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.

April Expenses – You know you want to be nosy!

Screenshot 2016-05-01 13.31.02

Ah yes another fine month of spending all my money. Although I managed to spend less than last month so thats a win.

Home Repairs and Maintenance – This month we had to get the home ventilation filters changed. We have HRV for home ventilation and they charge a lot for servicing every two years. I could do it myself, its a simple matter of climbing in the roof around all the insulation and changing two filters….but I don’t. Also I bought a voucher on Grabone to have our heat pump serviced as well. Once again probably something I could do myself.

Spending Money – Stepsons birthday! His band played at a local bar and I shouted him and his brother quite a few rounds of drinks. I bought a car charger for my cell phone and gave the kids some money for gas. Confession……I also bought a lotto ticket!

I did not win.

The disappointment was not worth the $9.60

Restaurants – Shameful amount spent on eating out of the house. Its amazing how quickly that adds up. $30 for pizza one night I was to tired to cook and $30 taking our teenage boarder out to lunch during her term break. Then $140 over the month on snacks and work lunches. These Damn food trucks have started parking up near work. Delicious.

Clothing – One pair of work pants for me and a pair of work pants for other stepson. Including the cost of posting them to him.

Property Expenses – Exciting times, I am buying a house in Hamilton, quite possibly the cheapest house in Hamilton and possibly only the 3rd worst house in Hamilton. (Its definitely a do up!) Some of the costs of due diligence are in this category (e.g methamphetamine test, deposit for lawyer).  My lovely mortgage broker Megin has negotiated some cash back on the mortgage so I should be able to refund myself these expenses.

And the rest is all pretty standard stuff. I spent very little on petrol this month. So thats a win! And I may have found a free parking spot close to work. So hopefully I can cut down on that expense.

Screenshot 2016-05-01 13.41.54

Between the restaurants and spending money categories I am spending $100 a week. Its like I have a $100 a week allowance for whatever I want. What do you reckon? Too high? It works out at around 6% of the total spending (but the mortgage payments really skew the total monthly spend).