This article was published on 24 January 2004. Some information may be out of date.

QI’m writing in response to your rebuttal to my short, sharp piece that was published in the Herald late last year — in which I said, “quite plain and simple, never sell a rental property, never sell”.

I would like to give you some substance to my view concerning your telling this lady to sell up her investment property.

Firstly, why did you not tell her that she should get a good property manager and keep the investment? Therefore she could continue to receive her passive income stream and be financially secure for the rest of her life.

In fact you could have told her to buy more property once the boom settles later this year.

The reason I said, “never sell a rental property”, was that the facts show that anyone who is wealthy parks their money in real estate and keeps it there for the long term.

As I mentioned above, there are plenty of great property managers out there who could relieve her of any of the hassles she may incur.

All of you financial commentators should know (including the bearded, grey-shoe-wearing dreary ones) that property is by far the best investment out there and due to leverage gives a higher percentage than any other investment on a consistent basis over the long term.

ALet me see now, I haven’t got a beard, at least last time I looked, and I don’t own any grey shoes. So I hope that keeps me off the dreary list.

Business editor Jim Eagles and Weekend Money editor Mark Fryer might have to watch their footwear, though.

Hiring a property manager has its merits, as stated in a recent issue of the Cairns Lockie Mortgage Commentary.

“Once you own a rental property you must manage them. This is often far more time-consuming than first-time investors imagine.

“Across the Tasman in New South Wales, over 85 per cent of all rental properties are managed by professional property managers. In New Zealand we believe this figure is around 20 per cent.

“If a property investor is finding it too time-consuming to manage their property, or the properties are in another town, then a full-time property manager may be the answer.”

The only trouble is that any service costs money. The landlord who hires a manager might be relieved not only of their hassles, but also their profits.

Rents in December were 1.2 per cent below a year ago, says BNZ chief economist Tony Alexander.

And rental yields are also falling. In the mid 1990s, Auckland rental yields averaged about 7.3 per cent, according to data from Barfoot & Thompson and the Real Estate Institute of NZ.

From 1998 until about May last year, they hovered around 6 per cent. They are now at 5.4 per cent, says Alexander.

And that’s before expenses. By the time you factor in insurance, rates and maintenance — to say nothing of mortgage interest — many landlords must be suffering losses on a month-by-month basis.

Add property management fees to the expenses, and the losses might be rather hefty.

“But that’s OK”, you may be saying, “I’ll get a big capital gain.”

If you own the house for a decade or more, you will almost certainly make a gain — although it won’t necessarily be particularly big.

If you invest for a shorter period, you could suffer a loss.

Reserve Bank data show that until the 1990s, inflation was so high that nominal prices — the prices usually used — never fell. After inflation adjustment, though, prices have fallen frequently in the last 36 years.

Since 1990, even nominal prices have fallen twice, in 1992 and 1998. And those are national figures. 1990s price falls were longer-running in Auckland.

It wouldn’t be at all surprising to see nominal prices fall again in the near future. And real prices are quite likely to fall.

You say that “anyone who is wealthy parks their money in real estate”. It’s probably true that almost all rich people own some property — along with shares and other investments — and can afford to keep their property through the bad times.

But that doesn’t mean poorer people can do the same.

It’s not easy to hang in there if you have to put cash in to keep the investment going and your other income is reduced. And it can be psychologically difficult if house prices are falling.

As for your statement that property is by far the best investment, my response is that it’s patchy. Sometimes its brilliant; sometimes not.

All the independent academic research I’ve seen shows that, over the long term, shares tend to perform better.

True, shares also tend to be riskier. But, because it’s much easier to diversify share holdings than property, for many investors they are not riskier.

Leverage — otherwise known as gearing or borrowing to invest — can indeed give a higher return. But that applies to any investment, in property, shares, truffles or whatever.

Note, too, that leverage can also give a lower return, or a bigger loss. It simply exaggerates whatever happens to the underlying investment.

QSeveral years ago while still living in Auckland, I wrote to you in reply to your criticism of Gold Coast investment property.

My point was that most of the less fortunate experiences with such investments were a case of buyer beware.

The “suckered” investors had gone in with their eyes closed, and been easily duped by slick salesmen. A fool and his/her money are soon parted, so to speak.

I argued that there was still a sound investment to be made if one did one’s homework.

We moved to live and work in Queensland three years ago, but not to the Gold Coast. We sold our Gold Coast house this year having never lived in it, but had it as an investment for five years.

All up, after expenses, yes even capital gains tax, it gave us a return of just on 100 per cent on the funds invested — about 20 per cent per year over the period. Rather better than the earnings of equities and managed funds during the same period.

I thought I would let you know the outcome. I still think that investment property has a place in a portfolio. But as with any other investment, it requires clear thinking, and a bit of maths.

ACongratulations on a great investment! Would it be churlish of me to point out that a bit more maths might be in order?

You can’t just divide 100 per cent by five years and come up with 20 per cent a year, because that ignores compounding — growth on the previous years’ growth.

Your return was, in fact, about 15 per cent a year.

If you haven’t got a sophisticated calculator or computer programme, calculating an annual return can be a bit tricky.

But there’s an easy way in situations where an investment has doubled — as in your case. You can use the Rule of 72.

It works like this: Your investment doubled in 5 years, so divide 5 into 72 and you come up with an annual return of 14.4 per cent. If it had doubled in 8 years, the annual return would be 9 per cent. If it had taken 12 years, it would be 6 per cent.

The Rule of 72 is an approximation. It works well for up to about 15 per cent. After that, it’s pretty rough.

Having said all that, 15 per cent is still a handsome return. And yes, it’s better than in most shares and managed funds during the period.

Note, though, that there are other periods when the reverse would be true. And many properties, on the Gold Coast and elsewhere, haven’t performed as well as yours.

Also, while clear thinking and the ability to resist slick salesmen boost your chances of doing well, there’s still a strong element of luck in it.

One of my biggest worries about property investment is that most people own just one property, or perhaps two. And there’s such a wide range of outcomes on single properties, from wonderful to disastrous.

Be honest: Would you have reported back to me if your investment had not done well?

Human nature being what it is, there’s a huge bias towards success stories.

QMary, I’d like to offer two spreadsheets to your readers, which may augment the one another of your correspondents sent you before Xmas.

The first one tells you how much regular monthly contributions will grow to over a certain number of years. For simplicity, it is based on a net interest rate after tax and expenses (i.e. fund management fees etc).

You fill in how much you will put in each month, the interest rate, and your current age and the age when you want to stop saving.

The second one shows how long a lump sum will last as risk-free money in the bank.

You enter the principal amount invested, the “real” interest rate (i.e. after tax and inflation), and then the amount to be drawn down annually, and it calculates everything down to the point where you run out of loot.

As a trustee of a reasonably large company superannuation plan, I come across a few people who are very much risk averse — who may be in or close to their 60s with quite large accumulations and who would worry themselves to death about any portfolio containing shares.

I give them this and show how a draw-down of capital each year can keep them going for a very long time, and even longer if they reduce their drawings when the state pension kicks in.

I then tell them to go and seek financial advice and, if they’re still worried or unsure after that, perhaps split their capital into three or four equal amounts and put them on term deposit so that each 6 or 12 months they have one maturing.

They can then draw their needs for the next period from it and then roll the rest back into a new term deposit.

I do stress that I am not a financial adviser though. (But perhaps they could invest in the Saturday Herald to read your column).

Interested readers can get the spreadsheets from me by emailing [email protected].

AThanks. Your spreadsheets do look helpful, and not only for the risk averse.

The second one is quite similar to one offered late last year. And there are also several useful calculators on the Retirement Commission’s website, www.sorted.org.nz, and on other websites.

But it’s good to have a wide choice. Different calculators suit different needs.

One note for users: your second calculator assumes you take this year’s money out at the beginning of the year.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.