Pricking the 'property is best' balloon

By MARY HOLM

Q. I applaud the growth of companies and technology, and think their growing popularity via the sharemarket wonderful.

However, companies, ideas, people, almost everything we care to think of gets outdated or ceases to exist at some point.

Property is a rare commodity that doesn't.

I'm not knocking sharemarket enthusiasm, as I, too, think it's super exciting, and am looking to get more involved.

BUT, I will always stick with an 80/15/5 per cent investment ratio, whereby 80 per cent is property, 15 per cent could be business and 5 per cent shares.

If I'm not mistaken, most of the richest people in the world use this sort of ratio. Why not follow their example?

It's wonderful to be optimistic about business performance in a rapidly growing market, but be wary of encouraging people to invest all or a substantial portion of their money in something they cannot see.

A relation of mine recently invested in some kind of building project fund and lost $400,000 within two weeks. Their retirement plans are probably destroyed.

So, as well as talking the exciting possibility of sharemarket dividends or the beauty of investments that one cannot physically see, mention a disclaimer that when dealing with large amounts of money, property has traditionally been seen as the safer bet.

A. Sorry, but you are mistaken.

It seems to be a common refrain that the very rich got rich via property. Where does it come from? Perhaps property seminars, or get-rich-quick books. If anyone has a credible, as opposed to a self-interested, source, I would love to hear about it.

In Forbes magazine's 2003 list of the world's richest people, Bill Gates, of Microsoft, is top. He's followed by American share fund investor Warren Buffett; German retailers Theo and Karl Albrecht; and Microsoft co-founder Paul Allen.

Then comes Saudi Arabian prince Alwaleed Bin Talal Alsaud. Surprisingly, his wealth apparently comes more from investments such as Citigroup shares, rather than oil - although I bet oil dollars helped him get started. Sixth is Larry Ellison of Oracle, and the rest of the top 10 are Wal-Mart heirs.

It would seem, then, that starting or running a software company, investing in shares, or running shops is the way to great wealth - rather than following a property-heavy formula.

That's not to say that many people don't get rich via property. But it's far from the only way. And it's true, too, that many ordinary New Zealanders who are never going to be anything other than ordinary, as far as wealth goes, have 80 per cent or more of their money in property.

You - and many others - seem to think there's something magic about the fact that we can see property, and that it will always be there.

So what? Your relatives' investment sounds like something I would classify as property. And it sounds horrendous. I don't suppose they would like to write to Money Matters, telling us more about what happened, to warn us all?

One of last week's correspondents is another example. She and her partner bought land only to find the quarry down the road was about to expand massively, sending the land value plummeting.

True, these are unusual stories. The vast majority of property grows in value over time, even if there are some periods of depreciation along the way.

In this sense, property is safer than shares. A much larger proportion of shares than sections will go down and stay down.

But it's a lot harder to spread your money over many properties, to reduce the impact of a bad investment, than it is to buy shares in many companies.

What's more, most property investors take out a mortgage, whereas most share investors don't. Borrowing - otherwise known as gearing - makes a good investment better and a bad investment worse. It raises the risk level.

So, while you're basically right when you say property is a safer bet than shares, undiversified geared property is not safer than diversified ungeared shares.

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Q. A little while ago, in your column, you mentioned reverse equity mortgages.

I have an unencumbered house, and being a superannuitant, aged 85, with no other income or shares etc, I am very interested in finding out more.

Would you be able to let me have names and addresses of any companies who handle this kind of mortgage, and perhaps tick the name of the better one?

A. To get everyone else up with the play, these are the products that

Philip Macalister wrote about in Money last week

.

Typically, they enable retired people with lots of equity in their home to borrow money, secured by the equity.

The loan is paid back when the home is sold, perhaps when you move into care or after your death. If you move house, you may be able to transfer the loan to the new place.

The products are sometimes called reverse annuity mortgages, but this isn't always an accurate term, as only one of the three providers in New Zealand offers annuities - regular monthly payments.

With the other two schemes, you get lump sums - although you could take a lump sum and buy yourself an annuity from an insurance company.

Anyway, a better name is home equity release schemes, or HERs.

It's important to note that, with a HER, the company will get back more when it sells your home than it lent you. If the scheme runs for 20 or 30 years, it will be lots more.

That's fair enough. You've had the use of the money in the meantime, so in effect you pay interest on that loan. But, because you're retired and don't have the income to pay the interest, it is added to the loan balance.

So, if you borrow $50,000 and the company takes $100,000 from the proceeds of your house sale, you're not necessarily being ripped off.

Take care, though. HERs can be quite complicated creatures (and we'll have no comments from anyone along the lines of "What would you expect from a her"!).

Both of the new HER providers - Lifestyle Security (called Home Equity in last week's article, but Lifestyle is their brand name) and Sentinel - insist that you consult your own lawyer before signing up, and I would certainly recommend that.

Finally, I'm getting to your request. For information toll-free, contact Lifestyle Security on 0800 993-366, Sentinel on 0800 867-645 and SAI on 0800 733-008.

I suggest you ask them to mail you written information first, and then call back if you have questions.

As for which scheme is best, it probably depends on your circumstances. Have a good look at all three.

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Q. The people in last week's column (who bought land near a quarry) have been swindled.

The vendor of the land is guilty of "concealment" and "passing off", as also is the local planning authority under civil law.

It is also more than likely their solicitor has failed in his "duty of care". New lawyer, and "joint and several" writs, with all speed.

Might as well include the quarry owners in the writ. They probably colluded with the farmer. Assuming the writer's story is true.

A. You're not American by any chance, are you? (Sorry, Americans. I like most of you, but you are a litigious lot.) I don't know enough to judge all this and, with respect, you don't either. As your last point suggests, there's another side to every story.

Still, you might be right, that the couple's lawyer hasn't done as well as she or he might.

I've been giving lawyers lots of promotion lately, suggesting readers get their help not only with the quarry dispute but HERs, provisos in wills, and "mid-nup" agreements.

Perhaps it's time to balance this by saying that not all lawyers always perform well. When there's a lot of money at stake, it may be worth getting a second opinion.

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Q. Thank you for your column. It is really useful to air the views and experiences of others on our journey to financial health.

I'm experiencing difficulty due to a family trust gone awry.

The problem in my case is that the lawyer who set up and administers my now deceased father-in-law's family trust is uncooperative and lacks transparency. This is a big hassle.

The point for your readers is that family trusts seem a good idea as long as you are around to supervise them, but once you're gone their execution depends on someone else, such as a lawyer, who may have a different agenda.

My advice would be to double-check the security of your trust - especially looking at those who will take over from you - to avoid your beneficiaries getting bogged down in the legal system.

Also another of your comments to last week's correspondent who bought a property from a less then transparent vendor (my sympathies!) is relevant here. You said, " ... many people concentrate all their efforts on a single property". Isn't that what a family trust is?

Keep up the good work.

A. More anti-lawyer stuff? Not really. Just a warning, and thanks for it.

On the single investment issue, it's not a good idea to concentrate on one or even a few investments. If you have bad luck with them you are severely penalised.

It's much better to diversify across asset types such as shares, property, bonds and so on and also within each asset type, holding lots of shares and bonds and interests in lots of properties. Then, if one or a few go bad, that should be cancelled out by others doing well.

But a trust isn't a type of investment, it's a vehicle for holding investments. In and of itself, it won't "go bad".

Perhaps, though, you're worried about the investments within a trust. Ideally, they should be just as diversified as any person's portfolio.

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