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Topic # 223132 14-Sep-2017 10:52
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Why the preference? I don't follow the trend that much. Is it because houses is what one is more familiar with, just hold and do the maintenance thing.  Is it how you can continually leverage and offset.  I don't like to have a life of debt but that's just me .... When we hear about property it isn't so much about business property development or enhancing right it's more like buying a house and leaving it unchanged to appreciate.  

 

Business would generate more expansion, more jobs etc ... And not just business ventures, it can be funds, shares, indexes.  Also no debt to service.  


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  Reply # 1865183 14-Sep-2017 12:07
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I'd say it's a risk thing.

 

Houses are a predictable, safe investment that rarely lose value - and usually bounce back even if they do

 

Businesses can rapidly, permanently and unpredictably lose value.  What if you'd invested your life savings in Kodak, or any number of small companies that disappear off the map every day?


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  Reply # 1865191 14-Sep-2017 12:22
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It is also a value thing. I have a friend who has started buying houses. She also runs a family business and doesn't have a lot of time for other activities. But she can manage a house or two. She has a long-term tenant in one place who covers her costs since that place has been paid off. She lives in her own home. She recently bought a third one and discovered that it is a money tree as short-term accommodation for backpackers and fruit pickers. While they pay her mortgage it also appreciates. That is a win-win, but there is no way should could ever afford to do it in Auckland. 

 

 





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  Reply # 1865224 14-Sep-2017 12:50
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In the past it's probably been a risk thing, but with rampant price growth there has been a surge in speculation. People with equity have been able to leverage the price growth with no cash down and see their asset base grow faster than the share market, with major tax advantages.

 

But it's unproductive investing (other than new build, of which there is minimal). As a country, NZ would do far better to encourage productive investment - and the property market is not as safe as people think it is, or has been in the past.





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  Reply # 1866306 14-Sep-2017 15:27
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shk292:

 

Businesses can rapidly, permanently and unpredictably lose value.  What if you'd invested your life savings in Kodak, or any number of small companies that disappear off the map every day?

 

 

 

 

Yes but with a diversified portfolio.  One could also get a bad house ie leaking or a bad tenant.  One would never put "life savings" into just one company.  Just look at the S&P 500 Index over the Great Depression.  




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  Reply # 1866310 14-Sep-2017 15:31
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ajobbins:

 

In the past it's probably been a risk thing, but with rampant price growth there has been a surge in speculation. People with equity have been able to leverage the price growth with no cash down and see their asset base grow faster than the share market, with major tax advantages.

 

But it's unproductive investing (other than new build, of which there is minimal). As a country, NZ would do far better to encourage productive investment - and the property market is not as safe as people think it is, or has been in the past.

 

 

 

 

Yes, if someone put funds into a big company (shares) it generates jobs etc.  What does a landlord do other than his/her accountant, property manager, tradesperson, the bank.  Most are not going to develop the property.  

 

 

 

I have a friend overseas who's looking at coming to Auckland for work and is OK with paying $400 for an apartment a week.  


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  Reply # 1866352 14-Sep-2017 16:33
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Its funny how everyone points out risk as being the reason, yet ask any investment adviser and they will tell you property is inherently riskier than the sharemarket. And over time, the sharemarket shows a greater year on year return than property. 

 

Sure you can pick out the crazy increases in some markets over the last few years, but conversely property from 2008 - 2012 or so was awful, especially compared with the sharemarket. 

 

I would say the reason why people like property is a) access - you can go and but a property quite straight forward as you probably already own one and know how to do so. b) and probably more importantly is leverage. Up until recently if you had an extra $80k in equity in your own home you could borrow the remainder from the bank for a decent investment property. You might rinse and repeat this a few times in a rising market and end up with a portfolio of 2-4 properties (the norm for most investors). 

 

It is the leverage that makes property so risky though. Consider you have rinsed and repeated a few times as property prices are skyrocketing. Because you are leveraged to the maximum amount your rents are barely covering the mortgage. But its ok as prices are rising and you are getting capital gains. it is at this point you are a speculator and not an investor. An investor would have done risk/reward calculations, factored in the property market stagnating or even falling, and vacancies. These are the long term investors and play a useful part in the property market as not everyone can own a home or even wants to.  

 

Speculators rely on a rising market and this is where people get caught out. 

 

Getting back to shares, leverage is rarely an option for purchasing shares (usually only available for bigger players). So your $80k in extra equity from your house buys you $80k in shares. Lets say you get a dividend of 10% per annum and because it is a good company with strong prospects its share price rises by about 5% per annum. After 5 years your $80k investment is worth ~$140k which would be a great result from shares with an approx. annualised return of 15%

 

Looking at the same equation from a property market point of view, your $80k purchased you a $400k investment property. Lets say for argument sake you purchased a GREAT property in an EXCELLENT yielding location. Your property earns you a yield before expenses of 8%. Take off interest costs, rates, insurance and maintenance, you're probably breaking even. But that's ok as property prices are skyrocketing at 10% growth annually (only ever happens for a few years, but for this example why not)Your $80k investment is now worth ~$570k ($650k less the $350k you borrowed. WOW. Except you kept on buying property with the extra equity. Now there is a slump in the market and even though property prices aren't going backwards, you have no capital gains to fuel your ongoing drive. And now interest rates have gone from 5% to 8%. Where you were breaking even you're having to top this up out of your own income. Then theres a couple of vacancies as the market is in a slump and some landlords have dropped their prices. Now you need to sell one or two of your properties, probably at less than you paid for them to reduce your repayment costs. But the bank is not happy with this as you are now extremely highly leveraged and they don't think you can pull out of it. They will work with you over time (usually a year) to help you get out of the situation, but eventually they call in the loans and you have to sell everything including the family home. Your $80k investment now left you bankrupt. 

 

Whereas the $80k you invested in the sharemarket, because it wasn't leveraged, worse case scenario is the company goes broke and the investment becomes worthless. Usually though, the shares are still worth come c on the $.

 

So, to wrap up, for the casual investor, property is one of the riskier investments, but its easy to get into, the rewards can be insanely high, they see all of their friends and work colleagues doing it, and think they will too. Personally I think it comes down to nativity and greed.


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  Reply # 1866375 14-Sep-2017 17:00
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Simple. Tax.

 

 

 

Property is more or less tax free on your gains if you hold it long enough. Nothing else is I don't think.






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  Reply # 1866384 14-Sep-2017 17:14
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rayonline:

 

shk292:

 

Businesses can rapidly, permanently and unpredictably lose value.  What if you'd invested your life savings in Kodak, or any number of small companies that disappear off the map every day?

 

 

 

 

Yes but with a diversified portfolio.  One could also get a bad house ie leaking or a bad tenant.  One would never put "life savings" into just one company.  Just look at the S&P 500 Index over the Great Depression.  

 

 

Good point.  Leverage is the other big plus for real estate.

 

But, with the recent poor performance of managed funds and scandals like Blue Chip, it's easy to understand why people prefer bricks and mortar.  I'm not saying it's a good thing - I'm sure NZ's economy would be far better if all the "mum and dad" investors invested in non-real estate


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  Reply # 1866500 14-Sep-2017 20:27
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rayonline:

 

Why the preference? I don't follow the trend that much. Is it because houses is what one is more familiar with, just hold and do the maintenance thing. 

 

 

Having been involved in business all my working career, I can assure that to make good profits requires dedication and hard work.

 

OTOH property has been like bitcoin - free money for believers. Helped by insane government policy (for 30 years - so not limited to the National party)


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  Reply # 1866567 15-Sep-2017 00:24
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Geektastic:

 

Simple. Tax.

 

 

This^^^^

 

But also because assuming that your outgoings for owning a rental property. (Interest on rental property mortgage + rates + insurance + body corp fees + maintenance & repairs + management fees etc) are more than the rent that you receive. Your rental property "business" will be making a loss. So you will be putting in some of your personal income to keep it afloat.

 

You are then "negative gearing", Which then means you can then claim back some of your PAYE tax from the government. Because there is virtually no other way to (legally) claim back some of the PAYE tax that your boss has paid on your behalf. This is why buying a rental property is so popular. If you instead get your income from a means that is not working as a employee, (meaning that you don't pay any PAYE tax). Then there is far less of an incentive to buy a rental property and negatively gear it. And if you are in a PAYE job paying over 200K per year (there are lots - just look at central and local government payrolls). You almost certainly will be able to easily afford the increased mortgage payments even if interest rates go up a few%. And you will be able to claim more tax back if they do. Which means that interest rate increases won't be as painful for you as they are for owner occupiers.

 

If you buy shares, about the only expense you incur from owning shares is brokerage fees. And they won't be much if you simply buy and hold.

 

 

 

Another factor is alot of older people would have been burned in the 87 sharemarket collapse, and the finance company failures more recently. And share failures such as Pumpkin patch, Dick Smith, Feltex etc. Yet there hasn't been a major property market crash in NZ in recent memory. The housing shortage also makes a property market crash less likely. 

 

And new investor mortgage lending has to be backed by 40% equity. The banks also typically require even more equity for mortgages on apartments, bare land, houses in small towns etc. So house prices would have to drop by alot to put masses of investors into negative equity. And the banks will also look at the equity in your owner occupied home as well. Imagine you own 2 houses, both worth 1mill each. 1 you live in that is mortgage free, and the other is a rental that has a mortgage for it's full value. Overall you have 50% equity. The value of both houses would have to more than halve to put you into negative equity. And if you are still managing to keep up with the mortgage payments, there is little value to the bank in calling in negative equity mortgages. As the bank will be turning an on paper loss into a real cash loss.

 

If the bank itself gets into financial trouble, and urgently needs more liquid cash. And the bank's only option left is calling in mortgages. Then calling in mortgages with lots of equity is the best bet. As those mortgagees will be able to easily refinance to a different bank. Meaning they will be able to easily repay their mortgages at short notice.






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  Reply # 1866659 15-Sep-2017 08:54
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Aredwood:

 

Geektastic:

 

Simple. Tax.

 

 

This^^^^

 

But also because assuming that your outgoings for owning a rental property. (Interest on rental property mortgage + rates + insurance + body corp fees + maintenance & repairs + management fees etc) are more than the rent that you receive. Your rental property "business" will be making a loss. So you will be putting in some of your personal income to keep it afloat.

 

You are then "negative gearing", Which then means you can then claim back some of your PAYE tax from the government. Because there is virtually no other way to (legally) claim back some of the PAYE tax that your boss has paid on your behalf. This is why buying a rental property is so popular. If you instead get your income from a means that is not working as a employee, (meaning that you don't pay any PAYE tax). Then there is far less of an incentive to buy a rental property and negatively gear it. And if you are in a PAYE job paying over 200K per year (there are lots - just look at central and local government payrolls). You almost certainly will be able to easily afford the increased mortgage payments even if interest rates go up a few%. And you will be able to claim more tax back if they do. Which means that interest rate increases won't be as painful for you as they are for owner occupiers.

 

If you buy shares, about the only expense you incur from owning shares is brokerage fees. And they won't be much if you simply buy and hold.

 

 

 

Another factor is alot of older people would have been burned in the 87 sharemarket collapse, and the finance company failures more recently. And share failures such as Pumpkin patch, Dick Smith, Feltex etc. Yet there hasn't been a major property market crash in NZ in recent memory. The housing shortage also makes a property market crash less likely. 

 

And new investor mortgage lending has to be backed by 40% equity. The banks also typically require even more equity for mortgages on apartments, bare land, houses in small towns etc. So house prices would have to drop by alot to put masses of investors into negative equity. And the banks will also look at the equity in your owner occupied home as well. Imagine you own 2 houses, both worth 1mill each. 1 you live in that is mortgage free, and the other is a rental that has a mortgage for it's full value. Overall you have 50% equity. The value of both houses would have to more than halve to put you into negative equity. And if you are still managing to keep up with the mortgage payments, there is little value to the bank in calling in negative equity mortgages. As the bank will be turning an on paper loss into a real cash loss.

 

If the bank itself gets into financial trouble, and urgently needs more liquid cash. And the bank's only option left is calling in mortgages. Then calling in mortgages with lots of equity is the best bet. As those mortgagees will be able to easily refinance to a different bank. Meaning they will be able to easily repay their mortgages at short notice.

 

 

 

 

I'm not sure how easy it is to claim back PAYE these days. LAQC's were the usual vehicle for doing that and they got canned some time ago. However, what negative gearing does allow is the multiplication of funds.

 

If you have $200,000 to invest and you can buy 2 houses with a $100,000 deposit on each and mortgage finance, you have assets worth $1 million if the equity requirement is 20%. A 10% capital value growth over say 10 years is going to give you assets you can sell for $2m or more, tax free. 

 

That is why. In what other way can you turn $200,000 into $1 million or more, tax free, in 10 years?

 

If there was a pension investment which got you the tax back on what you paid in every year, you might decide to put money in that instead. That would buy shares etc and therefore be investing in more productive assets than 2 houses.

 

Since there is no such thing in NZ (unlike UK, USA etc etc) people here who want to look after themselves when older and can afford it are pushed towards speculating in property. Also if you can buy the properties outright, of course, you can simply live off the rent after setting aside a sinking fund for repairs.

 

 

 

Note of course it's not all beer and skittles. A property market crash will potentially leave you with assets you can't sell or assets you can only sell for less than you owe.






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  Reply # 1867073 15-Sep-2017 20:26
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LAQCs were replaced with look Through Companies (LTCs). The only difference is that both the profits and losses of an LTC are taxed at the owners personal tax rate. For LAQCs, losses were offset the owners personal tax rate, but profits were paid at the company tax rate. So the overall effect was just a small tax increase that only applied in a very limited situation.

 

You definitely can still do negative gearing, everything is claimed for via your personal tax return. There are only limited situations where a LTC is needed to do so. It is all to do with your rental property income Vs expenses. The amount of equity in the rental property doesn't affect it. As you could end up with a mortgage free property that is negatively geared if you have really high expenses from say leaky building repairs. And you can also have a property with 0% equity (bought with 100% finance) That is not negatively geared. If the rent is high enough to cover all expenses including the mortgage interest. (The principal part of your mortgage payments is not counted as an expense in relation to negative gearing)

 

I fully agree as far as gearing in the other sense is concerned - borrowing money to invest Vs only investing money that you already have.






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  Reply # 1867127 15-Sep-2017 22:41
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Why the property investing over business?

 

Property in NZ to this day still one of the best places to get a high return from your money.

 

We were thinking of buying another investment property but figured we will hold off a bit until after the elections. My calculations tell me that even if a new property devalues by 15% over the next 10 years, chances are there will still be another property boom, or two before we are ready to retire. Therefore still an excellent investment to make and something to leave the kids one day.

 

 




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  Reply # 1867975 18-Sep-2017 11:57
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Byrned:

 

 

 

But the bank is not happy with this as you are now extremely highly leveraged and they don't think you can pull out of it. They will work with you over time (usually a year) to help you get out of the situation, but eventually they call in the loans and you have to sell everything including the family home. Your $80k investment now left you bankrupt. 

 

 

 

 

 

 

Is this done at the end of the fixed interest term or when the person has a floating plan?  Or can they do this at anytime?  

 

 

 

PS.  If one is too leveraged but you are still paying the required amounts can they do anything?  


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