Property Investment Basics

property-investment-basicsProperty Investment Basics

Low interest rates and rapidly rising property prices are driving investors to property investment. Many would-be property investors don’t understand the complexities involved and can easily make costly mistakes. Here are some basic principles to follow.

Understand that property investing is a business. It requires planning, discipline, a wide range of knowledge, willingness to take calculated risks, and a focus on getting a good return on your investment. There is no room for emotion in property investment.

Develop your strategy. There are many different approaches to property investment with different financial outcomes. You might choose to:

  • Buy property to retain for the long term, buy to renovate and sell, buy to renovate and retain, or be a property developer.
  • Specialise in certain types of property, such as apartments, properties with multiple tenancies, coastal properties, or low cost housing.
  • Specialise in a particular geographic area.

Different strategies have different implications for taxation and cash flow.

Get help from a team of experts. As with any other business, you will need an accountant and a lawyer. It also helps to have good relationships with real estate agents, mortgage brokers, insurance brokers, property managers, property inspectors and tradespeople.

Learn as much as you can before you invest. Read property magazines, learn from other investors and research the areas you are interested in. Practice doing financial analysis on properties for sale so you get a feel for the kind of property that makes a good investment.

Investing is a great way to build wealth because of the principle of leverage – that is, borrowing money to invest. Leverage multiplies the returns you receive on your investment. Get it right and you could well make a fortune. Get it wrong, and you could lose a fortune. There’s a good incentive to stick to the basic principles.

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The Big Squeeze

the-big-squeezeThe Big Squeeze

New Zealand’s rate of inflation continues to be low, even though our economy is growing. Lower petrol prices, cheaper airfares and computer equipment are some of the biggest contributors to low inflation and have reduced the impact of higher prices for housing-related goods and services. However, this is not necessarily cause to celebrate. The way in which people spend and save is very much influenced by the rate of inflation. Rapid increases in prices can cause people to spend now rather than later in order to buy cheaper. Saving becomes less attractive because the purchasing power of money declines over time. On the other hand, when prices are falling, spending is delayed in order to buy cheaper. The economy then slows down and prices can fall even further.

While high inflation is not desirable, neither is deflation (falling prices). The aim of the Reserve Bank is to keep inflation at about 2%; not too high and not too low. The principal tool for achieving this target is the Official Cash Rate (OCR), which in turn has an influence on the interest rates set by banks for deposits and lending. In theory, a lower OCR should mean lower deposit and lending rates for savers and borrowers. This in turn encourages spending and investment, leading to higher inflation. However, the OCR is only one of several factors that determine bank interest rates, so a change does not always achieve the Reserve Bank’s aim.

With inflation only just above zero, there is a danger we will head into deflation and the Reserve Bank is likely to continue to drop the OCR. If this translates into lower bank interest rates, savers will be caught in a big squeeze between falling interest rates and rising inflation. This is an uncomfortable place to be for retirees.

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Ownership of Your Assets

ownership-of-your-assetsOwnership of Your Assets

The more wealth you acquire, the more important it becomes to look at how your significant assets such as your home, investments and insurance policies are owned. Ownership has flow on effects in terms of tax, estate planning, and protection of your property against claims from creditors or former partners.

At the simplest level, assets can be owned individually or jointly if you are in a committed relationship. Owning assets in your individual name does not protect you against a relationship property claim from your partner in the event a relationship ends. Individual ownership of investments can, however, have tax benefits if you are your partner are on different tax rates. In the event that one partner dies, ownership of jointly owned assets will automatically pass to the survivor, whereas individually owned assets transfer to the estate, resulting in time delays and cost. ‘Tenants in common’ is a variation of joint ownership where on death of a partner, ownership of the deceased person’s share transfers to the beneficiaries of their estate. This can be useful as a way of transferring wealth away from the survivor so they fall within asset thresholds for means tested benefits, or as a way of ensuring children from a prior relationship receive their inheritance.

Family trusts are particularly useful for easy estate planning and protection of assets from creditors or relationship property claims. However, it is becoming very difficult to use them as a protection from means testing, for example for rest home subsidies. They are costly to set up and administer, and have to be looked at in relation to the benefits offered.

There is no perfect solution for asset ownership. Every solution has pros and cons, and it is a matter of weighing them up to see which offers the greatest benefits overall.

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Get Rich Fast or Slow

get-rich-fast-or-slowGet Rich Fast or Slow

The rate at which wealth grows is determined by three things: the difference between your income and your outgoings (that is, how much you save), the nature of your assets and the nature of your liabilities.



Income is a flow of money which can be either spent or saved. Wealth is like a store of money where savings are accumulated. The more you save, the more your wealth should grow.

The nature of your assets

Assets are things of value that you own. Lifestyle assets are those which decrease in value over time, such as your house contents, your car and many other possessions which add to your lifestyle but not your wealth. Investment assets which produce the greatest wealth are those which grow in value and provide income such as bank deposits, shares, rental properties and businesses. By reducing your holdings of lifestyle assets and increasing your holdings of investment assets you should build wealth more quickly. Your family home falls into a third category called lifestyle property. It will add to your wealth less quickly than investment property as it does not produce income.

The nature of your liabilities

Your debts can be categorised along the same lines as your assets according to the purpose of the borrowing, that is, lifestyle debt (for living expenses and lifestyle assets), investment debt (for rental properties or businesses) and lifestyle property debt (the mortgage on your family home). Lifestyle debt is known as bad debt because it is money borrowed to buy things which go down in value or have no lasting value. Investment debt is good debt as long as the net return from the investments purchased is greater than the cost of borrowing.

Building wealth is about saving more, increasing investment assets, reducing lifestyle debt and borrowing to invest.

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It’s About Time

its-about-timeIt’s About Time

It’s about time, or, to be more precise, it’s mostly about time. That is the answer to the question on most investors lips, which is ‘How should I invest my money?’ The next question to ask should be ‘How long do I want to invest my money for?’ Your investment time frame is one of the key ingredients in deciding how best to invest your money. The problem is, many inexperienced investors don’t understand the connection between time and investment.

Your investment time frame is the time after which you will need to access the amount of money invested in order to spend it. This is not to be confused with the time after which you will need to spend the income from the money invested. Many people approaching retirement have the mistaken belief that their investment time frame ends at the age of retirement. If things go according to plan, you will still have money invested the day you leave this earth. That could be thirty or so years after you retire. Your money will be mostly used up, but gradually. While every dollar you spend has a different investment time frame, it is more practical to consider three investment time frames – short term, medium term and long term. Money allocated to each of these time frames should have a different investment strategy. Money required in the short term needs to be invested mostly in stable assets, despite the lower return, to avoid the risk of loss. Funds for the longer term should be invested in assets which will grow, albeit with volatility, to get a good return. Funds for the medium term should be a balanced combination of the two.

Investing in this way gives the opportunity for a good return while making sure funds are available when required.

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Get Ahead Before You Retire

get-aheadGet Ahead Before You Retire

The last five years or so before retirement are some of the most important in your life. Your choices between spending and saving in those few years will determine the quality of your retirement. The wealth you have accumulated at the time of your last day of paid employment will determine your financial future for the rest of your life – which could be around thirty years.

In these last few years, it is really important to decide how you wish to spend your retirement and therefore how much money you will need. Then you will need to calculate how much you will need to save each year to reach your target level of retirement savings.

The transition from a high level of income to a low level of income after retirement is not an easy one. It is always a lot easier to find ways to spend extra money than it is to find ways to spend less! As you approach retirement, try and adjust your spending to fit what your retirement income will be. You will need to make allowances for any work-related spending, such as transport. The benefits of doing this are:

  1. You will be able to test how realistic your retirement budget is before you give up your job
  2. You will be able to adjust gradually over a period of time to your new income instead of going ‘cold turkey’ from a high level to a low level of income
  3. You will be able to save even more for your retirement.

Finally, check the balance between the value of your home and the value of your investment portfolio. If your house represents more than 70% of your total wealth, you may be in danger of being asset rich but cash poor in retirement.


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Include a Charity

include-a-charityInclude a Charity

Giving is for everyone. We all have causes we care about and we all have the power to give money to help those causes. Whether you leave this earth with $10 to your name or $10 million, you can provide for you chosen charity in your will. It is one of the easiest ways to give.

There is a common misconception that donations or bequests to charity are only made by wealthy people. This is not so. They are made by people who care about the communities they live in and the causes they are passionate about. Without the generosity of these people, many of our charities would struggle even harder to survive. There are many reasons why people choose to give; to contribute to the ongoing work of a chosen charity, to leave a gift as a lasting memory or to give back to the community.

The starting point is to choose a charity you would like to help. Do a little research on the areas you are interested in and the organisations working in those areas to find one that is a good fit for you. It is a good idea to make contact with the charity to let them know of your intentions. They will then be able to include your bequest in their future planning. The next step is to contact your solicitor to arrange for your will to be updated. You might wish to leave a fixed sum of money, a percentage of your estate, or a specific asset, such as a property or an investment fund.

Make sure you tell your family and friends about your bequest so they can ensure your wishes are carried out. Who knows, you may prompt them to make their own bequest. For more information click here.

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Conquer Your Fear of Debt

Fear of DebtConquer Your Fear of Debt

When it comes to confronting your financial fears, the ultimate four letter word is debt. For many households, debt it is the single biggest contributor to stress. It has the power to destroy relationships and even lives. Everybody’s tolerance of debt is different.  Problems occur when two people in a relationship have different views about debt, or when debt repayments cause financial hardship. If debt is dragging you down or causing fear, here is how to confront it.


  1. Make a list of all your current debts, the interest rate you are paying on each debt and the minimum repayments. Your first priority is to make the minimum repayment on all debts. The next priority is to make additional payments over and above the minimum on the debt with the highest interest rate. Once that is paid off, start on the debt with the next highest interest rate and so on.
  2. It goes without saying that if you are struggling with debt, you shouldn’t take on more debt. If things are getting out of hand it is tempting to borrow more to keep up repayments. Instead of this, negotiate a new repayment arrangement with your creditors or refinance over a longer term.
  3. Free up more money to pay off debt. Make a list of everything you spend in a month and look at what you can cut back on. Personal items, groceries and subscriptions to services you no longer use are the easiest areas to target.

Be smart with your borrowing. Borrow only what you have to, for the shortest amount of time at the lowest possible interest rate. Shop around for the best deal rather than the one closest to hand. Don’t borrow up to your limit; leave some wriggle room in case something unexpected happens.

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Planning with Uncertainties

UncertaintiesPlanning with Uncertainties

Making plans for your financial future is hard enough at the best of times, but when there are lots of unknowns it is even more difficult. There may be uncertainty around basics, such as what your income will be from one week to the next, or one year to the next, and around what your outgoings will be, such as when you transition from a working life to retirement. At a higher level, there may be uncertainties around which house, town or country you will be living in, or which career you will have.

There is always a temptation when there is uncertainty to not plan at all, because it is too hard. Yet planning is even more important when life is uncertain. The way to deal with uncertainties is to clearly separate them from the things that are certain.

Perhaps you have your own business or you work on commission, or work irregular hours. There is usually a base level below which your income doesn’t usually fall. That is the income level you should plan with. Regardless of what your income is, where you are living or who you are living with, there is a basic level of spending that covers the essentials of life. These are the expenses to start planning with. It is best to underestimate income and overestimate spending in order to err on the side of caution.

You may also have uncertainty around future plans for a sum of money you have on hand. Perhaps you are thinking of using the funds to renovate the house or set up a business. Think of the minimum time period in which your level of certainty will increase and invest for that time frame to get a better return.

As the uncertainty diminishes, plans can be adjusted accordingly.

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Small Steps to Financial Success

Small StepsSmall Steps to Financial Success

It’s great to have big, audacious goals to achieve. Perhaps you want to retire early, become financially free, or become a multi-millionaire. To achieve big goals, you have do things differently than you have done them before. However, finding the confidence to take a big leap out of your comfort zone is not easy. Big goals can seem unachievable at first, as well as scary, so a good plan is to take small steps initially rather than a giant leap. Small steps successfully achieved give you a sense of making progress while building your confidence to make changes.

Clarify your starting point

You can’t achieve a goal without knowing where you are starting from. It’s no different than taking a road trip. If your destination is Whitianga, the route you take, and the time you take to get there, will be different depending on whether you are starting out in Auckland, Wellington or Christchurch. Take stock of your current situation including your assets, debts and income and then develop your strategy.

Make one small change at a time

Set up a regular payment into a savings account, even if it is just a small amount. Review your KiwiSaver fund. Investigate ways to increase your income. Research investment opportunities. Doing something every day to take you towards your goals can add up to big progress over time.

Track your progress

What gets measured gets done! A simple way to achieve your goals is to create an image you can use to mark your progress. For example, if you want to reduce debt, draw a flower with a number of petals each of which represents a unit of debt ($100, $1,000 or $10,000). As you pay off each unit of debt, colour in a petal so you finish with a beautiful flower.

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