Negative Gearing

[rmbbrave]

quote:Originally posted by duncan macgregor

RMBBRAVE, the point you miss is you get that gain on a $300000 dollar house on a $30000 DEPOST. With $30000 in a bank deposit how much will you make in comparison. The capital gain on your first year is 100pc on your thirty thousand less the cost of the difference between the rent and the mortgage. Most deals the rent covers the repayments otherwise you paid to much in the first place. If your initial deposit cant make at least 50pc pa then you are doing it wrong. beats shares. macdunk

I understand what you are saying Duncan, but I think when most people talk of "10% capital gain per year" they are talking about the total value of the property not the profit made on their deposit.

I realize that you are very experienced in investing in property and I would very much appreciate your comments on the following situation.


<h5>Like Matty, I too am a resident of Japan and so I am able to borrow money from Japanese banks at low interest rates to buy property in NZ. I have recently secured a 25 year loan for US $120,000 (NZ$162,000) at 1.68% (not fixed). I have to put up 40% (NZ$108,000) of the value of the property myself. If I put up no more than 40%, I could buy a house worth about NZ $270,000.

The interest repayments would be (NZ$162,000 @ 1.68%) $2721 per year. If I get about 7% rental yield ($20,000) and have to spend a third of this on rates, insurance, management fees, etc. ($6,700) then I should be up about $13,300 per year not counting capital gain.

If the capital gain is 3% per year ($8,100) then my yearly profit is $21,400, which would mean my investment of $108,000 is returning 20% per year.

I have not included any one off costs of purchasing a house as I have no idea what they are. I would greatly appreciate any comments on my estimates. Are a 7% yield, a 3% capital gain, and a third of the rent being consumed by rates etc. realistic?

The major problem I see is a fall in the value of the NZ dollar. As the loan has to be repaid in yen a big fall could really eat into my profits from this investment. Given that the $NZ is at record highs ( US$ 0.74) a big fall is probably the most likely scenario. I have 6 months to decide whether to go ahead with the loan. Should I go ahead with it?

All comments welcome.</h5>

[dinosaur]

rmbbrave

The reason you are only showing a 20% return is that your gearing is wrong. A 40% deposit is too much IMHO. 10% or 27k on a 270K property would be the norm.

At 40% deposit you may not be negative geared.

Your third on rates, insurance and fees could probably be lowered to about 4k.

My biggest concern would be your XR exposure, but weighed up with the extremely low interest rate it would be worth the risk. As the XR is cyclical, you would just have to time your exit.

[rmbbrave]

Thanks very much for your comments Dinosaur,

The bank has set the 40% deposit so I can't change that. I am a non-resident for tax puposes in NZ so I only pay 2%. I don't even file a tax return so there are no tax advantages in this for me.

[duncan macgregor]

RMBBRAVE, A forty pc mortgage defeats the purpose. Never have rental properties over seas. I am not up with the play in international money play so wont comment. Keep your business where it is a hands on play or expect complications. The nz dollar will drop but then i think the yen will do the same because of china, but then as i said i am not playing that game, and might be comepletely wrong. macdunk

[Cooper]

rmbbrave.... could you not hedge against your expected forex losses? I wouldn't have the first clue about how to do it, but I'm sure it can be done.

[Bling_Bling]

If you have assets in Jap and NZ, you are naturally hedged.

[Cooper]

Undoubtedly Bling, but I think Rmbbrave is contemplating buying a house using cheap Japanese borrowing, and is concerned about losing money on the forex should the NZ$ reduce against the Yen. If the house purchase is a large part of his wealth he might be better considering a forward forex contract (or whatever its called)...

[skinny]

I did a similar thing a few years back, borrowed Euros (@NZ 46, int. rate 4%) for a NZ rental property (coastal & cost $150k [], gross yld 9%) that my brother keeps an eye on. Like your sitn. bank required 40% deposit which is fine if you are an overseas resident for tax purposes and can't claim NZ tax losses. In addition, should you return to NZ and wish to withdraw equity/increase gearing you can set up a Loss Attributing Qualifying Company (LAQC) for this purpose. See http://www.landlords.co.nz/article2254.html

Like Duncan I reckon NZ housing a good investment for the longer run, however, IMO Rmbbrave the stars are not in your favour at the moment at all. Over the next few years the NZ housing market could show negative real returns and its quite likely the NZD will fall against the USD -- if it does swings of over 30% are not unusual by historical standards. Have you factored such a fall into your sums? My advice is to wait out the next few months to see which way the wind blows. If you can, I would also consider purchasing property in Australia where the downturn in the property market is more advanced, e.g. median house prices in Melbourne are cheaper than those in Auckland now I believe.

Edit - here is a graph to ponder a colleague of mine did a week back. It shows latest figures (2004q4) for NZL house price growth was strong relative to many countries, no suprises there. However, when house prices are measured relative to income growth since 1997 its at the bottom of the pack (followed by the US interestingly enough for the bears here). Of course this is not to say that house prices will remain rosy - levels and interest rates matter too and that is why I am less optimistic than the graph alone suggests. It does perhaps show though that the NZ upswing has not been as over-cooked as in some other countries, esp. the UK and Ireland.

[Halebop]

Great graph Skinny. Thanks for posting. I've been looking for something akin to this for the last couple of weeks.

I'd love to see something like this that tracks performance for a decade or more if anyone is in the know?

No surprise to see so many baby-boomer economies in double figures. I might make this weeks pet project to discover information on inheritances. I wonder perhaps if the boomers are spending their parent's money as was anticipated by demographers in the 90's? Consumption seems out of wack with performance in a number of areas.

[rmbbrave]

Thanks very much Skinny and Duncan,

You have certainly given me something to think about.