s and returns, clearly it pays to dig a little deeper and find out exactly what fees you are paying.

If consumers want change then its going to have to be demand driven. Start comparing funds, look hard at those fees and be prepared to move your money to a lower cost fund. If you do switch, let your fund manager know why! Let family and friends know that fee’s are a really important consideration when choosing their Kiwisaver provider or any investment fund. (Cause everyone loves talking money with family and friends right!)

Luckily the Financial Markets Authority is on our side as Tasman Parker reported this week in the NZ Herald. Her article “FMA warns – don’t treat KiwiSavers as ‘cash cows'” reported on several concerns of the FMA including fees and lack of confidence from kiwisaver investors in the market.

Rob Everett, chief executive of the Financial Markets Authority, said KiwiSaver providers could not afford to treat members as “cash cows” raking in millions of dollars in fees a year without doing anything to communicate with them other than the minimum.

 

You tell em Rob!! We need institutions to challenge the big providers to do better, the more pressure the better.

Is Your Cash Working as Hard as You?

You work hard for your money, yet money sitting in the bank isn’t working hard at all. Low interest rates these days are frustrating for savers and those living off their savings (like retired folk), lucky for us inflation is also low so the value of our money is holy steady.
I feel like I worked extra hard for every dollar I saved, those dollars represent a lot of time and sacrifice. So why would I just leave them in any old savings account. Yet so many of us do! Its so easy just to park the money in whatever account our main bank offers. Now I spent almost a week researching which new sheets to buy so why not spend some time researching the options for stashing my cash!

People who work hard need to think about where to put their savings
You work hard! Don’t spend more time thinking about your coffee order than where to park that cash!

The best way to make your money grow is investing, but it also makes sense to keep some easily available in cash or to invest a portion of your money conservatively in things like term deposits.

So how can you make your cash grow in a low risk way?

Below are some idea’s which might be more relevant for New Zealanders but the point is you can’t just settle for the crappy interest rate your main bank gives you. There are other options with similar is profiles with better returns. Get out there and starting hunting out a better deal!

Shop around for term deposits. You don’t need to stick with your bank, your savings account may only offer 0.5% but there are still term deposits as high as 3.8% to be had. Interest.co.nz has lists of all banking institutions (along with their credit rating) and the term deposit interest rates they offer.

For even better returns you could look to peer 2 peer lending. It is riskier as their can be defaults but some lenders like squirrel offer loan repayment protection so if the borrower defaults you will still get your loans repaid. This makes it a very safe vehicle for investing with much higher returns, my average interest rate with squirrel is currently 8.25%. Be aware that these investments are not liquid and not really a great place to stash cash but you are paid back principal and interest on the investment each month. I mention it because It could be a useful tool for setting up a monthly income stream in retirement.

Banks are now offering cash PIE (Portfolio Investment entity) funds, these funds attract a lower rate of tax so they are a good option if you are in the top tax bracket. (The maximum PIE rate 28% tax while the top income bracket in New Zealand is 33% tax). You can have cash in on call accounts or term deposits as a PIE fund.

New Zealand's favourite PIE, Mince (beef) and cheese
New Zealand’s favourite PIE, Mince (beef) and cheese

Regular savings accounts have really low interest rates right now but if you are willing to look at alternate banks to the big names or credit unions you’ll be able to find rates as high as 3%. Some places are going to require a minimum amount saved before that interest rate applies but some places are offering great rates from the first $1 e.g. Heartland bank are offering 3% from the first dollar saved!

Bonus savings accounts can be a way for the disciplined saver to maximise their interest earnings. Usually there is bonus interest applied each month if the monthly deposit minimum is met and there are NO withdrawals. The pitfall with these types of accounts is that without the bonus interest you don’t really get a return because the base interest rate is so low. If you need to access the money for an emergency that month or to take advantage of a great investment deal you could be forfeiting most of your return.

Theres a big difference between 0.5% and 3% return, so park your cash wisely, mark sure your dollars are working as hard as they can and don’t leave potential returns on the table.

 

How I Bought My First Investment Property Using Home Equity

A lot of my friends wonder how I got started in property investmenting. They know I don’t have a ton of cash lying around, but all of sudden I have 3 rental properties. They get even more incredulous when I tell them I didn’t have a deposit for any of them. So let me tell you how I did it. Selling drugs, the mark up on meth is amazing!!! No actually, not drugs….two words – home equity.

Let me break it down into 5 steps.

Step 1) Own most of my own home. Easy right!? Now undoubtably this is actually the hardest step. In saying that about 64% of New Zealanders own their own home, not too shabby. Having your own house will provide a lot of security when you retire, but not much in the way of income. Sure it will save you heaps of having to paying for accommodation in your old age but its not going to pay your bills. That capital tied up in your home can be put to work!

Step 2) I built up equity in that house as fast as possible. (When I say fast, this took us ten years). Increasing equity means paying down the mortgage or increasing the value of the house. i.e.get in a flatmate, work overtime, make extra repayments, paint the house add a room whatever it take to get the loan to value ratio of your house down. We upped our payments as soon as the mortgage started and I’ve been inching the amount upward whenever we could afford it. When interest rates dropped we kept our repayments the same paying back more principle than ever before, so far we have shaved 13 years off a standard kiwi 30 year mortgage . The house is due for renovation and by spending wisely we could gain more equity. However I’ve put that on hold for now. The house is perfectly liveable as it is and we need to put our money to work in better ways at the moment. But if you live in a real run down house and you can improve the value by 25% I reckon go for it!

Run down room in need of painting! Renovate to gain equity!
Yeah, a lick of paint might improve the value eh….

Step 3) I talked to the bank manager about a revolving line of credit. When we moved our mortgage to Kiwibank we got a great interest rate, but because we didn’t have much of a loan (compared to everyone else I guess) they suggested we take out a line of credit/revolving mortgage as part of the deal. We wouldn’t have to spend it or use it at all but it would add to our total borrowing allowing us to qualify for a cash back offer. I didn’t let them link the revolving credit to any of our eftpos cards or accounts and so it sat, safely out of reach.

This line of credit can be used to pay the deposit on the investment property you want to buy. I mentioned that I was going to do this to bank manager and he said that idea was ok. You can also work with a mortgage broker to arrange this kind of thing for you. I did the first one myself but since then I’ve used Megin from the Loan Market to make sure I’m getting the best interest rates and cash back deals.

Now revolving mortgages/lines of credit usually have slightly higher interest rates than fixed or floating mortgages but don’t worry I’m only using the revolving credit for a short amount of time. (Less than a month usually).

Step 4) I found a house and got the banks approval to borrow 100% the value of the investment property. We have plenty of equity in our own home so the bank was willing to lend 100% of the purchase price $222,400 in this case. How much you can borrow depends on how much of your house you own i.e your equity. Currently the bank wants you to retain at least 20% equity, more if you are an investor in Auckland. This is a good thing, retaining a decent amount of equity will help protect you  of there is a downturn in the market and property values fall.

With the lending sorted I went unconditional and paid the deposit using the revolving credit facility.

House made with money
hmmm I suspect weather tightness issues

Step 5) I paid back the revolving line of credit. The drawn down loan is split between paying the remainder of the purchase price to the vendors lawyer and paying back the revolving line of credit. The mortgage is at a lower interest rate than the revolving credit so it makes sense to pay back the line of credit asap.

I’m not sure if its the best way or the “right way” and its certainly not the only way…..

And thats how I bought an investment property. I’m not sure if its the best way or the “right way” and its certainly not the only way but its how I made it happen. If you have equity in your home you have a lot of options, talk you bank, broker, accountant for advice! Personally I just tend to jump right into things and sometimes that backfires horribly, so make sure you always check with professionals about finances!

For me the downsides to this method is that properties are used as cross securities against one another (Including my main home! Risky! I’m working on doing something about this, talking to accountant about structures) and not having a deposit makes the cashflow situation a little tighter actually for two of my properties the cashflow is negative. Tauranga is down about -$20 a week and the Auckland apartment is losing about $30 a week. Argh, I should have talked to an accountant about setting up a company. It’s terrifying that I’ve leveraged my home to buy more homes, keep following this blog if you want to see if it all implodes down the line…or if the risk pays off and I can retire in ten years…

The positive side was ease of getting finance and accessing the money we’d worked hard to put into the mortgage instead of having to save a new deposit each time. Also being able to act quickly during a property boom was a huge advantage. We’ve made capital gains of well over $100,000 in one year. The revolving credit facility is still in place and we could use it to finance renovations, repairs etc if needed.

 

My Second Property Investment and How it Also Sucks!

Sometimes I think I’m just too stupid to be property investing. I’ve always said “Learn by doing and then learn some more by failing” well I’m certainly learning a lot this year.

Lucky for me it’s a rising property market and for now my idiotic purchases are being smoothed over by ever increasing property values.

They story begins last July when I got it in my head that I wanted an apartment in the city.

Oh geez why the hell did you think that was a good idea?

Because it was cool and if we moved out of town we’d always have a place in Auckland to use as a base. I spent a month looking and it was just doing my head in. So many open homes. Parking in the city zipping from building to building. I went to an Auction and got outbid by $200,000 (the market was and still is exploding) for a very dated (but excellent location) apartment. My only key criteria was that it had to have car park.

Anyway I’d all but given up on finding a place when a canny realestate agent gave me a call and asked me to come look at apartment. I told him no, I’d refocused my search to Tauranga and I wasn’t looking anymore, but he was persuasive and offered to drive me there himself so I took the bait. He showed me two apartments in the same building, one was vacant and one had a tenant but it was under rented.

The vacant apartment was really nicely staged, I was swayed by cheap furniture and borrowed artwork. Fresh paint and new (cheap) carpet also added to the illusion of a quality apartment. It had all shiny new appliances and had the appearance of luxury.

Photo of staged apartment with modern furniture.
Look how pretty it is!

I decided to make an offer because I thought I could get this place at a reasonable price, all the talk by the agents lead me to believe the vendor wanted a quick sale and that I seeing it first before anyone else so I should get an offer in before the open home that weekend.

Of course it was all talk.

So with a lot of back and forth and agents driving me sale and purchase agreements across town at 7pm to create a aura of urgency and importance we finally settled on a price of 447,500 for a 1 bedroom 67m² apartment with a carpark.

The bank very wisely insisted on a valuation and that came back at 455,000. (Amazingly!). The agents had also “thoughtfully” provided me with a rental asessment of $500-550 per week. I ran my numbers optimistically on a middle figure of $525 and figured it would break even.

I later learned that the place had been bought 1 month before  by the vendor for $390,500 so they made a tidy profit. Even my initial offer would have left them with a tidy sum. The agents were damn good at their job, the whole time making out like they were helping me get the apartment I wanted while driving up the price for the vendor.

Renting it out took a few weeks, it shouldn’t have but the property manager got sick and didn’t really get round to asking any of her colleagues to take over the showings. Then the rent achieved was only $500. I was pretty surprised, but it was my own fault. I trusted the supplied rental assessment and I didn’t do my homework. I didn’t research rental prices in the building or get and independent rental asessment. Unforgivable really when so many property managers will do one for free (in the hopes of getting your business I suppose.)

But there have been some amazing upsides to owning the apartment. The lack of maintenance compared to my other properties is quite a relief. Everything is taken care of by the body corp fees and those fees cover insurance. It really is hassle free. While it was vacant I got to use the car park. That was fun.

The Numbers

Mortgage payments: $22,921
Rental income: $26,000
Body Corp Fees: $3,406
Rates: $1,236

That works out to a nice tidy loss of $1,563 a year. Yes thats right I actually purchased a $1563 debt every year. Are you keeping track of how much money I’m loosing this year? My other rental property is losing $1054. So far thats a grand total of $2617 per annum. Or $50.32 a week. That is starting to hurt my cashflow!

Properties which cost money to hold are not an investment. However, the rising market and capital gains are increasing my net worth. But buying houses with the hope of values going up makes me a speculator and not a very good one. Buying properties that break even are not investments either. Unfortunately I am damn stubborn. I refuse to let it go. So I eat the loss wait for a day when the damn place actually makes me some money.

Any good news?

Well interest rates are low, and getting lower. I split the loan into 3 parts and each will roll onto a lower interest rate in the near future.

Rents are apparently rising. So they tell me. But I really feel that $500 a week is still a fair rent for the property. I will get a professional rental assessment when the tenants fixed term contract ends.

It will only take an increase of $30 a week or a reduction in expenses of $30 a week to make this place break even. I’m pretty sure I can achieve that in the near future..

So what are the lessons here?

Four main things I learned from this purchase.

Real estate agents work for the vendor – Not you! If they appear to be helping you get the deal done, take a step back, is it really in your best interests?

All that glitters is not gold. Staging makes a place look way fancier that it is. Whats lurking when all the glam is gone?

Get independent rental assessments and use the lower figure for running your numbers. Rental assessments, in my opinion, are usually inflated.

Set yourself some criteria. Without criteria its easy to get talked into buying something that won’t work for you. If I was buying an apartment again, it would be, carpark, views, natural light, sound proof.