Posts by James Green
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Warrants aren't really the same thing. The loss is limited - if they expire worthless you lose your principal but no more. Also, if you plan to play derivatives you've basically got to factor in a large amount of your time to watch the market like a hawk. Plus, you need to trade a lot and as a small investor you'll get nailed on transaction costs.
That's just how speculators play the game. Once upon a time, a long long time ago (perhaps a couple of hundred years now), derivatives were used to shore up future sales and purchases (in much the same way that airlines hedge fuel that they actually intend to buy). And you can still used them like this, rather than day-trading or whatever.
Take something like BHP. 3 years ago you could have picked em up for about $12. Currently price $30. If you think that their mineral resources will continue to be in demand, you might consider some June 09 warrants. Exercise price is $6.30, warrant price $24.30. Current BHP share price is around $30 (quite close to 6.3 + 24.3). You buy 100 for $2430. If in 2 years time the head share price is $50, then you have made a 105% gain. You could even consider parting with the princely sum of 630, and keeping the shares. On the other hand, you could buy 2430 worth of shares, but you would only have made a 67% gain. This doesn't seem particularly far fetched, given broker's current price targets. So you can still use warrants and options as a leverage strategy.
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Merc: IRD allow you to choose in your first year of ownership if you wish to depreciate an asset. It could be that our MPs elect not to depreciate. Or not.
Che: I kind of assume it was linked off a blog, so I'm reasonably confident they were public. My first thought was that it might have been I was particularly bored and was watching shitstorms on kiwiblog for a little light ent. I'm kind of annoyed that I can't find it. I usually pride myself on my information seeking skills, but I'm finding it harder to find stuff on the open internet these days. I guess especially because I don't really recall what the exact terms were that were used.
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Oh yeah. In case it wasn't clear, that is entirely my point. In some ways it doesn't seem like a lot as a percentage of the house, but there is a comfortable advantage for the investor.
I've seen some graphs lately, with number of investment properties owned in different income brackets over time, suggesting that 60-100k individuals had been buying up in the last decade.
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I thought a nice worked example might better demonstrate the weird advantage that depreciation gives to renters over investors. Seeing as Stephen and Joanna were both talking about Haitaitai, this is vaguely worked out to there.
So, the initial figures will be familiar to a regular home-owner$500,000 Purchase Price (Median for Eastern Wellington)
-$40,000 Interest
-$2,000 Rates
-$500 Insurance
-$1,000 Repairs
-$1,000 GeneralSo you now own a big asset, which hurts you in the pocket to the tune of $44,500 a year.
Now, if you were renting that house and it cost $450, then you've saved some over the year.$23,400 Annual rent
This then leaves you with a $21,100 net loss, over if you were renting. Now, here is where it gets a bit interesting. If you are actually Mr X, property investor, and you also have a nice salaried job of say $90,000, then you claim that loss against you big fat salary, and you get a $8229 tax refund. Mmmm tasty. So now you are only r $12,771 hurting. Niiiiice.
Then you get to depreciate the value of the house. Thus, you have a hypothetical loss of:-$9,000 Depreciation
And although you didn't actually pay that money, you still get a tax saving. Niiice.
$3510 Tax Refund #2
-$9,361 Net Cash
So you are now comfortably better off than the person who just owns the house. You might then get an accountant to write off part of your own house/rent/powerbill etc. as a business expense, further increasing your gain.
Then Mr X considers that houses in Eastern Wellington have risen 17% in the last year, and hope that they will do at least 10% this year
$50,000 Capital Gain
This means that Mr X hopes to make $40,639, although the capital gain is unrealised. However, if the house is sold for more, Tax Refund #2 is repayable, so it's closer to 37,000.
Having looked over this, it would seem that if you can't currently afford to buy a house, buy a rental property(!)
I'd also be very wary about buying in a far-flung area. If Stephen's expected bubble burst comes, the person who bought a house in Cannon's Creek will still have a house in a place they don't want, and be unable to find a seller. The person buying a house in a more desireable area will still have buyers (but for less), but if you don't have to sell, at least you're living where you want to be. -
While LAQCs do help, if you own the property in your own name, you can gain very similar benefits. In fact, I'm sure I read somewhere recently that there has been a burst of investment property buying by people in the 39c tax bracket. A rather unintended consequence of having a higher top marginal tax rate. Another cunning trick would be to make losses attributable (either from LAQC or directly owned) deductable only at 33c, not 39c.
On the other hand, while I used to see the merits in higher marginal tax rates, I've decided that it merely enhances a very familiar distortion. Having a business, any business, appears to be a good way to minimise tax and enhance wealth, by diverting income to things you'd buy anyway. I have memories of kids driving round in 'farm' vehicles (and by that I mean a nice new car purchased for the 'farm' business, not some sort of beat up old ute). A salaried person buys their newspaper, a farmer buys it for the business. etc. etc. Thus, high marginal tax rates afflict those with a 'normal' job ... and give business-people's accountants more work to do. Oh, and of course, that's also Che's tax dollar going on the accountant, because it's also a business expense.
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Property is the only leveraged investment an average person can make (ok, there are managed investments that use leverage to boost yield, but they haven't worked well).
ASB will lend you up to 70% of the value of quite a range of shares. The rates are a little less favourable than mortgage, but it's still not too bad. Unless of course, by average you mean people that are a little faint-hearted. A number of australian shares offer warrants, which are also quite attractive in terms of leverage, plus you don't have ongoing interest costs.
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So, so many things I could say here. But before I respond, I find it interesting that no-one has mentioned the D-word.
As someone who rents two houses from the bank, one for personal enjoyment, the other for profit, the single biggest difference between the two is DEPRECIATION.
(Incidentally, I would like to disagree with Stephen that if Yamis rent is similar to his mortgage repayment, then that should be excluded from the return. So perhaps deposit+payments-hypothetical rent).
At current prices, I would imagine the only reason most people buy investment properties is related to depreciation, and its flow-on taxation benefits. I think that (in my part of the woods anyway) that capital gains (tax) is a red herring. Depreciation turns cashflow negative properties into cashflow positive. This means that, even if a capital gain is your ultimate goal, it is not costing you anything (and may even be paying you), while it appreciates. In contrast, buying shares with a loan (margin lending), the dividends don't pay the loan interest, so you are paying interest in the hope that it will appreciate. Thus, depreciation facilitates property speculation. It seems especially ridiculous that you can depreciate an item increasing in value. If you buy a lawnmower to mow your investment's lawns, the mower loses value and will die one day. However, the house, at least in the current climate, is increasing in value, but you can pretend that it's not.
Changing the rules around the use of depreciation on residential investment properties would certainly be an interesting idea. However, like most strategies it would have some unintended effects.
Long term will it also mean a downgrade in the quality of our houses as landlords do the bare minimum to keep the house livable?
You see, that's not actually true. Depreciation ultimately is what facilitates landlords to improve their properties. Eventually, over time, the depreciation clawback when you sell makes it more economically viable to renovate (as the capital expenditure cancels out the depreciation). So if depreciation was removed, then it might make landlords less inclined to make improvements.
Thus far, my current best idea is thinking that instead of having depreciation, improvements on residential property could be expensed, rather capitalised. This would encourage landlords to improve their properties, but would remove some of the slightly sill tax benefits.
Finally, I'd just like to point out that if someone had purchased 45,000 of Mainfreight shares 2 years ago, they would now be worth 132,000, and if you'd bought 3 years ago, even more than that. And there would probably be $5000 in dividends etc. in that time. Naturally, not all investments are quite that good, but I'd still probably be better off if I'd stuck with shares rather than buying a house. And of course, shares never leak sewerage.
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Seriously I don't quite understand how Germany (90 mln people) manages with a single level .de but we need multi level domains for 4 million?
Argh!!!! I think that's a horrible horrible idea. Oftentimes, being able to search second level domains is hugely helpful. I frequently do google searches with "site:.govt.nz" appended to them, rather than using the govt's own search engine. Simiarly with educational institutions. If you're hunting for something academic, or a person with a common name (like mine), and you can search only edu or ac, that's a really tidy way to narrow down your search.
And as to aliasing, it still really pisses me off when places arbitrarily don't configure the non-WWW versions of their domain name. Would it really hurt to have otago.ac.nz point to a webpage?
NEWS FLASH: Unfreakingbelievable. The University of Otago has finally configured otago.ac.nz to point somewhere. That's so good. I should really send a thankyou note. I'm pretty sure that this has only occurred in the last month.
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My journalistic cynicism started early. By the age of 13, quotes from me, taken from an interview that never occurred had been published. And it hasn't really got a lot better ever since. One other career highlight was discussing Susan Wood's experiences in public toilets on Breakfast...
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OK. So someone has to be boring... but it is worth pointing out that sometimes things which seem self-evident turn out to be totally wrong.
And, call me boring, but I had a look at Emily's paper, and it's probably fair to say that it's the journalist making her look stupid. A few interesting, and perhaps not self-evident things
* A year post-birth, the average was .6kg away from pre-pregnancy weight (so on average, pretty much no extra weight)
* Mothers failing to loose weight were on average approx 2 years younger
* And there were a bunch of interesting things that didn't directly affect weight gain, such as employment status, depression, smoking, and breast-feeding