The return on investment from a rental property can come from someone else paying off your mortgage rather than capital gains.
Q: What are your thoughts? My dad, an accountant and 78 years old, has been a landlord coming up 55 years, and he’s never once talked about capital gains. He’s always maintained that the return on investment comes from someone else paying off your mortgage (or if you have to top it up, it’s compulsory savings). And in 30 years, when the mortgage has been paid off, you have an inflation-adjusted income for your retirement. I don’t think I’ve heard anyone else take this view, so interested to hear what you think.
A: Your Dad has come up with the perfect way to invest in rental property. Investing is about risk and return, and he greatly reduces the risk of property investment in three ways:
In retirement, if your father finds that worrying about tenants and maintenance is a drag, or if he would like to free up more money to spend on gallivanting around the globe, he always has the option of selling a property. Somehow I’m not picturing your Dad as a gallivanter, though!
Q: I am an investor in Oyster Direct Property Fund. Two years ago the fund manager suspended redemptions from the fund due to market influences at the time.
Are you able to offer any clarity on my rights as an investor and the fund manager’s obligations during this suspension period? Is there a time limit to how long a redemption suspension can last?
The fund manager is providing regular updates as to the status of the suspension. Indications are the suspension will be lifted in the near future but no firm date has been proffered.
A: Investing in a property fund can be another good way to get into property.
There are several upsides. You usually invest in commercial property, which differs more from your own home than investing in a house for rent. And the fund usually invests in a range of properties, not just one, so problems in one location might be offset by success elsewhere. Also, you don’t have to run the investment. You just put in your money.
On the downside, circumstances might change, and it can become hard to get your money back out. Or, if you do sell, you may get a low price.
It seems you’ve hit the downside.
“In late 2022, the economic environment shifted rapidly, with inflation, interest rates and market volatility all rising sharply,” says Oyster Property Group.
“At the same time, due to these market conditions, the fund experienced a significant reduction of new investment equity and a surge in redemption requests.
“To protect the long-term value of the fund for all investors, the redemption facility was suspended. This provision is built into the fund’s trust deed to support it during volatile economic periods, such as this one, and it was a measured and necessary step to preserve its financial resilience.”
While investors can’t get their money out directly from Oyster, the company says they can withdraw through online platform Syndex – although, given market conditions, I doubt if you would get a great price.
Oyster says it warned investors a suspension might happen in its product disclosure statement (PDS), which is given to all potential investors, and added that it encouraged investors to seek independent financial advice.
On your question – is there a time limit on a suspension? – Oyster replied, “There’s no fixed time limit – however, any suspension must be justifiable and in the best interests of all investors.” It adds that decisions on redemptions are overseen by the fund’s independent supervisor.
So, is the suspension likely to be lifted by the end of this year?
“Oyster is reviewing the fund’s position on an ongoing basis with focus on opening the fund to new equity and reinstating a redemption facility as soon as it is prudent to do so.
“As economic conditions improve and interest rate reductions begin to take effect, Oyster will provide investors with a clear timeline for these steps,” the company says.
Hang in there!
Meanwhile, other readers might note that any property fund investment should be with money you are happy to tie up for some years.
Q: Just a follow-up to last week’s Q&A about an easier way to donate to charitable trusts. For those who want to make donations directly, and avoid website portals or third-party websites who may take a percentage, a quick call requesting the trust’s bank account details via email or post works.
I have worked for such a trust with a website portal for donations (the portal and the bank take a fee). Frequently we received requests for bank details enabling direct credits, which we happily provide. This is then beneficial for both, and provides an opportunity to build a relationship with the trust rather than just being a donor.
A: Thanks for a good idea.
Q: I have a KiwiSaver account. I am 72 years old so can access my account.
If I deposit $50,000 into a term deposit, I will be paying tax on the interest earned. Also the money can not be accessed until maturity.
If I deposit the $50,000 into my KiwiSaver, I believe there is no tax paid. I am able to withdraw the money as required. KiwiSaver appears to be the better option. Am I missing something?
A: You’re missing a few details. KiwiSaver is indeed taxed, but your provider takes care of that, subtracting the tax from your balance. And the returns you see on Sorted’s KiwiSaver tools are after tax.
So when you compare term deposit and KiwiSaver returns, you’re right to look at the deposit returns after tax too.
Also, the risk level of your KiwiSaver fund is relevant. If you’re in a low-risk fund, it’s a good place to park money you might want to withdraw at any time – given you’re over 65.
On the other hand, if you’re in a balanced, growth or aggressive fund, your balance will sometimes fall a fair way. While you will probably get more long-term growth, these funds are not suitable for money you might withdraw within the next two or three years.
It can work well to be in several funds at two or three risk levels, and spread your money according to your spending plans.
Q: I recently received an email from sorted.org.nz saying that since KiwiSaver is changing (the government contributions halving), it was a good time to check your KiwiSaver against other providers.
I was shocked at the difference in fees between providers, from as low as $2000 up to $13,000 for total fees until I retire.
Being incredibly fiscally conservative, I had felt my money was safest in a bank-related provider where I had originally signed up. But after reading your book Rich Enough? I decided to swap my fund, saving $4000 in fees.
I also moved from a balanced account to a growth account as I have close to 10 years before I will be needing my KiwiSaver.
I strongly advise everyone to use Sorted’s KiwiSaver Fund Finder calculator to check fees. I regret being so passive about my KiwiSaver, and your book helped me understand that the money is reasonably safe (anyone who has seen finance companies collapse in the past probably can understand my concerns).
A: That’s great that you have made those moves. Your fee savings, plus the compounding returns on that extra money, will add up to some lovely retirement treats! You will almost certainly also have boosted your savings by moving to a higher-risk fund.
However, given your “fiscal conservatism”, I hope you’re ready to cruise through the inevitable ups and downs of your balance in a growth fund.
Also, as noted above, growth funds are best for money you don’t plan to spend for 10 or more years. So you might want to move the portion you’re likely to spend in less than a decade back to a balanced fund with the same provider. And then move it again to a low-risk fund when you’re two or three years away from spending it.
But if you expect some of the money to stay in KiwiSaver for more than 10 years, by all means leave it in growth. And be brave about downturns! Two further notes:
“We do have an entire email programme, primarily to those who have signed up for an account on Sorted, or otherwise have told us they’d like us to stay in touch,” he says. You can specify how you would like to be reached, and opt out at any time.
Q: You recommend using a KiwiSaver fund with low fees. But many of the low-fee funds have an additional membership fee. How to judge if the annual membership fee impacts the long-term advantage of low fees?
A: A valid question. Fortunately, the work is done for you.
But first, some background. Most KiwiSaver fees are percentages. But some providers also charge membership or administration fees, which are a fixed amount regardless of whether your balance is $10 or $10 million.
“There’s been a trend away from membership or administration fees in recent years,” says Hartmann.
“That said, about a third of KiwiSaver providers have let us know some form of flat fee that they charge.”
The effect of these fees will vary widely, depending on how much you have in your account. If, for example, your balance is $100, a $36 a year membership fee will have huge impact. But if your balance is $100,000 or more, it won’t make much difference.
According to information given to sorted.org.nz about these fees:
All of these are in addition to percentage fees at varying levels.
How can you apply all this to your own situation?
When you use Sorted’s KiwiSaver Fund Finder tool, you fill in your age, account balance and other details. The tool then projects how much you might end up paying in fees by the time you’re 65, in each of the funds at your risk level. This calculation – mentioned in the Q&A above - takes into account both flat and percentage fees, says Hartmann.
You may also want to use Sorted’s other KiwiSaver tool, Smart Investor, to get more info about each fund. But this time you don’t enter your details, so the fee calculation can’t take into account your balance and so on. Instead, the fees “are based on what you would pay over a year if you had $30,000 in this fund. This includes both flat fees for membership and percentage fees.”
If your balance is much lower or higher than $30,000, you’ll get a more accurate fee comparison in the Fund Finder.
My recommendation: First use the KiwiSaver Fund Finder, and focus on several providers charging the lowest fees. By clicking on each fund’s name, you go through to the Smart Investor page for that fund, to learn about the asset mix, what the provider says about the fund and so on.
You can also compare each fund’s past returns with other funds at that risk level. But don’t take much notice of this – other than to rule out really bad performers. High returns in the past are no indicator of high returns in the future.
As Hartmann says, total fees “can add up to tens of thousands, so it’s really important to keep an eye on fees”.
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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 mary@maryholm.com. 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.