By MARY HOLM
Q. I am a 35-year-old New Zealander living in London. My wife and I are moving back to New Zealand next year.
We own four rental properties in New Zealand worth $360,000, which will be mortgage-free next year.
We have $450,000 cash to invest. We would like to buy a further five rental properties worth $450,000, which will give us a total of nine freehold rental properties worth $810,000.
Then we would like to borrow $810,000 to buy another nine rental properties. This would give us a total of 18 rental properties worth $1.62 million, and paying off a mortgage of $810,000. We estimate total rental income of $2700 a week.
We also have an emergency reserve of $120,000 in a UK bank account.
Do you think this plan is a viable long-term investment?
A. You sound like followers of renowned Chicago architect Daniel Burnham, who once said, "Make no little plans; they have no magic to stir men's blood. Make big plans, aim high in hope and work."
And, while bigger is certainly not always better, in your case I think it is. By owning so many rental properties, you go a fair way towards reducing one of my main objections to that type of investment - that it lacks diversification.
That is particularly true if your 18 properties are different types of buildings - from urban units to suburban family homes in a variety of neighbourhoods to, perhaps, commercial and industrial properties - in different parts of the country.
When the rental market for some properties is bad, it should be better for others. Ditto if you want to sell.
You would, though, be somewhat limited in your diversification by the fact that you're planning to spend less than $100,000 on each property. That sum won't buy you much in the bigger New Zealand cities these days.
You might be better off with fewer properties, but at least some of them of higher quality.
Even so, you will still be a long way from being well diversified.
You won't have all your eggs in one basket, but they will all be in cane baskets, ignoring wicker and plastic ones, which might do a better job over the long run.
All property values are affected by such factors as interest rates, immigration and population growth, and the general state of the economy.
There will be times when the value of your whole portfolio of properties grows discouragingly slowly, and it might even fall.
There will also be times when you have trouble getting tenants into several of your properties, and may have to reduce your rents.
And, when you look over the long term and in many countries, returns on property have tended to be lower than returns on shares.
If you want to maximise your returns, it is always a better bet to spread your money over several different types of assets.
In your case, that should certainly include shares, and probably also some fixed-interest investments.
For more on how a property type might venture into shares, see the next Q&A.
Keep in mind, too, that running that many properties will be time- and money-consuming. And if you don't want to do the work yourself, you will have to pay for property management.
Despite my concerns, though, I have to add that, if property is what you really want, go with it.
You have done extremely well so far. With a $120,000 reserve fund, you're not likely to be forced to sell in a bad market if things don't go well.
And, with half your properties mortgage-free, you're reducing the chance that you'll get into trouble. Your rental income will probably always at least cover your costs.
Even if bad stuff did happen, at your age you have got many years to recover. While your plan may not make you as rich as alternatives, it's hard to imagine that you'll end up short of a bob or two.
Finally, to ward off letters from the word police, you shouldn't say freehold but mortgage-free. Freehold has another technical meaning.
Q. I am at a stage where I am looking to expand, or in reality start my investment portfolio.
The thing is I have always struggled with is deciding which is the best investment to enter.
It is quite obvious that you are very pro shares, as are most investment advisers I read about. I would hope that seeing you have such a strong opinion you must be a particularly wealthy person.
The most successful people I know have become so by rental property and not shares. In fact the only wealthy people I know who have a large share portfolio have made their money in business and have bought shares from the proceeds of the sale of that business.
So the next question is: how does one go about buying shares?.
Q. First, I'm pro shares only to a certain extent. They do tend to give the highest returns over the long term, and it is easy to diversify share holdings.
But they are not good short-term investments. Nor are they good for people who can't cope with fluctuating investment values. And I don't think investing in just one or a few shares is a good idea.
Second, I'm not a particularly wealthy person.
As a financial adviser I know said: advice is all about giving common- sense answers pertinent to the client's own circumstances, not trying to prove that you can make heaps of money for yourself or others.
To become really wealthy, you have to take big risks, whether with shares, property or emus. Some people succeed. Others - who we don't tend to hear about - don't.
I'd rather take moderate risks and be moderately well off.
Which brings me to your point about rich people having made their money in rental property.
I think you would find that there are also quite a few who regret the day they ever got into real estate.
I also wonder if a different type of person, perhaps more out there and inclined to talk about it, invests big-time in property, as opposed to shares. Their investment is certainly more visible, and tends to affect their daily lives more.
You might be surprised at who is sitting on large share portfolios.
Now to your question, about how to go about buying shares.
As I said above, it's not a good idea to own just a few shares. You are taking a risk that the market won't reward you for.
So, unless you have got at least $100,000 - some would say $500,000 - so that you can put a reasonable amount in a wide range of shares, you are best to go with a share fund. It will spread your money over lots of shares.
Even if you've got $1 million, you might still prefer a fund. You don't have to worry about which shares to buy, keep track of lots of dividends and so on.
I recommend index funds, which invest in the shares in a share-market index. They charge lower fees and pay less tax. And over the long run they tend to perform better than most other share funds, especially after fees and taxes.
I suggest you put more than half your money in an international index fund, rather than a New Zealand one.
You probably have a house, job and other assets in New Zealand, so it is good to diversify the countries in which you invest.
International share funds have performed particularly badly in the past three years. But there is no good reason to expect that to continue.
Keep in mind, too, that any share investment should be for 10 years or more. In the shorter term, there is quite a big chance its value will fall, but that is highly unlikely over the longer term.
Q. When you buy an investment house, can you claim GST back?
If you can, how do you do it, and why does nobody mention this way to save money?
A. The short answer is you cannot claim GST on residential rental property.
Readers with low tolerance for tax language should stop here.
For braver souls: you can claim if you are incurring expenses principally for the purpose of making GST-taxable supplies, says Allan Bullot, head of the GST practice at Ernst & Young.
And, as residential tenants do not pay GST on their rent, landlords cannot claim it.
The reasoning behind the rent exemption is that home owners don't pay GST on mortgage interest, so the Government decided it was fair to exempt rent as well, says Bullot.
What people sometimes do, he adds, is buy an investment house with the principal purpose of developing it. If they develop and sell, that will be subject to GST.
They might, for instance, buy a house and land for $1 million. They can get a ninth of that price back straight away from the Government, plus a ninth of development expenses as they incur them, says Bullot.
They then have to pay GST when they sell - and probably also income tax on any gain. But they have had the use of the money in the meantime.
There is a further complication, though.
If they rent out the property during the process, perhaps before the development work starts, a portion of their GST claim is clawed back.
In the end, it is worthwhile only for sophisticated developers to bother with all this.
Generally, the landlord who rents out a residential property for several years would not do it.
* Mary Holm is a freelance journalist and author of Investing Made Simple.
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