“Time is the friend of the wonderful company, the enemy of the mediocre.

– Warren Buffet

I recently had a conversation with a friend about their investment property. It was the usual exchange up until we started talking about capital gains.

“Jim just used his \$200k property gain to buy himself a new boat!” I heard him exclaim. The guy had several properties – and several mortgages.

I was in two minds, I couldn’t deny that \$200k was a huge gain but I also could shake that something smelled fishy. I crossed my legs.

I started wondering “Hold on. Was it actually a gain? How long and how much money did he spend on the house before he sold it?” Why does this even matter? Money is money right? Let me illustrate why knowing how much money you actually gained is important.

## The Property Guru

Lets look more closely at Jim.

Jim is an equity property investor and has 4 properties; A1, B3, C4, D5. For the purposes of this example we will focus on the sale of D5.

Here are the facts and calculations that I did in the background:

• Jim has just sold D5 for \$650,000 which is was worth \$450,000 5 yrs ago and has a mortgage at 6% fixed.
• Jim has tenants helping him pay his mortgage
• Based on the above, the current value of Jim’s mortgage at the end of Y5 was \$460,060 (Interest + Principal Contributions + remaining mortgage balance at Y5)
• Commissions and other cost to sell were \$25,000 (Based on B&T and this article)
• Let’s assume renovations were required (because you generally won’t get something for nothing. Yes even for property) at a cost of \$132,000 (60 sqm at \$2200 based on Westpac)

### I’ll save you the arithmetic, the gain after interest and fees is \$32,940.

So what happened to this \$200k gain? Most likely a product of the law of least effort (its easier to deduct \$650k from \$450k then do the arithmetic above or to keep track of several properties and their respective mortgages). If Jim did buy a boat for 200k it would have been at the detriment of his other investments.

But is Jim’s situation typical? In a “hot market” you may get away with a quick sell at a marginally higher price, which is what you’re hearing about in the news (as rampant speculators quickly start bidding up prices) however, in most cases you will need to do some sort of improvements/maintenance; especially if you have tenants.

More time passes = more improvements/ maintenance work = higher cash outlay required before sale. For property, time is a double edge sword.

## The Property Market

Let’s compare alternative investment vehicles with the average returns of the property market in Auckland as per Barfoot and Thompson.

Why? Because you want to.

 2012 2013 2014 2015 2016 2017 Jan \$470,000 \$526,888 \$580,000 \$700,000 \$760,000 \$846,500 Feb \$464,000 \$525,750 \$620,000 \$685,000 \$738,000 \$820,000 Mar \$500,000 \$575,000 \$652,000 \$711,000 \$798,000 \$900,000 Apr \$491,250 \$566,000 \$619,550 \$753,500 \$820,000 May \$504,000 \$570,000 \$645,000 \$750,000 \$809,500 Jun \$528,900 \$590,000 \$626,500 \$786,000 \$839,500 Jul \$518,500 \$585,000 \$645,000 \$757,000 \$840,000 Aug \$505,500 \$561,500 \$630,000 \$755,000 \$850,000 Sep \$525,000 \$599,000 \$635,000 \$790,000 \$850,000 Oct \$545,000 \$590,000 \$655,000 \$780,000 \$865,000 Nov \$560,000 \$621,400 \$691,500 \$795,000 \$850,000 Dec \$550,500 \$629,000 \$720,000 \$800,000 \$840,000 Yearly Average \$513,554 \$578,295 \$643,296 \$755,208 \$821,667 \$855,500 % change 13% 11% 17% 9% 4%

As you can see housing growth rate has decreased since its 2014 peak. Let’s assume the 5 year average is a good indicator 11%. As you’ve learned above this 11% is gross, meaning, that any interest effects, commissions, renovations, legal fees and other fees (like tax on capital gains) haven’t been taken out of this figure.

I’m going assume that none of these costs exist for our comparison because I’m too lazy to mock up example figures and I want to give property the benefit of doubt. Please note that the costs I am ignoring are VERY substantial and should ALWAYS be taken into account when making investment decisions unless you want to end up like Jim.

So let’s look for investment alternatives in a place where all kiwis should be familiar, the Kiwisaver.

The following funds currently outperform the property 5 year average:

1. The OneAnswer Australasian Share Fund; 13.68%
2. The OneAnswer Australasian Property Fund; 15.76%
3. Milford Active Growth Fund; 13.84%
4. Milford Wholesale Fund; 13.68%
5. My personal P2P lending account; 18.39%

These are gross figures to make them comparable. If we were to take just last years property growth figure (4%) and compare that against the Kiwi Saver results we can see that almost every single Kiwi Saver fund (irrespective of risk preference) outperformed last years property growth.

Obviously future gains are not indicative of past results but it does show that there are other (easier) options out there that give you the same if not better results.

If property growth continues to slow is it wise to continue to hold your property or put more money into other investment options? Only you can make that call.

## The Take Aways:

1. Don’t believe the media hype about property. As you can see from the March results the average cases are nothing special and with a declining growth rate it will be interesting to see if the hype continues.
2. Get the full picture – Make sure you understand how much money your investments are making less the costs.
3. Property is not always the best choice or the easiest to manage.
4. Make your money work for you not the other way around.

That’s it for now. If you have any questions about anything let me know in the comments below.