Buying a house when you have shares

[rayonline]

Just a hypothetical question. Shares, perhaps has a return rate of 10% PA not including dividends in the long term spread out. Mortgage has a interest borrow rate of around 6.5%. What is your advice to people who have some shares and is going to buy a house to live in? One could sell the shares and knock of the mortgage faster althou one could argue the return rate on shares an be higher. There is also risk involved with a mortgage if you prolong it ie if you get made redundant also if you knock off the house you can then put savings into shares and rebuild up again.

Your thoughts?

[dingoNZ]

Well it depends on your circumstances. If you have a 300k mortgage and paying 6.5% on it and only 30k of shares you'll be paying ~$17,000 in interest (assuming you are paying the principal off) where if you're earning 10% on the shares you will make $3,000.

I know some users here have revolving loans which they use to invests in the stock market for high dividend paying stocks as from my understanding it can be deducted for taxation purposes. I'm sure someone will explain in here :)

[Harvey Specter]

1. Sell shares,
2. buy house,
3. get a loan plus a separate unutilised revolving credit account (upto your full 80% LVR limit)
4. use revolving credit account exclusively for the purchase of shares and other income generating investments
= interest on that separate revolving credit account becomes tax deductible

* this post does not constitute tax advise. Please seek psychiatric help if you choose to rely on it.

[minimoke]

Couple of things at play here. Increase in value of capital, income and expenditure.

Unless you live in Christchurch or Auckland there may be limited opportunity for capital growth in a house - especially if you take in maintenance etc costs. Where as you would expect your share portfolio to increase in value.

Teh dividend yield will in some way go towards paying the interest on your mortgage. the money you would have paid in mortgage interest then goes into paying down debt for an immediate 10% return (10% less tax = 6.5% interest to be paid approx)

In the event of redundancy you will need access to cash. Either through a revolving mortgage facility. Or perhaps shares that can be immediately sold off.

[Aaron]

Have a look at Birmanboy’s thread under “Investment Strategy”> “Folly or Fortitude”. This is the same question asked in a different way.
A question I have pondered myself though many times. I can answer this better once I become the first ever person to be able to reliably predict the future. If you can guarantee a 10% (non-taxable) capital gain plus dividends it would be a no brainer. Keep the shares although you might want to look at how you might structure things to make the interest tax deductible. But there is no guaranteed 10% return. There is a guaranteed 6.5% saving on interest costs.
Debt equals risk.
My opinion would be that I have no idea for your situation as I don’t know much about the size of the loan your age etc etc. but I would tend to sell the shares and pay off the loan but keep the line of credit open and wait until an obvious bargain shows up. My personal (and so far incorrect) view is that the GFC2 is just around the corner and I will borrow against property to buy shares if they become a bargain, assuming I am intelligent/brave/lucky enough to recognise a bargain in a time of turmoil. Keep in mind I am poor, older and have a terrible track record of investing.

[Schrodinger]

Good advice in here. It depends on your situation.

One of my favourite excel models is the one for mortgage costs and it really opens your eyes when you stretch this to 30+ years. If you have sound performance investing outside of housing it will then entirely depend if you are married/single and maybe have the choice to live without a mortgage. Of course this will depend on the missus and her patience levels. You do not have to own a house and have a huge mortgage. Much more flexibility if you are single.

A simple observation is that paying the bank huge interest costs over 20+ years for a large asset that is by some estimates 30%+ overvalued is not a smart move. Other posters here have said put this on your RC facility and pay 6.5% which is more attractive than ML lending. You can run the various scenarios in an Excel model and compare what you potentially return over 20+ years. I recommend this as it can get your thinking straight.

A general observation is that the higher the quality the asset/investment the more impact this will have on your long term success. So focus on investing in things that are good companies/investments and you should be set for the future. Some investors on these forums are pulling 20%+ PA over more than 10 years so it definitely is achievable.

Just my 2c.

[Snoopy]

A general observation is that the higher the quality the asset/investment the more impact this will have on your long term success. So focus on investing in things that are good companies/investments and you should be set for the future. Some investors on these forums are pulling 20%+ PA over more than 10 years so it definitely is achievable.


Over 20% pa for ten years straight? That is equivalent to multiplying your wealth by a factor of more than 6 over ten years. There are some here with bravado who might make you think that they are doing this. I would say they are presenting selective information. 20% over one year on a broadly based portfolio is very achievable in the right market conditions. Doing that for ten years plus on end, I would say is impossible using 'good companies/investments', (another phrase for Blue Chips).

I think you would need a lot of leverage and luck to get 20% pa consistently over the market cycle. You would probably have to invest in spec shares and takes lots of risks to do it. Leverage you can maintain. Luck runs out. That's the problem.

There are some here I am sure who have made 20%+ per year for five years on an 'emerging portfolio'. I reckon that if they stick to those same tactics there is a fair chance they will have lost all of their investment funds by the time the investment clock ticks over ten years. You can claim you are successful and still go bankrupt. Ask David Ross and those whose fortunes he destroyed. Claiming way in excess of market returns with a large pot of capital over a long period of time is what gave his game away in the end.

The lesson: be realistic with your long term investment targets.

SNOOPY

[IAK]

Depends if you live in Auckland or the provinces.

[Winston001]

I've been buying (and generally holding) shares for 30 years. It has been enjoyable but not particularly profitable.

In the same period I have watched relatives friends and clients who have never been near a university, quietly and modestly working hard buying houses and/or farms. They have never considered the share market because they think it's for clever people.

They have been much wiser in terms of wealth and also in terms of lifestyle. It is humbling to reflect upon.

Don't know if this helps but if I did it again, I'd invest less in shares, more in property, and always pay down debt. Seen too many broken marriages and bankrupts over the years.

[Schrodinger]

Over 20% pa for ten years straight? That is equivalent to multiplying your wealth by a factor of more than 6 over ten years. There are some here with bravado who might make you think that they are doing this. I would say they are presenting selective information. 20% over one year on a broadly based portfolio is very achievable in the right market conditions. Doing that for ten years plus on end, I would say is impossible using 'good companies/investments', (another phrase for Blue Chips).

I think you would need a lot of leverage and luck to get 20% pa consistently over the market cycle. You would probably have to invest in spec shares and takes lots of risks to do it. Leverage you can maintain. Luck runs out. That's the problem.

There are some here I am sure who have made 20%+ per year for five years on an 'emerging portfolio'. I reckon that if they stick to those same tactics there is a fair chance they will have lost all of their investment funds by the time the investment clock ticks over ten years. You can claim you are successful and still go bankrupt. Ask David Ross and those whose fortunes he destroyed. Claiming way in excess of market returns with a large pot of capital over a long period of time is what gave his game away in the end.

The lesson: be realistic with your long term investment targets.

SNOOPY

Think of it this way as KW again pointed out: a couple of 10-30 baggers, a mixture good stocks paying 5% div and the other broad portfolio pulling 10-15%. Definitely agree doing this over 10 years you would be in the elite 0.001%.

[Baa_Baa]

Having a mortgage myself, I find that an Offset Loan works well for me. I'll get back to this shortly.

Using revolving credit, to buy shares, doesn't excite me as it's leveraging debt, in your home, from which debt servicing which must be deducted from earnings elsewhere, and is therefore subject to the risk of not making sustained offset gains, which multiply expenses, or losses. Debt leverage works until it doesn't but when it doesn't it can eliminate months or years of gains very quickly, depending on how nimble one can be.

I don't want to sell my shares to pay off mortgage debt either, as it's a hobby as much as a long term earnings and capital gains strategy. But with an Offset Loan, I can link my cash management account, as well as other savings accounts like for example, my own, my childrens, and my tax provisioning account, which offsets against (reduces) the mortgage principle. Because I choose to pay a fixed amount monthly, the savings on interest accrue against principle on the mortgage, which grows equity. The trade-off is I don't earn interest on any of the linked savings accounts. I bank with Westpac.

Interestingly no one seems to mention their cash accounts, but I treat mine the same as my shares, maintaining the same cash ratio to each share holding, depending on my view of market risk. So there's always a small pile of cash which my offset loan can leverage against my mortgage. I'm moving quietly now to increase cash as a percentage overall, but that's another story.

I admire that some can achieve sustained share portfolio growth of 20%, and I read their every word. They may not appreciate the value of their wisdom, but I do and appreciate it. In my past few years I've done OK though with +26% overall and +34% this FY, but for me it's been about picking earners, timing entry (and exit), riding growth, selecting carefully a spec, and shooting dogs mercilessly and early. It works for me so far.

You know, if you don't live in AK or CH at the moment, and have a lot of money tied up in property assets going sideways, or down, then it's a dog and should be shot, just like mine, and just like a bad share decision. If you do live anywhere and are struggling to service debt, it's also a dog. You can put a roof over your and your family's head more cost effectively than exposing yourself to opportunity cost, or capital loss and debt .. a triple whammy.

So if I was to try and summarise this, it's taken me a while to figure out how to accelerate equity growth, minimise debt, and maintain cash for investing .. all while suffering a property asset going sideways. I do this by offsetting my cash against my mortgage, trading that off against loss of bank interest. But I'm exiting property if I can find a buyer, it's just not a good investment where I live right now. I also get to enjoy my hobby investing in companies and so far it's working out OK.

I know there's a lot of very clever people here. If they want to share a word of wisdom, I'm all ears.

Cheers
BAA

[Snoopy]

Think of it this way as KW again pointed out: a couple of 10-30 baggers, a mixture good stocks paying 5% div and the other broad portfolio pulling 10-15%. Definitely agree doing this over 10 years you would be in the elite 0.001%.


I wouldn't criticise a smart cookie like KW. Absolutely fantasic what you have achieved KW, although I suspect your list of fiends/acquantances who have done the same is short.

However, I come back to my point of investing in the market for 10 years straight and getting 20% per annum compounding return.

KW said
"My NZ portfolio averaged 23% per annum over 7 years."

"Havent really tracked my Aussie one, but it would be similar from 2009 to 2015 (it was 23% from August 13 to April 14)"

None of those periods cover 10 years, even if we give KW the benefit of the doubt about 'not really tracking' the second one. Now if KW is one of the sharper tacks in the box (a one in 1000), all we have to do is find someone even sharper to take out the ten year prize. Good luck in finding them. Meanwhile you consider that it is still realistic for the average Joe to benchmark KWs returns as not quite good enough?

SNOOPY

[Snoopy]

I genuinely havent tracked it, i'm pretty lazy like that. Only started a spreadsheet August 2013, then stopped updating it in April when i moved back to NZ and removed a chunk of money from it.


Given your returns on the market, I am not going to argue that you made the right allocation of your time between 'doing it' and 'monitoring it'. All you need to know is that by doing whatever you did you outperformed the market by quite a bit. Calculating exactly how much the outperformance was is probably not a productive use of your time.



The original NZ one was easy because i put in $30k and took out $125k after 7 years - even i can do the maths on that. I Tripled funds under management from 2000 to 2005, and Quadrupled funds again from 2005 to 2011 (so incl GFC years) but both periods included continual cash contributions so havent broken those out.


You think it reasonable to take the difference in cash balance between the start and the end of the operation as your gain, while ignoring 'contual cash contributions made during that time? Really? Come on KW, you don't really believe that's the right method.

I can see how it might have happened though. The majority of your gains were market gains so you didn't think tipping in a few grand here and there along the way was material. But small contributions compound. So your 22.6% average gain (yes I did check your maths :-) ), may end up being only 21.4% when the time value compounding effect of those contributions are taken into account. So with rounding error your compounding performance goes down by a couple of points. This is precisely the kind of thing I was meaning by selective memory. Sorry to use you as an example of something we all do (even me) to some extent. But all this getting away from the original point I was trying to make.

The fact that an investor achieved a 20% compounding over 7 years when the test period was 10 years does not give that investor 7/10. This is because all of the investor's capital is subject to market risk every year. The point I was trying to make here is that statistically that if an investor earns 20% on their portfolio in one given year -a figure that I think that at some point many of us have achieved- this does not mean that it is equally easy to achieve that kind of return over ten years. In fact the way the maths works, in particular when recovering from 'down' years, I would say that if someone claimed they earned 20% compounding over ten years there would be a 99% chance they were misguided.

SNOOPY

[skid]

As KW says -its all about timing---When I bought into the property market(in Auckland)it was the equivalent of picking up bargains after a market crash--whether those kinds of returns can happen again is doubtful,but having said that--paying off a mortgage is a sure thing in terms of savings--every dollar you save is worth far more when you add in interest savings and tax savings.
If you think you can do as well as KW apparently has-then perhaps shares is for you--otherwise(and lets not forget those who have ended up in the red on shares)you may want to consider going for the safer option(in terms of the mortgage)--of course buying the right house can be as challenging as buying the right shares,but it may be beneficial to note that even KW has bought herself a house.

No matter what your income is--Go down to the bank and see if they will give you a large loan to buy shares---I dont think so...

[Schrodinger]

Margin lending?

[skid]

Margin lending?

oK now compare that to the terms of a home loan

[Buffett Jr]

A personal story from my experience.

From 21 years old until 26 years old, I scrimped, saved and researched all I could about the stock market. When I was 23 years old I bought my first stocks in NZ and AUS companies. I only had 30-40k to play with. I spent on average 1-2 hours a day purely reading books on investment strategies, reading annual reports, following research analyst reports on companies, following company announcements, etc.

Over a 3 year period, I got about a 50-60% return on my 30k invested. Therefore I turned this 30k into 45-50k or so. Thinking back for the time I spent with all the research, I really enjoyed doing it and increasing my knowledge. I felt I was out smarting everyone my own age because none of them had the knowledge of the sharemarket or companies like I did. If someone brought up in conversation that Auckland Airport was building something new or Ryman Healthcare was building a new retirement village, I knew all about it. When I heard of people buying a first home at BBQ's or through work, all I could think of is that "you are silly to buy now, don't you know that house prices are high compared to average incomes and average rents!" I would happily not buy a property and continue researching my stocks.

However, last year, my fianc'e and I bought an investment property in Auckland. She cashed in her term deposits and I cashed in my shares. A small 2 bedroom place. I was hesitant to be in a cash negative position and it went against a lot of financial advice I had read as a young man. However, we have a property manager, the rent comes in, it takes about 5-10 mins of our time to think about each week and I have more spare time to do other fun things like hanging out with friends, going hiking and cycling, not stressing that the company 6 monthly report is coming out tomorrow or that I'll be out of town on Friday and won't be able to check my stock prices twice each day at precisely 9.30am and 4.30pm every day.

In case you were wondering, the house price has increased our 110k deposit into 190k equity in 9 months time. A 72% return, with minimal time input, no need for any expert investment knowledge and 10-15 hours more free time each week.

I personally think I'd never really seriously invest into shares again. I find property so much easier, less time consuming, less stressful, etc. I do miss the stock market sometimes when it comes up in conversation, but over the last 6 months I've never checked any stock price or annual report since and I couldn't be happier.

Not advice for you, but just my perspective.

[gv1]

You are in at the right time, there is a huge increase in property prices. Years back that was not the case. As for property...recently one of my tenants left with whole lot of rubbish flowing into the streets. Whole place falling into pieces, even though place was renovated 1 yr ago and place managed by a property manager. Tenants still haven't paid $700 water bill.

[Buffett Jr]

You are in at the right time, there is a huge increase in property prices. Years back that was not the case. As for property...recently one of my tenants left with whole lot of rubbish flowing into the streets. Whole place falling into pieces, even though place was renovated 1 yr ago and place managed by a property manager. Tenants still haven't paid $700 water bill.

Where is your property and who is the property manager?

$700 water bill seems like a full 12 months of bills unpaid? Did you not start to question once the first bill wasn't paid?

[gv1]

Property in East akld. sorry can't name them. Tenant had been drip feeding paymt. Odd payments made. Asked P/Mgr number of times if payments have been made, assured that it has been. Reconciled accounts end of last year, spreadsheet sent to the agent. Discovered that P/mgr has not send one invoice to the tenant. Monthly bill $150-$200. Tenant given eviction notice now.

[Jay]

Time to fire the P/Mgr as well by the sound of it gv1

[Harvey Specter]

Property in East akld. sorry can't name them. Tenant had been drip feeding paymt. Odd payments made. Asked P/Mgr number of times if payments have been made, assured that it has been. Reconciled accounts end of last year, spreadsheet sent to the agent. Discovered that P/mgr has not send one invoice to the tenant. Monthly bill $150-$200. Tenant given eviction notice now.Given they said they had been paid, but hadn't even sent the invoices, I would hold the OM responsible. If you are using a big agency, go straight to the top and get it sorted. WHile that would normally be your risk, they should be liable due to incompetence and lying.

[gv1]

Thanks mate. The tenant is also a hard case. P/Mgr also had been having hard time with them.