Avoiding having to pay for something is the equivalent to receiving money. Photo / Getty Images
Q: I own a rental apartment in Auckland and owe $195,000 on it and the rent is $385 a week.
I have just over $30,000 in shares and am wondering if it would be a good idea to sell those shares, as they are at a good price at the moment, and then put all these funds into reducing the mortgage on the rental. Your thoughts?
A: Let's say you had some scales, with 10 equal weights on the left side and nine on the right. You could balance the scales either by taking one weight off the left or by adding one weight to the right.
It's similar with money. Avoiding having to pay for something is the equivalent to receiving money. Both improve your wealth.
The question for you is whether the mortgage interest you avoid paying by cutting $30,000 off the loan will be higher than the return on your shares.
You should take into account that mortgage interest on a rental is tax-deductible. If, for example, you're paying 6 per cent interest and you're in the 33 per cent tax bracket, (taxable income over $70,000), take 33 per cent off the 6 per cent. The mortgage actually costs you about 4 per cent.
Our question then becomes: will the return on your shares be more than 4 per cent?
That's likely, over the long term, but we can't be sure. And that's where risk comes into it. A share investment is fairly high-risk - especially if it's in just one or two companies. But paying down the mortgage is low-risk in two ways:
• You can be pretty certain of your "return" — the interest you no longer have to pay on $30,000.
• Reducing your debt makes you less vulnerable to financial crises, such as redundancy at a time when your tenant isn't paying the rent. With a lower mortgage, it would be easier to meet payments or to get a mortgage holiday.
My vote, therefore, is to sell the shares and cut the mortgage. One suggestion, though. While you like the current price of the shares, you would be annoyed if it rose further right after you sold. You could sell half now and half in a month or two, just to spread your price risk a little.
Compensation for borer
Q: I live overseas. A short time ago I became owner of a small 1920s two-bedroom house in Auckland. With this came a thriving population of borer beetles, which I already knew about. The infestation was not terribly severe. The house is still standing and passed a structural inspection at the time of purchase.
As a matter of course, I had the house treated for borer and expected to compensate the tenants for the inconvenience of moving objects out of the way. They eventually asked for a full week's rent-equivalent as compensation.
Maybe the treatment was more thorough than previously, but I was surprised how much work the tenants had to do. They claimed that a full working week was required to move things into and out of boxes. Is such an effort usual? When I lived in Auckland, borer bomb treatments took just a few hours, or overnight, and not much stuff had to be moved. It was no big deal.
Where can landlords get advice on how much compensation to provide tenants for this and other kinds of inconvenience? I want to be a fair landlord, and have a good relationship with the tenants, but cannot write open cheques for unlimited hours of tenant work that I cannot oversee from a distance. The local rental agent was also surprised by the claim made.
A: There don't seem to be guidelines on this sort of thing. "Generally it's pretty subjective rather than objective, and when asked I just use gut feel and experience," says Scotney Williams, the principal of the Tenancy Practice Service.
"A week's rent as compensation is a lot. What that amounts to in practical terms is that the tenants lost 100 per cent of their right to peace, privacy and comfort in the use of the home for a whole week. Now that seems unlikely but not impossible," says Williams.
"The real problem is that the Tenancy Tribunal doesn't have a schedule of such matters either, and it can (as the last resort) make up its mind largely in the same way."
He adds: "It's always easy to be wise after the event, but you could have tried to limit the compensation by offering them $300 for the shifting/inconvenience and that might have worked. Once they have done almost anything at all, the figure tends to go up in their mind and there is no way to limit it because they have all the evidence of what they did and you have no evidence of what they did, so if they went to the tribunal they might have got more.
"One method of compensation is to record the hours involved and to commute those hours into rent compensation. What is never clear is whether a half-day's interference is compensated at an equal half-day's rent. This is particularly so where you are not talking about pecuniary loss but loss of rights," says Williams.
I'm no expert at this. But I would think this is not just about time taken moving things, but also about the hassle and possibly concerns about whether a treatment that's bad for borers might not be great for humans.
In future, Williams' advice of talking beforehand is obviously good. But this time, it might be better to just accept the tenants' word rather than take on a battle you might lose — especially given that you're overseas.
Reno might be cheaper
Q: Your letter from the single mum of three teenagers wondering whether to renovate her home or sell as-is caught my attention.
Having renovated a number of houses, I sympathise with her dilemma but wonder if she hasn't missed a key point. That is, the cost of selling and buying a larger, presumably more expensive house, in the same area. She doesn't say whether leaving the "good street and nice suburb" is a compromise she would be willing to make to achieve the larger house.
I'm renovating a 1920s bungalow, which has cost a small fortune given the state of dilapidation it was in. But it's been the best investment I've ever made. I haven't added onto the house but I have put in a new bathroom and kitchen — both of which have needed stripping back to the frame, insulating and relining with new tongue and groove.
My last house had a custom-made shower and vanity, which I just didn't have the budget for in this house, so a Placemakers bathroom it is. I can't put a cost on the actual building work (as the whole house was being renovated), but the fittings cost around $5,000 (excluding a bath) and I didn't go for the cheapest.
I'm now having the house painted. I received four quotes: $13,500, $17,500, $29,000 and $43,000 including GST — amazing! My bungalow is 100sqm and has lead paint, which is being removed.
I asked each painter who would actually be working on the house, as my security is important to me. That has been an eye-opener — one said it might be different people every day. I went with the $17,500 quote as the same team will be on the job the whole way through. I'm sure you could get cheaper, particularly if you're happy participating in the black economy, but I preferred not to go there.
The main message I want to give is to do the sums and to shop around. I've been amazed at the bargains I've been able to find. "Single mum" could spend $20,000 to $30,000 selling her house. That amount could pay for the bathroom, so does that make the renovation quote look better?
The other important factor is community. My neighbours are fantastic, and that's so important to me as a single person. We don't live in each others' houses but know we can rely on each other if needed (rubbish out, mail collection, sugar!), and from time to time, wine and a catchup. Hard to give up.
A: Nothing beats advice from those actually doing it.
A possible source is www.nocowboys.co.nz, which rates "builders, mechanics, painters, plumbers and more". People who have used these services are asked to rate them. Not every tradesperson has been rated, but there are some interesting comments — good and bad — about some of them.
You also make a good point about the considerable costs of selling a house.
PS. Given your kindness, this might seem a bit mean, but you scored 2 points on my Amazometer — and that's not good! Everyone these days seems to be amazed or to find things amazing. The word is losing its meaning. Hey, folks, let's come up with something amazingly different.
What's a tiny holding?
Q: Last Saturday in your response to the Genesis Energy share topic you made a comment as follows: "Tiny holdings in different shares aren't viable because of the minimum brokerage and so on."
What do you consider to be "tiny holdings"?
I have a portfolio of 20 companies with various holdings from 900 Auckland Airport to 9000 Michael Hill.
I have recently undertaken a portfolio rationalisation, but in light of your comment wonder whether I should scrutinise things a bit further.
A: Firstly, good on you for having shares in 20 companies. Several years back, some research found that New Zealanders who directly owned any shares held fewer than two companies on average.
Many One-Stock Wonders probably got the shares through an inheritance, employee share scheme or demutualisation. Regardless, it's not a good idea to be so undiversified. While the value of a single share can zoom, it can also go to nothing. But if you hold at least 10 stocks — preferably 20 — in a wide range of industries, you can be confident you won't lose all your money, and you'll probably do well over the long term.
The trouble is that you need maybe $100,000 to comfortably buy 20 stocks, because trading small parcels is expensive on a per-share basis.
For example, if you buy online through ASB Securities, the brokerage is 0.3 per cent with a $30 minimum. Buying $1000 worth would cost you the same — $30 — as buying $10,000 worth.
At ANZ Securities, the brokerage is $29.90 for all trades up to $15,000. And if you're just doing a one-off sale, it's $100 or 1.25 per cent, whichever is greater. At Forsyth Barr, the minimum brokerage is $75.
There's another issue, too. If you're running a portfolio with insignificant dividends, and having to make decisions about minor holdings, it might not seem worth the hassle.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 or Money Column, Business Herald, PO Box 32, Auckland. 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.
Prices and interest rates have fallen, offering a window to buy homes now.