Mary Holm: Should I sell up or become a landlord?

At a crossroads between selling up and moving to a better school zone or holding on to the home and renting it out. Photo / 123RF

COMMENT:

I'm at a crossroads. I own a house and have decided to move to a different school zone no later than next year to keep my child schooling with friends and also in a significantly better academically-performing school.

The decision I have to make is whether to rent out my house or sell. The rent I can get if I keep my house — about $530 a week after agent's fees — is much lower than the $620 a week rent I'll have to pay in the school zone.

The rental income won't cover my mortgage payments. Once I allow for landlord expenses and topping up the mortgage payments, plus paying my own rent, I will have to spend about $130 more a week than I do now.

I paid $662,336 for the house in 2017, and based on sales info for my neighbourhood from One Roof, I anticipate that the house will sell for $670,000, out of which I'll have to pay agent fees.

Should I sell, even at a loss, and put the money in other investment options? The risk of defaulting on the mortgage is quite high if I keep the house, as I'm treading water now.
Thanks for your help. Regards, highly-stressed solo mum.

The things we do for our kids! But that's the way it's meant to be.

Some people reading your letter would say something along the lines of: "Stay where you are and send your child to a local school. It's not the school's record, but the home environment that will affect your child's performance."

But that's an issue beyond the scope of this column. And in any case, I understand your desire to keep your child with friends. So we'll set that idea aside.

We'll also set aside the possibility of selling your house and buying a smaller, less pleasant place in the school zone. I assume there simply aren't houses in the right price bracket.

So your options are:

• Sell your house and invest the proceeds outside the property market. The risk is that the proceeds won't buy you as good a home after the child leaves school.
• Keep your house and rent it out while your child is at school, returning to live in it after the child leaves school. You'll be paying $130 more a week than now. The risk is that you will default on your mortgage payments.

What about the fact that you might sell your house at a loss? That happens to many people at least once over a lifetime — including me. While nobody likes to think they've made a loss, what you paid for the house is a "sunk cost" and is irrelevant to your future decisions. Your house is worth whatever you can get for it now, so just accept that.

So let's weigh up the other risks. In the first option, given you may want to buy a home again in five years or so, I would suggest you invest the proceeds fairly conservatively.

That's because there's too big a chance over that short a period that a share fund investment would fall. But the trouble is that conservative investments don't bring very high returns.

Will your money grow enough to buy a house in five years? Of course it will if house prices languish or fall. But what if they climb again? You will be able to buy something somewhere, but your standard of living could drop considerably.

In the second option, you'll still be in the housing market, so it won't really matter what happens to house prices in the meantime. But it's not always easy being a landlord, and you worry about meeting your mortgage payments.

How about explaining your situation to your mortgage lender? They might be willing to let you extend the term of your mortgage — from say a 25-year loan to a 30-year loan — or even switch to an interest-only loan, which would reduce your payments.

Tell them you would go back to the old term when you move back into the house. Lenders are far more open to something like this if you discuss it up front, rather than after you've been late with a payment.

But even if you can't change the mortgage payments, I reckon you will somehow manage.
When I was a reporter in Michigan decades ago, I wrote an article about a bank set up for lower-income women who had been turned down for mortgages by the regular banks.

It turned out that it had a lot fewer foreclosures than the other banks. The women were determined not to lose their houses and would move heaven and earth to make their mortgage payments.

I suspect the same would apply to you. I worry about how you signed your email, but I think you might be just as stressed if you sold your house and found yourself watching every move in the housing market.

How does that sit with you? If your heart sank as you read this reply — perhaps because you would be a reluctant landlord — that says you really want to sell.

If so, go ahead. This is really a six of one, half a dozen of the other situation. There's something about the way you write that makes me feel confident you'll make it work either way.

Debt or invest?

Is it better to pay off mortgage debt or invest money saved in either property or shares?

We have a household income of $200,000 and own our family home with a mortgage of $570,000. We have savings of $120,000. I would like to make the best use of the savings and, in this instance, I'm looking to see what would be prudent — paying off debt or making investments.

I have no experience in shares, other than KiwiSaver and retirement funds. I have owned a rental property before but think the current house prices are too high and to make a gain I would have to wait for the next property cycle.

Can you advise what I can do to get the best value from my savings?

First, if you do decide to invest the money, I suggest a share fund or growth fund that holds mainly shares.

It's much easier than buying individual shares yourself, and you get a wide range, which reduces your risk. You do have to pay fees, though, so choose a fund that charges low fees.

One way to find such a fund is by looking at growth funds in the KiwiSaver Fund Finder on sorted.org.nz. If you're happy to tie up your $120,000 until NZ Super age, select a fund, move your KiwiSaver account to that fund and add your savings as a lump sum.

If you don't want to tie up that money, select a fund that suits you and then ask the provider if they have a similar non-KiwiSaver fund. But keep an eye on fees, which are often higher outside KiwiSaver.

Okay, now, is that better than paying down your mortgage?

As I said to a couple in a similar situation in last week's column, putting your savings into a growth fund works well only if you're willing to put up with volatility, and won't panic and move your money when sharemarkets fall. You need to be committed for a decade or more.

Can you cope with ups and downs? Even if you can, are you planning to withdraw the money to buy a rental property when prices get cheaper again, which unfortunately might be when shares are down too?

If you can answer "Yes" and "No", a share fund should work for you.

If not, put the money into the mortgage. It's never a bad move to reduce debt.

Super legacy

I believe that NZ citizens and residents still receive a basic superannuation from the Government based on the Muldoon scheme! If that is the case, is it guaranteed in law or is it up to the Government of the day to decide how much every person receives?

I don't think there's much Muldoon legacy in the current NZ Super. But regardless of that, no government can ever guarantee — in law or otherwise — what will happen in the future.

The laws of the land are made by governments, and a future government can always change a law made by an earlier government. It happens all the time.

Still, I don't think you should worry that the current government, or any future one, will drastically cut NZ Super payments. That would lose them too many votes — not just from current superannuitants but from everyone approaching retirement and everyone else who wouldn't like to see old people in poverty.

Risk and return

I bet that the writer last Saturday querying his fund's performance relative to the NZX50 invested with Milford.

I have been to three or four Milford functions and I have asked exactly the same question and why so much of their funds in the Active Growth Fund (in which I am) are in fixed interest (currently 24.9 per cent, based on a report received from Milford yesterday). I never received an adequate answer. Perhaps you could ask them?

Also, funds should charge a lower percentage as investments increase because the overhead cost is lower.

You're right, last week's correspondent was in Milford's Active Growth Fund. So I put your questions to Milford Asset Management.

"Investment is not just about returns, it is about risk and returns", says Brian Gaynor, Business Herald columnist and a director of Milford.

"We put a huge emphasis on risk. One of the principles regarding risk is the 'Efficient Frontier' developed by Harry Markowitz, who subsequently won a Nobel Prize in economics for his work. Markowitz concluded that you got diminishing returns for the increased risk you take.

"We did a lot of work on the Efficient Frontier when I was on the Guardians of the NZ Superannuation board in its early days. The clear conclusion was that once you got to 80 per cent growth assets, it wasn't worth taking the extra risk and going to 90 to 100 per cent growth assets, as it increased the risk much more than the expected return.

"Most major pension funds and superannuation funds follow this theory. For example, Australia's Future Fund has 22.5 per cent in fixed interest/cash. NZ Superannuation Fund no longer gives monthly portfolios, but its long-term goal is 20 per cent in fixed income for the same reason. Milford is doing what is absolutely normal on a world basis.

"Many KiwiSaver investors don't take risk into account and believe KiwiSaver funds should be 100 per cent in growth assets. That would be a very, very risky approach and highly unusual for any serious portfolio manager."

Gaynor adds: "I don't ever remember anyone asking that question at one of our functions, and if they had we would have given them a proper response.

"I am going to write about this in the next few weeks, because the first question you had last week clearly shows that many investors only look at returns. Risk is also very important."

I can't argue with that.

On your point about funds charging lower percentage fees as they get bigger, I quite agree. It has been really disappointing to see so few KiwiSaver providers reducing their fees as their funds have got bigger.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is "Rich Enough? A Laid-back Guide for Every Kiwi", and her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.