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  1. #1
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    Default Hypothetically; buying a home or invest in a fund?

    With house prices so expensive now, I also read an article maybe someone sold up in Auckland their family moved to a different part of NZ and was planning to purchase with cash. Then I thought ....

    A) Get a mortgage and drip feed it, then invest the rest into a fund or a diversified portfolio.

    B) Simply rent and invest everything.


    Views?


    Cheers.

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    A few thoughts.

    Renting is becoming increasingly precarious for tenants, ironically partly because of all the new tenancy protection rules, and for most households stability of accommodation is important.

    As a general rule, and absent medium to large increases in interest rates, equity in own home increases over time. Because principal is paid down, house prices rise, incomes rise, expenses go down as children leave home. Rent on the other hand ....

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    Quote Originally Posted by rayonline View Post
    With house prices so expensive now, I also read an article maybe someone sold up in Auckland their family moved to a different part of NZ and was planning to purchase with cash. Then I thought ....

    A) Get a mortgage and drip feed it, then invest the rest into a fund or a diversified portfolio.

    B) Simply rent and invest everything.


    Views?


    Cheers.
    To me, houses work better financially having the least possible equity tied up in them. Your capital increases on the value of the property not your equity... As such houses are a great way to create initial equity but at a point your money works better elsewhere.

    We have 1 rental property left and rent the house we live in. It has worked out pretty well as it's released a nice pile of equity to put into stocks, which have out performed capital growth on the house we would have owned... I say has, as with the current mortgage rates and the abhorrent rent in my area, it is actually cheaper to service a 100% loan with expenses on a house than it is to rent. Something that as a landlord and a tenant, I find absurd. There is no reasonable case I can think of where it should be cheaper to buy a house than rent... As a result I'm currently reviewing our living arrangements.

    Anyway: With low equity, houses can be a good option. With higher equity shares can (if invested well) have a far better return overall. I find the more money you have invested in shares the better it becomes...
    Last edited by t.rexjr; 26-10-2020 at 11:04 AM.

  4. #4
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    Quote Originally Posted by t.rexjr View Post

    Anyway: With low equity, houses can be a good option. With higher equity shares can (if invested well) have a far better return overall. I find the more money you have invested in shares the better it becomes...
    That's what I've been thinking. Modest house 900k instead invested maybe at a 10% return is more than 40k or 50k what it cost to rent.

    I've also questioned about withdrawing kiwisaver to purchase a house.....
    Last edited by rayonline; 26-10-2020 at 12:47 PM.

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    Quote Originally Posted by rayonline View Post
    That's what I've been thinking. Modest house 900k instead invested maybe at a 10% return is more than 40k or 50k what it cost to rent.

    I've also questioned about withdrawing kiwisaver to purchase a house.....
    10% (after tax?) return on 900k is quite a tall ask without taking on a quite high level of risk. There have already been significant rebounds in markets in response to low interest rates. Some of the 900k may need to be put into conservative investments with less risk too. Even 5%, after tax, would encompass a higher than comfortable degree of risk, if you are depending on returns to pay for rent.

    There would also be a risk that in 6 plus years time a new government may have a policy of introducing a CGT on all assets except the family home - and your assets would then be in financial investments and not in an owner-occupied main residence.
    Last edited by Bjauck; 26-10-2020 at 05:25 PM. Reason: Corrected typos etc.

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    Yes, 10% seems rather high. Quality commercial real-estate returns are much lower than that. Those with relatively high risks could rise that high, but I would advise extreme caution especially with residential investments.

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    A 10% return is rather high? A Tall ask?

    I hope you are joking eah?

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    Quote Originally Posted by rayonline View Post
    That's what I've been thinking. Modest house 900k instead invested maybe at a 10% return is more than 40k or 50k what it cost to rent.

    I've also questioned about withdrawing kiwisaver to purchase a house.....
    Without a doubt - if you're in a position of leveraging, then you're best to withdraw the KiwiSaver and move the funds into a house. Few have mentioned the tax implication KS funds have and to the individual at RWT (@ every damn year!! on the fund earnings/dividends and capital gains). There are no tax credits on years where your share investments go negative in a KS fund ; which can be applied to future years gains like in a business. As i've stated many times in other threads, the minimum 3% employer matching to KS is mostly eaten up by management / admin fees. Keep in mind, the reporting of returns by these managed funds are not NET of taxes and fees and it should not be the client that has to figure that out.

    What is compelling is the rules have not really changed in the residential property game. In Auckland people have always said prices for houses were expensive in the 80s, 90,s 2000, and today. As for the person that sold up in Auckland to move to a more rural (small town?) place in NZ, I would say that's not a wise move if you're looking for capital gain. I mean this is not uncommon in the past 50 years and every time, the Auckland property does better (because it's valued more). To take that equity portion out and investing it in shares and assuming the returns net of taxes is going to do better? You got to be kidding me?? Look at all those millionaire homes in Auckland - those that stayed put by not selling for 30+ years will realise the largest tax free capital gain.

    A person renting that has proven income should have no excuse to get into their own home. The banks are pushing for all that and you get that leverage benefit. A KS fund won't put you into that position regardless of so and so fund's return is this or that high. IRD loves Kiwi Saver and the more people in it, the more tax they take.

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    Quote Originally Posted by Zaphod View Post
    Yes, 10% seems rather high. Quality commercial real-estate returns are much lower than that. Those with relatively high risks could rise that high, but I would advise extreme caution especially with residential investments.
    Compared to FNZ's NZX50 the last 5yrs annualised return is after tax over a bit more than 14.00%. Many of the Kiwisavers growth funds have said the last 10yrs have an annualised of 10% (before tax and fees possibly).

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    Quote Originally Posted by rayonline View Post
    Compared to FNZ's NZX50 the last 5yrs annualised return is after tax over a bit more than 14.00%. Many of the Kiwisavers growth funds have said the last 10yrs have an annualised of 10% (before tax and fees possibly).
    During that period one year deposit rates have dropped from close to 4% to close to 1%. As with real estate price increases, much of the impetus behind share price rises have come from falling interest rates. How much further can term deposit rates fall?

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    Quote Originally Posted by Bjauck View Post
    During that period one year deposit rates have dropped from close to 4% to close to 1%. As with real estate price increases, much of the impetus behind share price rises have come from falling interest rates. How much further can term deposit rates fall?
    Term deposits have been low for many many years and doubt it's been a major factor in keeping house prices afloat. What I see is a transition from those renting, to those getting into owning their own home.

    A large part of keeping the share markets up is cheap, low interest loans. Look at the bond market in the past 5+ years, and with COVID, it's essentially wiped it out. I don't know how financial advisors (or Kiwi Saver fund managers) today would advise to keep a % proportion of their investment into bonds or fixed term deposits that yields negative in terms of inflation. More importantly, the risk factor is enormous. Banks don't like to lend to business ventures or large scale real estate projects so instead, it's been the central banks that have supported them.

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    Quote Originally Posted by SBQ View Post
    Term deposits have been low for many many years and doubt it's been a major factor in keeping house prices afloat. What I see is a transition from those renting, to those getting into owning their own home.

    A large part of keeping the share markets up is cheap, low interest loans. Look at the bond market in the past 5+ years, and with COVID, it's essentially wiped it out. I don't know how financial advisors (or Kiwi Saver fund managers) today would advise to keep a % proportion of their investment into bonds or fixed term deposits that yields negative in terms of inflation. More importantly, the risk factor is enormous. Banks don't like to lend to business ventures or large scale real estate projects so instead, it's been the central banks that have supported them.
    True, falling interest rates in general have been providing the fuel behind asset price rises. How much further will they fall and for long they will remain rock bottom are the questions.

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    Quote Originally Posted by SBQ View Post
    Without a doubt - if you're in a position of leveraging....
    I'm not so much in leveraging. Don't particularly like a bank looking over your shoulder for your life.

    Re: one's own home which they live in it even if it was after 30yrs and all that capital gain. You still have to live somewhere right? Most people may not wanna sell up and move to Invercargill. If they downsized and live in very much the same area they get something but smaller units generally cost more per sqm right. I suppose they could do a reverse mortgage or pass it down as an inheritance but they can't take it to the grave with them. Bc when you are living in it you cannot release the equity, you cannot sell a corner off and buy some food or go on a nice holiday with it ....

    So that leaves house investment with at least the 2nd home they don't live in it. Which I get if they get rental income, and they get CGT while they pay mortgage and continually leverage and leverage ....

    Maybe if they invest that 30yr in their (1) family home and then sell up and simply rent?
    Last edited by rayonline; 27-10-2020 at 07:25 PM.

  14. #14
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    Quote Originally Posted by rayonline View Post
    Bc when you are living in it you cannot release the equity, you cannot sell a corner off and buy some food or go on a nice holiday with it ....
    See Heartland thread
    For clarity, nothing I say is advice....

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    Quote Originally Posted by peat View Post
    See Heartland thread
    Would you happen to have a link or know which section of the forum it is in? I had a look on this section and the Investment Strategy section and haven't found it yet. I don't imagine it would be on the NZX section. Also ran a search for Heartland.

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    Quote Originally Posted by rayonline View Post
    Bc when you are living in it you cannot release the equity, you cannot sell a corner off and buy some food or go on a nice holiday with it ....
    Any reason why you can't increase your mortgage while living in it?

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    Quote Originally Posted by t.rexjr View Post
    Any reason why you can't increase your mortgage while living in it?
    A tempting strategy, and one that’ll probably appeal to those sat at home in front of their screens in their quarantine bubble; borrow at historically low rates, invest in stocks, make loads... meanwhile the world burns, tax income plummets, countries and businesses (trumpsies) can’t afford to pay back the loans, banks call in their retail loans, only way of repayment is to sell stocks, market crashes.... 1929.

    Of course no chance of that happening again, we’re much smarter thanks to the internet, really helps keep things in perspective... lol

  18. #18
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    Quote Originally Posted by rayonline View Post
    Would you happen to have a link or know which section of the forum it is in? I had a look on this section and the Investment Strategy section and haven't found it yet. I don't imagine it would be on the NZX section. Also ran a search for Heartland.
    https://www.sharetrader.co.nz/showth...Group-Holdings

    Im just mentioning it coz they provide reverse mortgages which are a way to release equity in your house... I keep this notion as Plan B if I run out of money.
    For clarity, nothing I say is advice....

  19. #19
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    Quote Originally Posted by bullfrog View Post
    A tempting strategy, and one that’ll probably appeal to those sat at home in front of their screens in their quarantine bubble; borrow at historically low rates, invest in stocks, make loads... meanwhile the world burns, tax income plummets, countries and businesses (trumpsies) can’t afford to pay back the loans, banks call in their retail loans, only way of repayment is to sell stocks, market crashes.... 1929.

    Of course no chance of that happening again, we’re much smarter thanks to the internet, really helps keep things in perspective... lol
    It's not going to happen again because the controls today are far more than in the pre 1930s. It was not too long ago in NZ (circa 1970s) that in order to buy a car overseas, one needed "overseas funds" to make the purchase. Today, all the economies in the world are linked. The actions of 1 place, say the RB or NZ printing $ will not go unnoticed abroad. Capital flows easily around the world which is why gov'ts have implemented draconian measures to deter movement of funds (ie. AML, FMA, OECD's CRS, etc).

    As for borrowing funds to invest into equities ; i'm unfamiliar if this is common practice in NZ. Who would sign away their principal dwelling on a gamble that stocks will rise? It's more likely they will pick the wrong shares.

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