Happy with a property investment

BY MARY HOLM

Q: I was not surprised to note that you did not receive a deluge of mail from property investors after your recent negative comments.

First, if they read your column they would be used to the predictable comments that issue from most financial advisers.

I was interested to see Mark Fryer's article, appropriately on the back of yours, "Keeping Tabs on Advisers".

If you do your sums on the suggested $105,000 investment that evaluated in five years to $120,000, you could come up with your suggested percentage profit. In fact you did, two weeks in a row.

Try the third week - try the reality. The investor invested $40,000 over five years and made at least $15,000. What is your percentage on that?

Please do not publish it or more fools will go rushing off and go against the financial advisers' best advice.

Why do you think the banks will lend on property investments? Why can't financial advisers see the wood for the paper?

Also, not to forget that this particular investment was not regarded as a good investment, as property investments go. What else can you invest in with little or no money?

The increased equity is paid for by tax relief and tenants. The $15,000 capital gain was also non-taxable, I believe.

I hope the mug reinvested in property and did not put any more money in the advisers' pockets by one means or another.

The damage has already been done, I'm afraid. I already did publish the correct return.

I quote from this column on February 16: "The return on a property investment is made up of the excess of rental income over expenses, plus capital gain.

"You say the excess rent is negligible. But you've made a gain of $20,000 (including $5000 paid off the mortgage) on the $40,000 invested, over six years.

"That's an annual return of about 7 per cent, and it's probably not taxable."

As for whether this was regarded as a good property investment, I said: "Through a combination of good luck and good management, you seem to be one of those who have done it well." So I'm not sure where you're coming from.

But I'm not publishing your letter just to prove I'm right. What worries me is that you seem to think I'm a financial adviser. I am not. I'm a journalist.

Regular readers will know that I frequently criticise the way most financial advisers operate.

I've got strong views about some investments. They have developed from studying and reporting on what's going on, for more years than I want to count. I have no vested interest in recommending or dumping on any type of investment.

Now that that's off my chest, there are a few more points to which I want to respond: * Banks will lend on property because banks will lend on almost anything these days, as long as you've got some security and a regular income. It's dangerous to assume that, because a bank will lend, your investment must be safe.

* You can invest in a share fund with much less money than it takes to go into property. Many funds will accept as little as $100 a month.

* You say, "The increased equity is paid for by tax relief and tenants." The tax relief on property is the same as on any other investment; you can deduct your expenses.

Just because property tends to have higher expenses doesn't make it good. For every dollar you spend, you get a tax break of only 39c or less.

OK, there is depreciation. But if you sell your property for more than you paid for it, the depreciation is clawed back. So it doesn't end up being much of a plus.

As for tenants, sure, their rent is your income. Similarly, in a share fund, the dividends are your income. If you borrowed to invest in shares, the dividends would be like tenants.

* You're right, the capital gain on property is usually not taxable, as I said above. That, too, applies to other long-term investments.

* It sounds as if you've been burned by a financial adviser or two. You have my sympathy.

It also sounds as if you're happy with a rental investment. Good on you. They sometimes work well.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.