Better off in the Bank?

[tricky]

I heard a comment today that many of you may have come across before describing a property investment:
"It only returns 5% gross yield - better off putting your money in the bank and getting 7%".
I'm not sure if I agree with this statement.
Factor in capital gain and depreciation and I'm thinking a 5% return in property is better than 7% in the bank.
Which leads to the question:
What rate of return from property is equal to 7% from the bank?
Would an empty house which only picked up capital gain be similar to 7% in the bank?
There may well be a lot of factors to consider in order to answer this and I'm thinking of the broad, average situation most of us are in - employed, bit of equity, couple of properties ...
If anyone has the brain power and the time - feel free to comment.

[Ivanhoe]

Can you depreciate your money while it's sitting in the bank? Can this on-paper loss be offstet against your (LAQC) or other legal entities (Trusts) income?

[David_W]

Property beats the bank hands down

Interesting question tricky,

Having money in property beats having it in the bank easily. Remember the leverage property gives you too. Eg. 20% deposit (banks funds other 80%) on a $300K Auckland property, means $60K committed. Take an Auckland 10 year return of 100% (Rev IQ/RP Data gives a 10 year growth figure of 100% in many places in Auckland that you can buy for $300K).

Your $60K becomes worth $360K in 10 years time. How - assuming an interest only mortgage, we have an initial loan at $240K still there 10 years later. However the property has gone up 100% in 10 years (in Auckland where capital growth is generally higher than other regions of the country this rate of growth is just typical) to be worth $600K. Ie your $60K with leverage is now worth $360K, a 600% increase. What is your Cash on Cash Return or Internal Rate of Return on that.

Whereas in a bank your $60K at 7% compounding annually is worth $118K at the end of it. It hasn't even gone up 100% over 10 years! That is the power of leverage.

So $300K made in equity on the property versus $58K in the bank. Even if you were negative gearing with a typical 5% Auckland yield - who cares. You might only make $250K instead of $58K! Big deal. Remember with property you can still claim depreciation to reduce your salary/business income, claim some home/office expenses for administering your portfolio etc.

Leaving large sums of money in the bank is lazy in my opinion. Sure I have a rainy day fund, but that is to cover my car having a nightmare and the next overseas trip. Get a property and keep "money" in a revolving credit account.

Please practice the numbers yourself. Even with a 9% return from the bank and a 4% net (not gross) yield you will be far better off (unless the property is only worth $50K in the wops).

[Gatekeeper]

All Ok if you believe housing will continue to inflate at 10% pa. It's very very doubtful!. Everythings way out of sync, house price growth is way above the average and has been for a while. To expect it to keep on and on is being very very optimistic in the extreme. Things usually go back to the norm eventually, however long that takes. (See good article on this and the length of time p[redicted to go back onto the path http://www.infometrics.co.nz/top10/art3520.htm

So whats the other scenario?
Interest rates go up, maybe way up, and those most heavily leveraged get stung, with top heavy mortgages, and a big loss at the end. The guy with the cash is earning 27% per year!

Think it sounds unbelievable? It's not, I've been there.
On the right side of that one, thankfully. It does happen, property cycles go both ways. The more extreme one way the longer or more brutal the correction.

[spurner]

building wealth or receiving income

Depends what your intentions and expectations are.

If you are investing to build a portfolio, build wealth for retirement or whatever then I think it's pretty obvious that you'll build a bigger nest egg/portfolio through property rather than saving money in the bank.

On the other hand if you're really retired, and you're more concerned with receiving a reliable income to spend and live on, then I venture the suggestion that you may be better off with money in the bank, from a cashflow POV. Of course you will forego future capital gains and rental increases, but you will also forego management, maintenence, vacancies and ownership hassles.

If you want more cashflow NOW then you'll be better off selling up and putting your money in the bank. The other more balanced option is to sell enough of your properties to repay all your debt, so you'll have better cashflow to spend, and also have the benefit of growth on your remaining properties.

[McDuck]

In the good old bad old days, I think normal trading banks paid 18% on a term deposit.

That was pretty good if you were starting out and on a low tax bracket.

So say you had 100k in the bank, you were getting 15k extra every year after tax….

Houses were not appreciating …so it was a very secure option at the time.

Then the government gave the Reserve Bank powers to control inflation, and that was the end of that little party.

Then I think people went all mad on gold and stocks…
I can vaguely remember people having grins on their faces as wide as the Cheshire cat all one summer, …and down trodden broken souls and pensioners waving their walking sticks baying for blood the next.

Which I never understood….I mean it seems obvious that you don’t gamble what you aren’t completely prepared to loose.

[Gatekeeper]

Then the government gave the Reserve Bank powers to control inflation, and that was the end of that little party.

But then we got globalisation. Is the RBNZ really in control, or are we at the mercy of intl bankers who pump out liquidity (monetary inflation) that must find a home? Exported inflation!!
RBNZ hikes have had little effect.

[crombie]

How about selling of 5 % yield property and putting funds in Bank and keeping long term buy and holds, thus keeping some reliable cashflow from bank interest and liquidity.
Interest income is still offset by depreciation on remaining properties.

Just curious as to how much a percentage of property value, do property investors generally keep in available in cash on deposit?

[4thecat]

And it all depends on a lot of things.
Is the property in Ekatahuna or in Auckland = For your yield/return.
If you look at the property a bit closer, you find that unlike what you read in the books
Properties do not go up 10% per annum as most people like to believe.
They stay put for years on no end, may drop 5-10% in value and then , without much notice
double in a matter of 2-3 years .

For me, I am temporarily out of the property game, earning close to 10% ( terrible isn’t it ?) on the money markets. I can’t see the point of having money sitting around in Property ( or any other commodity ) for years on no end, doing bugger all. Saying that, give it a few years from now, and the property market is getting ready for another run. I catch the wave then …..
Someone mentioned that for a small outlay of money you can buy a house worth hundreds of thousands of dollars ::: called the Deposit, and the bank finances the rest.
You can do the same thing on the stock exchange, using leverage or even get into options.
There is not a lot of difference. After all, you buy property in the hope that it will go up in value.
If you buy shares you buy them in the hope that they will go up or down in value too.

Also
If you look at it a bit closer, why people invest in Property, I don’t think they do it for the weekly Rent return. Most would invest for the Capital gain factor. But is it capital gain at all ??? or is it only
a way to save guard your money against inflation ?

[David_W]

I am not suggesting the property market will go up 10% this year. But over the past ten years in Auckland my family's portfolio has gone up more than 10% per year every year, and indeed the ten years before that and the ten years before that.

In most parts of Auckland that is considered normal. I do appreciate that capital growth is not generally anywhere near as good as it is in magnificent Auckland.

[kalovatt]

Properties do not go up 10% per annum as most people like to believe.
They stay put for years on no end, may drop 5-10% in value and then , without much notice
double in a matter of 2-3 years .

For me, I am temporarily out of the property game, earning close to 10% ( terrible isn’t it ?) on the money markets. I can’t see the point of having money sitting around in Property ( or any other commodity ) for years on no end, doing bugger all. Saying that, give it a few years from now, and the property market is getting ready for another run. I catch the wave then …..

Exactly what I am doing now as well.

[David_W]

Some investors/traders I work with only ride cycles. They buy when the market is starting to go up, sell at highs and hibernate for 5 years, then do the same again. I would argue they miss on making money as you can still buy property below value and/or renovate it to add value, and/or build/develop a site to make money out of in those 5 years. It depends on what you want to achieve really...

[JohnL]

A better measure is how much property goes up, inflation adjusted. We had very high inflation during the 80s so property went up heaps. We now have low inflation so what is the projected long term appreciation? I can't remember where I read it (probably in the Herald) but the national rate of property increase over the last forty years was only a couple of percent above the rate of inflation. Perhaps somewhere you can look up real figures for different towns?

John

[mals69]

Even at 10 %

in the bank mr inflation will eat it up.

[4thecat]

Properties and any other commodity do move in cycles. Within those cycle’s are opportunities again to make money. But, if the cycle is going against you , it’s a bit like swimming against the prevailing current. If you are a strong swimmer , you may / will get there. But it’s hard yaker to say the least.

Take the current property market or example, from the tell tell signs that I can see , it is slowing down .
Which means people will find it harder to sell = but this means there are also opportunities to find a bargain.
Now that’s all good and nice. But it will also mean you may have also a hard time to move your bargain on again. ( looking at it from a trader point of view ) You may got a bargain, but if you can’t sell it quickly, your bargain can quickly becomes a Mill stone around your neck.

I have been in property for a pretty long time, and it’s been profitable all along the way. However I also know, there is a good time to be in it and a good time to cash up, and park your money elsewhere, which doesn’t mean putting it in the bank.
There are heaps of things you can invest your money in temporarily , which go up in value. It’s just a matter of being able to spot them and be a bit flexible in your investment mindset.

To find out where to put your money, just have a look at the stock exchange for example ( not NZ as it is a bit small ) and look at the different sectors like Property shares , as in Offices, Shopping centers, Developers, Retirement villages , or industrial properties, or Metals, Oil, Paper, Bullion , or what ever you can think of. There is almost an endless supply of things to look at.
You soon will see where the money is moving to. It always moves to where people think they can make money . True or false , who cares, it’s what people think , what’s important . the same applies to the property market.
Next.
Look at the charts of each of those different sectors and print them out.
Now to the interesting part , go and find a 5 year old Kid , to do the Kiddy test.! Don’t invest in anything, unless you do a Kiddy test first !
Basically show a 4 or 5 year old kid the different Charts/ graphs and ask a single simple question .
Which is : Tell me,,,,,, are those lines you see, going up or are they going down or sideways ?

If this 5 year old kid tells you they are going up, go and invest in it ! what ever it may be, it’s going up in value, so why not go for a ride and take advantage of it too?
( the reason for the test? : You see kids don’t know the first thing about stocks, world economics, and are very impartial to what you are showing them. all they see is a single line that is pointing in a general direction.
I have done this many times, and I tend to analyze things to high havens.
You get a 5 year old and ask the question, you get an answers within 15 second !
The fascinating thing about it is , its the people perception and there money that makes those lines go up or down. Like the old saying goes Go with the flow !
All I am trying to say here is, if you think the property market is slowing down, and you are in for a few years with low, or no returns, have a look around, there are heaps of opportunities out there to make money , and it‘s not all that complicated. Even 5 year olds can tell you where the next opportunity is.