Money matters: Have a bit of fun (and don't get a renter)

By MARY HOLM

When the mortgage is gone and the debts are all paid and the cash flow is fine and I can have a holiday trip each year ... what's next?

Q: I am a 35-year-old single female. I own my own home worth $200,000 and a share in a holiday home. I do not have any mortgages.

I have a short-term investment with my bank of $20,000 and have loaned a family member $20,000.

I have a full-time job and pay $500 a fortnight directly from my salary into a multi-sector unit trust. This started in November last year and has a value of around $5000 at present.

I like to travel each year, and have been paying for this from interest on investments and the balance of my wages.

I have no debts and will have no need to make any major purchases in regards to furniture and cars, as everything I own is relatively new.

I am keen to buy a rental property as an investment. If I did this, I would be using the bank deposit as part payment.

Before I paid off my mortgage, I was easily managing loan repayments of $750 a fortnight.

I feel that I need to have a reason to stick to a budget again, as, apart from the unit trust, I am now tending to spend money on the odd luxury or two.

I would like your thoughts on a possible good investment for me and the rental property scenario.

A: The odd luxury or two? You naughty person!

You are almost frighteningly well set up for a 35-year-old, with your mortgage-free home, your investments and your car and furniture all organised.

There's no reason why you shouldn't blow a bit of money on a treat every now and then.

Still, I don't want to discourage you from further saving. So what should you put your money into?

Regular readers won't be surprised to find me steering you away from rental property. Its main appeal seems to be that it will force you to make regular mortgage payments.

But that's not peculiar to property investment. You could do the same thing by getting a mortgage on your home and investing in, say, shares.

Isn't that risky? Well, yes. You can find yourself owing more than you own, as did many people after the 1987 sharemarket crash.

But the same thing can happen in rental property.

In the last few years, I've heard of quite a few landlords whose rent didn't cover rates, insurance, mortgage and other expenses.

Tired of putting extra cash in, they decided to sell, only to get less for the property than they paid for it. In some cases, the proceeds from the sale didn't cover the mortgage.

The high-inflation days, when you couldn't go wrong in property, are over.

Another reason I'm not a fan of rental property is that it's the same type of asset as your house and holiday home. If house prices continue their recent lacklustre trend, you're going nowhere much with all your assets.

Despite that, some people still seem to enjoy owning rental property.

They're the types who love to spend weekends doing maintenance, don't mind late-night phone calls about a leaky roof, and can cope with difficult tenants, or long periods of no tenants.

If that sounds like you, perhaps you could buy a property purpose-built for renting, such as a unit near downtown.

Those properties tend to bring in more rent per dollar spent. And they are a different type of property from your home, so you're somewhat more diversified.

I would prefer, though, to see you diversifying much more broadly, by investing in a share fund.

You've already got some money in shares, which will be part of your multi-sector unit trust. But you could go much more heavily in that direction.

The value of share fund investments will fall sometimes. You need to be prepared for that, and don't bail out when it happens.

Over the long term, though, history suggests you will do much better in a share fund than in property or a multi-sector unit trust. And, at 35, you've got plenty of time to play with.

You could either continue with the unit trust and also put $250 a week into a share fund or - if you feel you can cope with fluctuating investments - put the lot in a share fund.

What about the "reason to stick to a budget?"

If you set up a direct debit into a share fund, or into an account from which you buy share fund units every now and then, that should take care of that.

Q: A comment on the share club letter two weeks ago.

Ever the sceptic, I wonder about a share club that has to advertise for members, although I have never been a great believer in advertising for life partners either.

If you do intend publishing more contact lists for such clubs, perhaps some warnings/disclaimers might be appropriate?

It would be relatively easy to set up a scam to draw in members and arrange a few fictitious loss trades to siphon money off.

Due care and diligence before passing over money would be appropriate. ($10,000 is not a small amount for many involved in share clubs. Make sure its money that can afford to be lost.) It is also, a review of club processes to understand: ownership registration of bank accounts and investment assets; whether decisions are taken by the group in advance; whether anyone has discretion to trade without reference to the group; how trades are "proved" to have taken place, to mention a few.

A: And there I was, naively thinking that people in share clubs - and, for that matter, people who advertise for life partners - are all nice, honest types.

But you make some good points. Wherever people are handing over large chunks of money, there could be scoundrels working out how they can get hold of it.

So, everybody, you have been warned!

I got only one response to my suggestion two weeks ago that share clubs looking for members could let me know.

And it isn't exactly a share club. Here's what the letter says:

"In May, a friend and I launched a little "chat room" club called The Burley Boys Club (where the women are treated like royalty).

"We meet about once a month at The Springs Garden Restaurant, 7 pm on a Tuesday night for a couple of hours.

"Our agenda is mainly sharing our insights and activity arising from John Burley's recent book, Money Secrets of the Rich (Aussie version).

"We are small-time investors and savers simply sharing our experiences. No subscriptions. Light door charge to cover hireage. We have a simple e-mail list to advertise meetings."

The man who sent the letter, Clive Littin, tells me you don't have to have read the Burley book to take part.

He can be contacted on (09) 820-0165 or e-mail at: clive@ihug.co.nz.

It doesn't sound as if there's too much potential for skulduggery in this club.

Q: In your article on June 2, you state that in the Bible the passage in Ecclesiastes Chapter 3 does not mention "there is a time to buy and a time to sell."

However, verse 6 says, "a time for saving and a time for throwing away," (Good News Bible), or (RSV Bible) verse 6, "a time to seek and a time to lose; a time to keep and a time to cast away."

Maybe the writer of Ecclesiastes knew a bit more about life than you give him credit for!

A: I think you missed my point.

I meant that whoever wrote the Bible passage seemed to know something by omitting "a time to buy and a time to sell."

That's because nobody knows - at the time - whether any particular day or month is a good time to buy or sell. It's only in hindsight that we can tell when investments are at peaks or troughs.

Another thing: when I wrote that column, I considered the bits that you quote above.

But selling an investment doesn't really amount to throwing or casting it away. Well, not usually. And, I hope, never for readers of this column.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

* Got a question about money?

Send it to:

Money Matters

Business Herald

PO Box 32, Auckland

or e-mail: maryh@journalist.com.

Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.