My First Rental Property Investment – And how it sucks

 “I should invest in property.” – Thought I had one day last year.
Picture of a rental property

Property is such an attractive prospect. With a good property manager its largely passive, there are sweet sweet capital gains and I could see in the future having a few properties could be a great way to provide steady income in retirement. I don’t know about anyone else but I really really struggled to find a property with decent rental returns. New Zealand houses are really expensive and sometimes not great quality. I couldn’t afford anything in my home town (Current average house price – $931,061!) so I had to look in some of the smaller regional towns nearby, I started with Hamilton but the houses I could afford there tended to attract tenants that looked like hard work. After spending many weekends looking at dismal homes I gave up on Hamilton and started looking further afield.

Ariel photograph of Tauranga
The Charming Coastal City of Tauranga

I finally ended up looking in Tauranga (a coastal town with a large port about 3 hours away) and I found a large 2 bedroom home, with a really light and bright living space. It had a lovely feel to it and if I were to one day fully renovate it the results would be a very classy living space. Even in its current condition it was very liveable.

I didn’t have a deposit

Yup, I bought the property with no deposit. I own my home here in Auckland (well a large % of it) so the bank was willing to lend me 100% of the purchase price of this property.

The thing with houses is that the purchase price is just the beginning of all the things you are going to have to pay for. Although I did talk the sellers down from a list price of $235,000 I ended up paying pretty close to that figure by the time the purchase was done and the house was ready to rent out.

Purchase price $224,000

Pre Purchase Building Inspection $517.5
Drain Inspection $230
Legal $900
Drain rehab and repair $3624.1
Insulation and ventilation $2949.61

Total purchase costs $232,221.21

As you can see it cost me another $8,221.21 to get the property ready to rent out. I wasn’t to upset about the prospect of getting these repairs done as I felt I was still getting the property for a good price. The drains were completely clogged and causing dampness around the property but they are fully functional now. I also paid to have a high standard of insulation and ventilation installed. New Zealand properties are notoriously cold due to poor insulation and are often prone to mould issues as tenants trying to keep heat in will not open windows in winter. All the moisture from regular household activities can create an environment that encourages mould growth on ceilings and soft furnishings. It was really important to me that any home I rent out is warm and dry.

And how about those ongoing costs…..

Costs, coins, accounts.

Well lets start with a happier note. The place is currently rented out for $340 a week and they’ve paid on time, every time. Gotta love that.

Annual Rent $17,680

Annual Expenses
Mortgage (principal and interest) $14,736
Rates (property tax) $1,845.90
Property management $1,016.6
Insurance $1,136

Shortfall of  -$1,054.5

So this is why it sucks

I have to pay out $20.27 a week to keep the place going. I also will have to pay out of my own pocket for any unexpected repairs and regular maintenance. It’s a negatively geared property. Its quite common in New Zealand to invest in property this way, however I would prefer to making money! I can offset the losses against my income so I end up paying less income tax, which is nice.




There is some good news!

After one year the mortgage is down to $218,574 and the rateable  valuation on the property is $256,000 giving me equity of $37,426! So you could look at it as spending $20.27 a week to acquire $37,426 which I’m sure you would agree is a bargain! Its been a great boost to the net worth. I was extremely lucky to buy when I did. The market in Auckland had become ridiculously expensive and a lot of young families were looking to move to more affordable towns. The market in Tauranga was only just starting to heat up and I’m sure I got an absolute bargain. You can’t find much for under $300,000 in Tauranga now.

Am I going to keep this money pit of a property?

YES! For now I’m going to hold, I have the opportunity to refinance in February 2017 and I should be able to reduce the mortgage payments. The Tauranga property market is booming and the current valuation of $256,000 is a very conservative number generated by the council when they are determining property rates. If I were to get a proper market appraisal I believe the value would be a lot higher. There’s no tax on capital gains in New Zealand so I get to keep all of the profit.

There’s always the possibility of increasing the rent, my property manager keeps on top of the market and will assess if any increases are justified. I plan on having the property at least cashflow neutral by March 2017. For now I’ll continue to pay my $20.27, which to me seems a small price to pay for owning this assets which keeps on increasing in value.

Actually its not as much of a money pit compared to last year

I did two things this month to improve the returns, I re-evaluated the insurance and discovered I was really over insured and paying too much. I got this bill reduced by $200. I also switched property managers, my first manager was useless and expensive. I finally got fed up and found a company recommended by the property investors association. The price is excellent and he’s a great communicator (which is exactly what you need for an out of town rental). I was inspired to see what savings I could make after reading a post over at Afford Anything about the incredible power of the 1% margin for improvement. The idea that loads of small improvements can make a big difference was so obvious and I felt like an idiot for not optimising my expenses sooner. Yes property can be passive but for the best returns its helpful to keep a watchful eye on things!

**October update

Values in Tauranga have skyrocketed in the last 6 months. My modest property purchased for $224,000 ($216,000 mortgage) in 2015 is now worth $340,000-$370,000. The rent has been the same but my tenants are moving out in a month and my property manager has advised that he can increase the rent. Interest rates are dropping and the reserve bank has signalled one more rate drop before the end of the year. My fixed term mortgage ends in April 2017 so hopefully I’ll be able to take advantage of a much lower interest rate. With the increased rent and lowered interest rates this property should be making a profit next year woohoo!

 

Quickly Fulfilled Desires – “The Things That Control You”

Like a lot of younger folks (I’m under forty, thats still young right?) when I find something I desire I want it right now.  But as someone who looked wiser than me pointed out “Those things which you can easily grasp have the most control over you”. It sounded confusing to me at first but I’m sure there’s some wisdom in there. I understand it like this… if you can whip out the credit card whenever you want to buy something, then spending has control over you. Whereas you should control the spending! If you pour yourself a beer every time you even think of having one, then beer has some control over you. You are no longer in control of your drinking. For some of us the things we desire in life have to be put a little out of reach so we can exert control over them. We can put things physically out of reach, separating ourselves with distance. So even if you want a beer there is none in the house. Or we can separate ourselves via time i.e I only drink beers on Fridays and Saturdays and so you wait till the weekend, you put your beer drinking in the future. I’ll fully admit that chocolate in the house has control, I have to eat it. They only way I can resist is to actively remove temptation. I do this by eating all the chocolate in one go……..but usually by not buying any except for rare treat occasions.

All the beers I would drink, if i had my way
Just a couple of beers won’t hurt

I wanted to upgrade my phone about 2 years after I bought it, but it still worked and had all the functions I needed. I delayed the purchase until my current phone no longer supported the apps I wanted, was far too slow and kept crashing. Then I waited even longer till a model came out that suited me. Thankfully new gadgets have no control over me. Do you upgrade every year, are you controlled by technology?

I discovered early on in my life that money does indeed have some power over me. When I look at my bank balance I immediately find ways to spend it. Over the years I developed strategies which involves moving most of my money (money for savings, investments, bills) to separate accounts. Then my checking account only has my spending money left in it. And I’m allowed to spend that however I want. As the years go by I’m getting a lot better at holding on to that money and a positive balance in the account no longer drives me to spend like it once did.

It takes time to learn which things in life have the most power over you and how to push back and regain control.

Time travelling wealth

By investing and saving my money I am putting as much of it as I can into the future. Out of reach and yet still under my control. In a way I have time travelled my wealth to distant future, hopefully a future that involves driverless electric cars and robot butlers. Some of it is going 29 years into the future! (Kiwisaver, can’t touch till I’m 65). A portion of my funds are only going 15 years into the future. I’ll have to patiently wait till I catch up to it. I’m putting my wealth out of reach where it no longer has any power over me and hopefully in the interim years I will be well practised at budgeting and living within my means so when it finally comes time to pull the plug on the job and quit work forever I’ll be able to manage the lump sum in a way that will make it last till the day I die.

A big pile of cash
This looks about right.

I wonder if 2 million dollars dropped in lap right now (apart from the inevitable bruising and crush injuries) would I be able to make it last forever? Have I learned enough yet? Have I practised disciplined budgeting for long enough to keep control over 2 million and not got nuts buying home-brew equipment and extravagant holidays?

I figure that the large amount of time it takes to reach financial independence is a right of passage that educates and tempers us. It’s a chance to make small investing mistakes with small chunks of savings, its time to learn how to build a portfolio or find out who you can trust to build one for you. Learning that just because you have money in the bank does;t mean you can afford to buy whatever you want. I’m only a year into this way of thinking, but I’ve learned a lot about myself by setting off down this path. I’m looking forward to learning even more.

March 2016 (Shameful) Expenses

Alright internets, you can look but you can’t touch. Here’s the expenses for the month. Not so pretty. March madness, thats what I’m putting it down to.

It was my birthday, which led to a trip to Nelson, where I attended a home brewing conference and Marchfest.

And I splurged on a fancy present for myself, a new iPhone SE. I don’t feel too bad about it, as my last phone lasted me 5 YEARS! It was definitelty time for an upgrade as the old phone was beginning to feel quite unusable.
Actually the phone just arrived this evening, the courier asked if it was a new iphone and I felt compelled to tell him I had my last one for 5 years, 5 YEARS PEOPLE. Is everyone understanding that I don’t upgrade my phone willy nilly yet? otherwise I’ll have to mention the 5 years thing again…..

A graph of my horrific spending habits

Mortgage payments are way up because we managed an extra Thursday this month. Gee thanks March. (It’s paid weekly).

Managed to put a whole lot of money in savings, but also pulled some money out of a short term savings account to purchase myself a new phone. 2 steps forward, one step back.

a more detailed look at my monthly expenses.

Professional registration – the government decided my job requires registration. Can’t have any ol bum working in the lab, might make meth or something? I dunno. Anyway every March I write them a letter swearing I didn’t commit any crimes in the last 12 months and they let me carry on.

Spending money was some computer bits and pieces that we bought to finish up a PC that we put together for the teen living with us. Teens need computers for school and stuff, stuff being streaming music really loud all the time….. plus I bought loads of craft beer. Restaurant category was eating out for lunch a dumb amount of time. I was quite disorganised this month.

After the trip to the homebrew conference I felt compelled to start brewing again. Uh oh, I better start a new category for this. So I bought ingredients for a batch of beer and some misc parts for the kegerator I built couple years back, some new beer lines, connectors and things.

2016-03-18 16.15.30
Actual label in the test brewery at Plant and Food research
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Punched hole in a bale of hops to test for moisture content etc
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Marchfest line up, I tried them all!
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We got to sample/sniff a new variety of hop in development at Plant and food research!

Holiday spending was over 4 nights in Nelson, including beer money for Marchfest. I paid for a lot of things in advance so the expense was just food really. Nelson was just wonderful, I really enjoyed it there. I hope they do the conference again next year.

So what can we see from my expenses? Well I’m definitely not in the frugal category and I actually get to go to far off places and do things I like (beer festivals yay!). There is room to save more/cut expenses if I want to ramp things up a bit. I do prioritise beer and food over entertainment (no pay tv for me, not even netflix bro!).

Did you notice something else? Apart from the mortgage I have no debts to pay down. At 36 I have finally learned how to use a credit card properly and all my student loans are dust. No car payments either because I drive a 1999 mazda familia.

Sometimes I feel like its a quite spendy budget, but I do feel in control of the direction of that spending. I get the the things that matter the most to me while still paying down that mortgage, investing and saving.

February Stock Purchase Made Me Richer Already!

I mostly invest in index funds, nice and boring. Occasionally though, to stop myself from going mad on the slow journey to financial independence I like to dive in and buy some single stocks.

Last month I noticed I had a bit too much cash sitting in the savings account earning bugger all interest, I had to put those dollars to work! So I put some more money into squirrel (its a P2P lender, picked up a nice secured 9% loan!), paid $1000 off one of the mortgages (which I’m not really sure was a good idea, but debt reduction is good for my psychological well being) and treated myself to some shares.

dollar-exchange-rate-544949_640

I purchased ABA.NZX that is, Abano Healthcare group. They are a company that has interests in audiology, dentistry and radiology. I work in healthcare so I guess I tend to invest in things I am familiar with when I pick out single stocks. I figure the index funds take care of diversifying my investments so I can afford to have a bias with the small amount of money I invest in shares directly.  I picked up 145 shares at $6.70 each (paying a stupid brokerage fee of $30). Really I should have waited till I had a larger lump sum to buy shares with to mitigate the fees here. I had been following the company for a while and I thought they seemed pretty good value at this price. The shares are now up to $7.30 a month later, a gain of $87 woohoo!  (Edit: its up to $8.01 as of June) For most investors in New Zealand there is no capital gains tax on shares so thats a win.  My single stock purchases are buy and holds I’m by no means a day trader, I definitely don’t have the time to do all they research required.

I usually stick to index funds (gotta love those low fees). Smart shares offer a monthly purchase with no brokerage fees! You can also get similar programs from Superlife. This months purchase was $190 worth of MDZ (a NZ mid cap fund) and $100 worth of DIV (a newish fund from smart shares that I’m trying out, its supposed to be divided focused, not that impressed so far!).

These monthly drip feed services have really helped me build up a portfolio before I was really all that serious about achieving FI (Financial independence) and even when times are tough the minimum contribution is only $50 a month. Thats well within reach of most people and its not so hard to sign up if you want to start investing in the sharemarket.

 

 

 

Why you need to start NOW if you ever want to buy a house.

OK lets take an average Kiwi looking to get on the property ladder. You’re 35, you got married a couple of years ago and now you’re thinking of starting a family. Wouldn’t it be nice if you could have your own home. A backyard with a garden and space for junior to play. Walls you can paint and garage you can have a workshop in, a kitchen you can upgrade.

However house prices have really gone up in your area, and a 20% deposit is now well over $100,000. You’re thinking of going down to one income for a few years to start a family, how in the HELL are you going to save up $100,000 before you’re 40?abode-987096_640

The truth is I think you need to plan for the financial decisions you make in your thirties while you are still in your twenties. Even if you are single, a free spirit roaming the country currently never planning on settling down it can’t hurt to plan ahead. You need the power of time when it comes to accumulating enough funds for a deposit.

But does your average graduate or school leaver think like that? A young person finally getting a paycheque after years of schooling isn’t thinking about what they might want 15 years down the road. They have disposable income they are primed for spending. Hindsight is a beautiful thing but I only listened to about 1% of things people over 30 told me.

If I was young again I’d be maxing out my kiwisaver from day one. 8% of income plus 3% match plus tax credit will add up to a nice chunk of change by the time you are ready to buy a house. Hopefully chunky enough that you don’t have to withdraw all of it for the deposit. I like kiwisaver as a vehicle for saving a house deposit over the long term for young people mostly because the money is untouchable for anything else. You can’t decide to blow it on a trip to Thailand with your girlfriends. Its LOCKED DOWN!

Then I would match that again into a regular savings account. Yep another 8% of wages into the lowest risk high yield deposits you can find. And I’d whack a portion into an index fund because its not just enough to save money, you need to invest money! Now that portion you’re not planning to spend it in a hurry, you need to leave it in the market and add to it regularly to gain the benefits over the years.

This gives you a 16% savings rate plus a bonus of the 3% employer match. So pretty close to 20%. Set it up and forget about it until you get a pay rise, adjust your savings to match. Now 20% may seem like a lot, but it’s really not. You’ve been living on next to nothing while you were finishing your schooling so avoid inflating your spending to make 80% of your pay packet disappear each week. You can probably save even more. Keep upping the amount by 1% of your wages every pay day till you hit the sweet spot. Your savings/investing rate is directly linked to your ability to become financially independent. So keep an eye on it, don’t let any bad spending habits erode your savings habit.

Balance your budget with a Potato
Balance your budget with a Potato

If you start saving like this from your very first paycheque you won’t even feel the pain of missing that money. Despite what you end up doing with your life you’ll have plenty of capital for making those big financial decisions in the years ahead. You’ll have more freedom than many of the adults you know.

Depending on your job and social circle there is a lot of pressure to upgrade your lifestyle rather rapidly. But when I think back to my student days, well I was broke sometimes but things were uncomplicated. The house we rented was old, with internal windows and we didn’t have worry about maintenance. We split the bills 5 ways so everything seemed cheap.I walked everywhere and lived with all my friends in flat. The furniture was old and it didn’t matter if you spilled a bit of beer on it. On sunny days we’d drag it out to the porch or garden. I was happy and yes its unrealistic to stay living like a student forever, but the longer you can hold on to the uncomplicated liftstyle the bigger headstart in life you’ll have.

Millennials are often being underestimated, I think they are a very interesting group. About half the ones I know are barely interested in wealth and the other half are very motivated in following their goals, but they may not be related to wealth in any way. I’m not sure if its because they have already decided that they can’t achieve the homes and assets of their parents generation, or if growing up in a world with global warming and population explosion has made them search for meaning in other ways. So maybe that first home isn’t part of the life plan, well that doesn’t mean that saving investing that money isn’t a good idea. Money isn’t just something your parents generation obsess over, money in the bank is actually stored freedom and choice.

You never know what you’ll need the money for. It could allow you to retrain in an exciting new profession, take year off work to travel, quit that soul destroying job, allow you to invest so you can always be financially free and buy that first home. Give that gift to your future self.

 

 

I Quit my Side Hustle

After 2 years of pouring beer and handing out samples in stores I finally decided to call it a day.

food-cold-wood-hand

The last job they booked me was a big box supermarket that had recently started to stock craft beer. It should have been an easy gig but this store seems to have a higher ratio of weirdos and assholes. After laughing off insults and rudeness, keeping a smile on while listening to some jokers superman fantasy (non-sexual but oddly violent) I decided that actually this wasn’t worth my time anymore.

I stuck out this side gig for 2 years (on top of a regular full time job). I initially took it because I love craft beer so it seemed like an easy way to make a little extra cash.

Over the years I’ve met some really amazing people. I have to say that craft beer people are some of the nicest I’ve ever met. But I want my weekends back! I need to spend more time with the love of my life and less time trying to convince green bottle beer drinkers to give IPA a crack.

A lot of bloggers will try convince you to get a side hustle. They are after all a brilliant way of bringing in extra cash and if you are smashing down some debt its bloody brilliant but unless you are some kind of stamina machine its going to eventually take its toll. However 2 years worth of extra income have certainly helped us get ahead with our investing.

I’m not ruling out going back to working a second job, I’ll always keep my eye out for something interesting and I’m lucky enough to not need the income so I can be picky about what I do and leave before I get too burned out or jaded.

Hey if you’re desperate to get a side hustle going anyway check out Side Hustle Nation – How to Earn an Extra $1000 a Month as a Brand Ambassador



February Expenses and Savings!

Oh man, the things I did this month. WAY MORE SPENDING! But also so much AWESOMENESS!

Took a plane to Christchurch to watch my brother in the Coast to Coast. It’s a mad event where people run/cycle/kayak from one side of the South Island to the other (IN ONE DAY!). It was an amazing day and quite emotional. I was really proud of my brother but it was pretty hard watching him at some of those checkpoints, I could tell he was in a bit of pain but he just kept on pushing. It was a 14 hour day of racing. I wouldn’t have missed it for the world it was really inspirational.

dbikesupportteam

dylkayakdylfinsh

My brother had a very deep connection with my Grandparents. Both have since passed and my Grandmother suffered through an oesophageal cancer. This was the second time he’s done the coast to coast and each time it was to get donations for the Cancer Society. His goal was to raise $24,000 he’s pretty close at $15,657. I would not be surprised if he raced again just to get to his goal. He is that kind of guy.

So a weekend away certainly added to the budget, but I don’t regret it at all. I also had a few other unexpected expenses. Last months water bill was double the usual! Why? Well it was A BLOODY LEAK. Under the concrete floor of the garage. Re routing the line coast $864! Also my laptop seemed to be dying a spasmodic beachball death but a new hard drive seems to have solved things ($173). Cheaper than a refurbished laptop thats for sure. There’s years left in this baby. Woo! Thanks to husband for perseverance on that one! So many OS installs.

Oh and I went to the dentist : /

So here’s the damage.

Screenshot 2016-02-29 20.34.19

I had to top up the rental property mortgage this month. But that was only 2% of the budget.

Oh and we took on a youth. Yep we have an 18 yr old living with us, they are paying a small contribution towards expenses but really its about helping them get some qualifications (high school GED I guess for those in US). We have free second chance education for anyone under 19 who dropped out of high school. So extra groceries and what not to keep the youth comfy. (Apparently they like the nutrigrains and mac and cheese)

Screenshot 2016-02-29 21.27.09

 

Spending money – yep a large category. It was buying YNAB, a new laptop hard drive and some craft beers. That’s it!

Clothing – I gifted my husband some new undies. No regrets.

Holiday spending – Damn I ate out A LOT on that weekend away. Sometimes cause of family pressure. But it was worth it. I also pre booked some tickets for next months Beerfest getaway.

Restaurants – One Saturday date night at Deep Creek brewery for husband and me plus two pizza nights, one at home and one at a friends for our D & D night.

Bonus month because I ended up doing two weekends on-call for extra monies. (Usually only once a month) So income was up a bit.

Still managed to save heaps despite the speedy month! It feels like even a small amount of discretionary spending easily leads to a budget blowout. $8326 is just such a massive amount of money.

 

I think I just made my first rich person mistake…..

So I have a stock tracker app on my phone and I track stocks online with my brokerage account.  I mean, you check our investments EVERYDAY RIGHT?!

No?Preview

Just me then?

k.

Anyway something wasn’t feeling right, my phone was tracking MELCA (Meridian energy installment receipts wtf) and the price never seemed to change. It was weird. I thought it was just a glitch in the app.  I finally got off my lazy ass and decided to double check, I went to the online share registry and discovered I had actually purchased MEL (Meridian energy ordinary shares).

Anyway the shares are worth $1000 more than whatever the hell I was tracking.

Best one day gain ever.

So there you go, my first ever rich person mistake! Thankfully in my favor!

 

Why I’m not maxing out my Kiwisaver and why I’m not worried about it.

*For the rest of the world Kiwisaver = 401K, retirement fund type thing.

I only put the minimum contribution into kiwisaver. A measly 3% of my income.

ShockHorror

GASP! – but how will you ever save enough to retire?

Well there’s more to retirement than Kiwsaver and there’s some really good reasons to not put all my savings in there.

  1. Can’t touch it till you’re 65. It’s completely locked down for most people. There’s a couple of exceptions, if you are buying your first home (Doh did that before Kiwisaver was even a thing), if you are terminally ill (holy heck hope it doesn’t happen to me before I’m 65) or if you are in a desperate dire “exhausted all your options” financial meltdown.  None of these are scenarios I’d actually like to be in!  I want to retire early so I’m going to need access to my funds from age 45-50 so I can’t have everything tied up in Kiwisaver. This is the biggest downside to Kiwisaver for me, It just doesn’t work for early retirement.

    Supernatural-Dean
    Oh Kiwisaver, why you let me down.
  2. Double contributions doesn’t equal double returns.  Another shocker but let me show you an example. Lets take a 25 year old woman earning $45,000 a year. Here are her projected Kiwisaver returns at the different standard contribution rates using the get sorted kiwisaver calculator.

3%     $244,562 – minimum contribution

4%     $284,560

8%     $444,055

As you can see moving from 3% to 4% doesn’t give you a 33% increase in your final figure. Nor does going from 4% to 8% double the return. That’s because of the magic of the employee match at the 3% rate. Currently employers only match the minimum 3% contribution rate. They will contribute monies equal to 3% of your wages to your kiwisaver account. NICE! 100% return straight away, can’t complain about that.

Another reason why returns don’t double is the way the tax rebate works. If you save $1042.86 annually into Kiwisaver you’ll qualify for a tax credit of $521 which will be added to your Kiwisaver account at the end of every financial year. This is a great bonus to my savings but there’s no increased rebate when contributing higher amounts.

So whats the answer?

The solution for me is to put my money into other investments but in a similar automatic way. Automatic payments on payday shift my money into brokerage accounts and savings accounts safely away from my spendy fingers. I contribute monthly to index linked funds (with no buy in costs or brokerage fee and overall low fees) and these are diversified across New Zealand, Australian and International sharemarkets and I can access them as soon as I’m ready to retire.

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But I keep the Kiwisaver going because the employer 3% match and tax credits are too good to pass up.

So You Want To Buy Some Shares……..On the New Zealand Share market.

 

I’ve noticed that for many of my friends and family buying shares is a mysterious and complicated process. They are more comfortable buying a house than trying to navigate the stock market! Not to mention the fear of losing all their money and the bad reputation shares have as an investment in this country (a hangover from the 87 crash). The irony is over 2.5 million New Zealanders have signed up for Kiwisaver and most will have some component of their retirement savings in the form of shares.

Screenshot 2016-02-21 13.23.10
NZX50 over the last 12 years or so

Choosing stocks yourself can be a difficult task, there is a lot of research available that you have to wade through and buying based on “gut” feeling alone isn’t really recommended. So its no wonder that most of us leave it to the professionals and get lured into investing in managed funds (whether in Kiwisaver schemes or not). The downside is that the purpose of these funds is to make money for the fund manager and they tend to do this by charging you lots of fees that eat into your profits (this is just my cynical view on it!). There is a good alternative to managed funds available, they require little management and charge the lowest fees. They are called index funds and are a very good entry point for investors who don’t have the time or the inclination to get deeply involved in researching companies, tracking balance sheets, following business news and all the other work required in picking your own stocks. They basically mirror the stock market and they are diversified covering loads of companies.

In New Zealand I’ve used Smart Shares and Superlife to buy low fee index funds. The Smart Shares are also traded on the sharemarket.

If you’ve got a handle on index funds and want to spice up your investing life with some individual stock purchases it really is quite a simple process. Its no harder than setting up a bank account or applying for credit. Here is a little information to help you get started and familiarise yourself with the process.

  1. Set up a brokerage account – This is the hardest part, if you are already with a bank that offers the service then its a bit easier. Basically you need to have verified copies of identification (e.g passport, drivers license signed by a justice of the peace or similar), a copy of a bank deposit slip AND proof of address (e.g a govt letter, council bill, power bill with your name and address). Gathering these is easy but it takes time and is a pain in the ass.
    You’ll also need to figure out your tax witholding rate. In NZ all the taxes are collected as dividends are paid out so the only obligation you have is to keep your witholding tax rate up to date. How handy is that! And no capital gains taxes for most investors (you have to be acting like a real bad ass day trader to attract the IRD’s attention, if you’re buy and hold you’re sweet).
    Now you’ll be asked to open a brokerage bank account, this is where you’ll put the money used for buying shares and it’s where the cash will end up when you sell shares. You can even have your dividends paid directly into this account (much better than having to deal with cheques). I’m with ASB securities, I’ve found them pretty chill to deal with. There are other brokerage companies that offer the same services, so do some research. You can start the application process online.ASB_Securities___Share_Trading___Home
  2. Common Shareholder Number CSN – You’ll be assigned one of these numbers after you sign up for a brokerage account. It’s how they track which shares you own. It’s your unique identifier. It will be sent to you old school styles in the mail. You’ll need to keep this in a safe place.
  3. Faster identification number FIN – You’ll also be sent a FIN. This is like your pin number for trading, 4 digits and easy to remember….maybe. Actually keep this in a safe place too. Again this will come in the mail.Other fun things to know!

The share registers (places that keep track of what shares you own) in New Zealand are Computershare and Link Market Services. Different companies use one or the other for taking care of the shares. You can get logins for both companies once you have a CSN (Common Shareholder Number) and they will send you snail mail or you can sign up for emails. They will send you mail every time you buy and sell shares letting you know your holdings. They keep records of dividends too.

OK I have a brokerage account now what?

  1. Put money in your account! – You need cash to buy those shares so set up some payments and get saving.
  2. Pick a stock – Once you’ve done your research and you are ready to buy you’ll need is the companies stock code. e.g. Auckland International Airport is AIA.
  3. Click on the buy button. – Somewhere on your brokerage site will be a button to buy, all you need to do is find it. Keep your stock code handy and enter it on the buy screen.Buying shares online
  4. What’s your price? – Buying shares is kind of like an auction, you decide what price point you want to buy at. In a way you are saying to the market how much you think the stock is worth. So you can put a limit order in for slightly less than the share last traded at to grab a discount. You can put a limit order in for any set price, you get to decide! However someone has to be willing to sell the shares at that lower price. If no one wants to sell their shares your order may sit there for a while.
    The other option is to buy at market. Your order will go for the current price offered by sellers. This is a faster way to buy.Place_an_order_-_ASB_SecuritiesThe opposite applies when you come to sell. You can set a limit sell order to make sure you get the price you want or you can sell at market.
  5. HANG ON, WAIT A MINUTE!How many shares should I buy? Well that’s a good question. What’s your budget? Lets say you have $3ooo. You can simply divide the $3000 by the share price and you can get an idea of how may shares you can afford to buy. Most brokerage accounts in NZ also charge a $30 fee (OUCH!) for each transaction. So you’ve got to take that into account. Buying only $300 worth or shares and paying a $30 fee doesn’t make much sense. Your share would have to increase in value by 10% to recoup the brokerage cost. If you can save up $3000 it makes the fee only 1% of the transaction, a much less painful figure.
    $3000 minus $30 fee divided by share price….. gives you the number of shares you can afford. If you set a limit price you know exactly what you are going to pay. If you set a market price you might want to make sure your brokerage account has a little cash buffer to account for any price movements.
    However that’s not all you have to consider. There is a minimum limit, you can’t just buy 1 share here and 2 shares there.

     

    Minimum purchase amounts for Shares on the NZX.

    2,000 Where the price does not exceed 25 cents

    1,000 Where the price exceeds 25 cents but does not exceed 50 cents

    500 Where the price exceeds 50 cents but does not exceed $1.00

    200 Where the price exceeds $1.00 but does not exceed $2.00

    100 Where the price exceeds $2.00 but does not exceed $5.00

    50 Where the price exceeds $5.00 but does not exceed $10.00

    25 Where the price exceeds $10.00

    e.g if a share price is $1.23 you would have to buy 200 shares for $246. If the price was $8.45 you have to buy 50 at a price of $422.50. Easy! Its just a little bit of basic math. For the most part you’ll probably want to buy parcels of shares larger than $1000 to minimize the impact of brokerage costs.

  6. Ok I’ve set a price and number of shares – Sweet, confirm the order and sit and wait…. if its successful you’ll get an email confirming the purchase. You’re the proud owner of some shares! Or maybe the offer will be too low and nothings gonna happen. If you really believe that the price you are offering is fair just sit and wait the marker may move and meet your offer. Orders made via ASB securities are valid for 30 days and the price may just drop to where you want it. You can amend your orders, cancel orders, create new orders at anytime so don’t panic.
    I hope this post has given you a little more confidence and given you some insight into just how easy it all is. At the very least maybe I’ve demystified it a little. There are plenty of optionS out there for you to get exposure to the share-market without doing it yourself but its easy enough to give it a go. Having a few percent of your total investments in individual stocks that you picked yourself makes it that much more interesting and satisfies my desire to meddle. I leave 98% of my investments alone but I can buy and sell my pet companies, feel like I’m doing something for my future without jeopardizing the majority of my investments.