Rent - Don't buy

[Longtack]

Board with a retired middle-class woman who wants a bit of company and income, or a lover. Both will provide stimulation.
Little mtce, no depreciation, no rates etc, all equity fully invested.

[Sauce]

Ahem...

Longtack: Not only do woman depreciate, but depending on the model the maintenance and rates would equal even the most demanding property portfolio.

Regards,

Sauce [}]

[Sauce]

Re: renting vs buying

I have a few rental properties, but rent myself. The house i am renting is worth around a million dollars, yet it only costs me $700pw to rent. The landlord pays for gardening and to have the swimming pool cleaned.

To purchase this home and have enough equity in it so that my interest costs were as low as $700pw I would have to divest most of my growth assets. Obviously, this would be a backwards step.

I think the argument for renting vs buying is fairly straight forward, but depends where you are in your personal investment cycle. If you are youngish and in a growth phase, it makes more sense at the moment to rent and put all your equity into growth assets like positively geared rentals and stocks. Especially renting in the middle/upper end of the market - you get more lifestyle for your money than you could possibly achieve by purchasing. With capital gain less likely over the next few years, the case for renting is even stronger. Obviously if rents were to rise back above the cost of borrowing, it would be better to own your home.

If you are at the consolidation stage of your personal investement cycle i.e. looking for lower levels of risk and growth and more cashflow it might be more comfortable to own with a lower level of gearing.

Regards,

Sauce [}]

[Sauce]

From the latest BNZ Monthly Report:




Rents Lag Price Rises Again

For your guide, Statistics New Zealand have reported in the Consumers Price Index that on average rents
rose by 0.7% during the March quarter whereas average prices using REINZ data rose 5.4%. Compared
with a year ago rents have risen 2.2% while prices have gone up around 13.6%. And compared with five
years ago rents have risen just 9.4% while prices have gone up 67%. What is the most probable scenario
from here? Rents rise 58% in the near future or prices flatten out and probably fall. Given the evidence of a
growing oversupply of property it is hard to see an upward rents adjustment in the near future.

[TheBossMan]

I'm about to implement the strategy:

1. Make money in shares (pretty easy to do)
2. Use the profits to buy&hold property. No immediate tax to pay.
3. By the time you retire, leave some for cashflow and convert the remaining into trust-based structures.

Any thoughts?

[CJ]

quote:Originally posted by TheBoss


1. Make money in shares (pretty easy to do)
2. Use the profits to buy&hold property. No immediate tax to pay.
3. By the time you retire, leave some for cashflow and convert the remaining into trust-based structures.

If it is easy to make money in shares, why not keep doing it rather than moving to step two. Likewise if you had reversed the order of 1 and 2 I would ask the same question as you can start both with little money - some would argue you can start property with nothing!.

What is a trust based strcuture. It is a holding vehicle, not an investment structure I would have though. YOu can do both shares and property through a trust. Why wait until retirement to start a trust - you can only gift $27k per year so start young if you want to get Millions into your trust.

[TheBossMan]

I'm an active trader and I doubt I've the discipline to buy&hold. Even if I were to pick good stocks for the long-term, I may be tempted to sell them off too early. So, I'll make short-term gains and use the profits to buy property (defer tax till I retire).

[Sauce]

quote:Originally posted by TheBoss

I'm an active trader and I doubt I've the discipline to buy&hold. Even if I were to pick good stocks for the long-term, I may be tempted to sell them off too early. So, I'll make short-term gains and use the profits to buy property (defer tax till I retire).

I think your strategy is totally sound. Everyone has a different system and if it excites you enough to implement it then thats the most important thing. There are many people who make all the plans in the world and never get there.

I have engaged in a very similar strategy which has been incredibly good. I use income from my work to buy shares which act as my "long term porfolio" or "better than the bank savings scheme" (for tax purposes!) and for the purpose of diversification I have then channelled funds into property investments. If I need to sell shares that have made significant capital gains to allow for the purchase of these properties, then so be it, but for tax purposes they are always part of my long term portfolio.

One of the best things about shares is that you can enter and exit easily so moving funds into property is easy, and if you time things fortuitously you may even be able to get back into the same shares at a cheaper price later on (should it still be a good place to park your money of course).

In regards to an entity structure you should seek expert advice because its hugely important that you get it right and it's generally different for everyone depending on a whole raft of personal variables (age, family, work etc).

I would suggest that c's suggestion of setting up a trust early is a very pertinent point though. He is right that you can only gift 27k per year to your trust, but more importantly you want to lock in all the growth that your assets are providing into your trust (which should at least eventually eclipse 27k per annum by a huge amount).

One of the problems with trusts is that any (paper) tax losses cannot be carried over to be claimed against your personal income and will be locked within the trust (but can still mimimize the trusts tax liabilities of course).

So in the meantime you may want to consider using an LAQC or "loss attributing qualifying company" for your property purchases. This will mean that after expenses such as depreciation you can minimise your personal tax liability.

You will need to way up the long term benifits of asset protection and estate planning against immediate tax releif. And of course trusts also have tax advantages if you are on a 39% tax rate and also if you split income from your trust to each of your family members at lower tax rates.

Trusts can certainly be the perfect vehicle for creating a retirement plan, and as they say "the best time to set up a trust was yesterday" but get advice from a tax/asset planning expert who can look at your situation in detail.

Regards,

Sauce [}]

[TheBossMan]

thanks. I'm already trading under the umbrella of a limited liability company. yep, long-term asset protection and passing the $$ to my kid when I retire is all I'm looking for.

cheers

[duncan macgregor]

There is only one time to rent and not buy. That is if your work place is on the move. Lets take the average over the last fifty years,The price of property has exceeded the rise in inflation . Property can be leveraged very quickly, at lower rates than other investments. You can buy that house, borrow from it, and do whatever. We all know about hidden costs roof leaking whatever, but you get people that buy crap shares as well. Taking into account that property never crashes at the same extent as the share market, makes it a safer investment. It is very easy to borrow against a property set up, so take a look at what you save. If you stick it in the bank you pay tax on interest. If you stick it on your property loan your interest is nil. Set the deal up to pay up or borrow more. Play the markets in the good times with your property money its not a competition both are complimentary its only a case of opening your mind and seeing the opporyunities as they present themselves. macdunk