Q&As
- Where to from here for 56-year-old rental property owner?
- Should rich people be writing this column?
QIt never ceases to amaze me how many wealthy people write to your column. Are there no ordinary people in average (or less) situations that would like to put forward a question to you?
I’m a single income earner on $37,000 and aged 56.
I took a huge calculated choice and subdivided my section and built another house on the back (hopefully as some future security for retirement). The front house is rented out to pay the mortgage, with help from my income ($20 a week).
Together the houses have a GV of $550,000 (with a mortgage of $173,000 on the front house).
I have no savings to speak of and a 9-year-old car. With nine years to retirement, where to from here — any suggestions?
AThere are those who would say, “increase your mortgage and invest the borrowed money.”
But given your age and income, I reckon you’ve taken enough risk already.
You’ve got all your money in two neighbouring properties. If the neighbourhood loses value, you’re hit twice. And it can happen anywhere. I once took a huge loss on a good St Heliers house when values plunged after the 1987 share market crash.
And you’ve borrowed to invest, which makes a good investment better but can put you in big trouble if things go wrong.
Still, your debt is much smaller than the value of your two properties. Unless you lose your job and can’t get a new one, or mortgage interest rates rise a lot and rents fall a lot, you should be OK. On the upside, there’s a pretty good chance your venture will prove really lucrative.
Where to from here? I suggest you save for an emergency fund — in case, for example, you have no tenants for a period — and to buy a new car when you need it. It’s far better to earn interest on a car fund now than to pay interest on a car loan later.
You could save in bank term deposits. There’s another possibility, though. Many mortgage lenders will let you repay your mortgage faster than necessary, knowing that if you need that extra money later you can borrow it back. Check if that’s the case for you.
If you save your emergency and car money by paying extra off the mortgage, you are effectively earning whatever your mortgage interest rate is, tax-free, on that money — much more than term deposits pay after tax.
How come? Let’s say your mortgage interest is 8 per cent, and you pay off an extra $10,000 for emergencies and car. You’ve avoided paying 8 per cent on that $10,000, or $800 a year. Avoiding spending $800 on anything boosts your wealth in the same way as earning an extra $800 does.
(If you were tax deducting your mortgage interest — which seems unlikely in your circumstances — we would use the mortgage interest rate after tax. In your tax bracket that would be about 6.3 per cent, still considerably more than term deposits pay.)
Once you’ve set up the emergency and car fund, go full steam ahead at getting the mortgage down as low as possible by the time you retire.
At that point, you will probably want to sell the rental property. That will free up the equity for you to invest in, say, bonds. You can then live off the interest and, bit by bit, the principal.
QI read your column reasonably frequently (and also your government-funded booklet) but still struggle with your giving of advice.
To give advice in this area it would seem no or minimal personal experience of wealth creation is needed.
Why not clarify in larger print that you are in fact a journalist giving your personal opinion on this particular subject? I appreciate that you also get “expert opinions” for some questions. But these also appear to be from professionals but not necessarily wealth creators.
Why not give your readers a fair go and get some of New Zealand’s top 500 rich list people to give their ideas on the subject instead? I am sure you will find their answers quite different.
AGood idea. Any readers in the top 500 who would like to write to this column are welcome — although that might irk the previous letter writer.
For all I know, some of them do already. That’s one of the beauties of a Q and A format, and the way we often discuss a topic for weeks. Readers benefit from many different opinions.
But are the richest people the best ones to teach others how to get rich?
It seems to me that most people get rich for one or more of the following reasons — often combined with good luck:
- They have a talent or appeal that makes people willing to pay lots for their contributions.
- They are a certain personality type — confident, tough, perhaps gifted at managing many people, or at dreaming up a wonderful invention.
- They put lots of time and energy into building a business or acquiring wealth — sometimes at the expense of other things in life.
- They are bigger risk takers than most. They put all their money into one or a few investments, or they borrow heaps to invest, and those investments do really well. (There are, of course, other big risk takers whose investments are poor and who crash spectacularly.)
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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.