The spectre of investment gone wrong

By MARY HOLM

Last year I had a good think about saving.

Since then I've been contributing monthly amounts to the ABN Amro Craigs START series investment trusts.

I'm putting in quite a bit actually, in excess of $3000 a month, because I've done the "how much will I have for retirement" sums recently (using the Sorted website) and realised I was going nowhere fast.

I'm in my late thirties now and earn over $250,000 a year.

When I was in my twenties, and living in Australia, I bought two properties in Queensland. Both are reliant on tourists for income.

They have proven to be shocking investments. Both initially gave guaranteed returns for six years and paid for themselves, but things have really gone downhill since 1999.

I am now left with a mortgage in Australia of $230,000, with repayments of $1700 a month. The combined income averages now at $1600 a month, and my rates and body corp costs average at $600 a month.

I've spent over $20,000 refurbishing in the last year just to keep the income coming in.

These "investments" are losing me around $10,000 a year after tax rebates.

Obviously they have dropped in value too. From a combined purchase price of $234,000 in 1993-4, I think they would now fetch $180,000 if I was lucky.

Do I cut my losses now, or keep them in the hope that income and possible capital gains will save me?

Imagine you've just inherited $180,000, and you're considering how to invest it.

Along comes a smiling Queensland property salesman. (Do they still wear white shoes and gold chains?).

"Have I got a bargain for you," he says. "Two lovely properties, just recently refurbished to the tune of $20,000. The seller is desperate, so they're going really cheap."

I don't think I need to ask how you would respond.

And if you say no to that proposition, it means that you would prefer to be doing something else with the $180,000 you're currently investing in Queensland.

The message is clear, then: Sell.

Before we get too hasty here, it's worth noting that the properties might be great buys at $180,000. That means you would be selling too cheaply.

I don't know much about the Queensland property market. Maybe prices will soar over the next few years. Stranger things have happened.

But they're going to have to soar pretty high to make up for $10,000 annual losses. There's no guarantee you will ever regain all you've put in, or at least not in a decade or two.

If you were invested in a broadly diversified share fund, you could pretty much count on recovering from a big drop, if you hung around long enough.

That's probably also true in a diversified property fund. But not necessarily in two properties.

There's another issue here, too. When a significant investment goes horribly wrong, it tends to haunt you. There are psychological reasons for getting it out of your life.

If you do sell, you're going to have to find $50,000-odd to clear your mortgage.

You don't say whether you own a home. If you do, you might be able to extend the mortgage on that.

If not, perhaps you should get a personal loan from a bank. That shouldn't be hard to obtain, given your high income and savings habits.

Either way, get rid of the loan as quickly as possible by putting into it all the money you were putting into the properties.

I suggest you also suspend payments to START and pay that $3000 a month off the loan. That's particularly true if the loan is not a mortgage, but higher-interest borrowing.

Once you've got rid of the debt, though, restart START.

You've got plenty of time to regain lost ground. By the time you retire, the Queensland saga can be a fading memory.


* Send questions to Mary Holm at Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net

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