Author Topic: Where to invest $400k cash in NZ? We are mortgage free.  (Read 4024 times)

LolaWoofgang

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Where to invest $400k cash in NZ? We are mortgage free.
« on: January 17, 2016, 09:20:37 PM »
Hi All,
New to posting but have been reading the Mr Moustache articles and reading tons of material on the forum for about a year now.

Both partner and I emigrated to NZ 6 years ago and love it. All my previous investment knowledge have come from property investment as there weren't many options where we were.

Now a little bit about us - We live in a very comfortable home that we purchased at $450k and is now valued at $500k should be ever want to sell it and move to a smaller place. We are 38 and 36 respectively and don't have any human kids, only a furbaby. We are mortgage free and completely debt free. Our household income is slightly more than $150k per annum and our cost of living is around 20% of that which includes a lot of international travel/family holidays as our extended families live abroad.

I recently sold a property investment overseas which has increased our liquid savings to $400k and this is at the moment sitting in a term deposit, earning 3.2% @ 10.5% tax rate. We have about $10k in peer-to-peer lending that is generating returns of 10-12% but the amounts are small.

We have both decided that we would like to retire (i.e. work for money) by the time my partner is 42, (he is younger @ 36) and would like to have a comfortable income of $6000/month to be able to travel, pay for the occasional luxury restaurant, volunteer and donate to worthy causes etc. We both have medical and disability/death insurance coverage. To work out how much we are going to need, my very basic calculations are below:

I am unclear as to how to calculate how much cash we are going to have to raise before ER. I realise that we are able to include in our portfolio income generating assets eg. rental property but I want to be ULTRA conservative and would like to have a significant amount of cash put aside before we call it a day.

Assuming we are only able to generate $1k of income a month through other means like rent and dividends, we will still require an ER income of $60,000 per annum.

Part A: How much do we need?
Based on my very simplified calculations, and assuming we live up to 85 years of age, I have come up with two numbers:

85-42 = 43 years in ER

$60,000 @ 43 years @ 2.7% inflation (average Kiwi inflation in the last 15 years) =  $2,649,660.00 

$60,000 @ 43 years @ compounding 2.7% inflation =  $4,402,622.05

- Which number should I use?
- I realise I haven't taken into consideration interest generated from leaving the money in a term deposit but the trend in that respect seems to be that savings interest rates are declining.

Part B: Generating the cash
1. Through savings - Our income is pretty secure for the next 5 years at least but I have discounted that as well and lowered it to 130k per annum at 20% cost of living per year. Saved household income = 104000 x 5 years = $520,000, which leaves another $2mil to raise if we're going with the first calculation!

2. Through wealth creation strategies such as buying and selling property - this is where I need help. Some financial investment strategies here would be great. We've looked at stocks, managed funds, property investments and peer-to-peer lending and so far find that property investment is still the best way to generate a large amount of returns in a relatively short period, <5 years. We also have some experience buying off-plan developments in blue-chip areas and have in the past sold for a good profit.

Part C: Income generation post ER
1. Rental property - I have been crunching some numbers in the Wellington region where we live and I can't seem to find the numbers to make sense. Most investment property initially comes across as good until you really look at it conservatively then the returns are at best 4-5%. And that is if you manage the properties yourself. Perhaps I am looking in the wrong places? Some property forums have advised to look into areas like Palmy for better rental yields?

2. Any other suggestions/recommendations?

I am a bit of a novice when it comes to investments in NZ and haven't really explored much in other areas. I find stock investments slightly confusing though my partner seems better at it though is very risk averse. We were recently introduced to investing in start-ups both in tech and manufacturing and were interested. However, many of these start-up companies we've met seem to struggle with their Investment Memorandum and can't seem to give us satisfactory explanations or realistic looking projections. Anyone else have experience in this?

Any feedback and suggestions and/or discussion welcomed! Really happy to have found this forum!

Jennie

"It's not how much money you make, it's how much money you save." - my Mother

« Last Edit: January 17, 2016, 09:32:50 PM by LolaWoofgang »

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #1 on: January 17, 2016, 10:01:04 PM »
Your mother is very wise.

Now to your question(s), it seems like there are a lot of moving parts so let's try and isolate them one by one and get some assumptions out of the way.

Do you plan on dying with as close to zero assets?  Your post implies that you have calculated your projected expenses until you die.  Not many here make that calculation because well it's nearly impossible to predict when we will die.  What we do try to do is estimate how much we spend a year and use the 4% rule, where you need 25x your annual expenses to be be FI.  Assuming you invest it in stocks/bonds/real-estate earning on average 7-9% a year.

As far as investments go, the majority in this forum are low expense passive index funds investors.  There are a few that specialize in real-estate however.
 

LolaWoofgang

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #2 on: January 18, 2016, 12:06:42 AM »
Ahh yes, the 4% rule. I had read that when I started doing my research about a year ago but have forgotten. Will go do a quick refresher and then come back if I have any other questions.

I am still looking for NZ property investment / other investment advise though.

Out of curiosity, in which parts of the US can you get a 7-9% return on a rental property? Sorry if this sounds like a naive question but say if we exclude mid-western states, can we get that type of returns in the suburbs of say Washington?

Thanks!

Captain and Mrs Slow

  • Bristles
  • ***
  • Posts: 414
  • Age: 59
  • Location: Munich Germany
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #3 on: January 18, 2016, 05:22:28 AM »
This might help with the math concepts

https://www.coursera.org/learn/time-value-money

Couresra Principles of Valution Time Value of Money


Scandium

  • Handlebar Stache
  • *****
  • Posts: 2223
  • Location: EastCoast
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #4 on: January 18, 2016, 11:20:56 AM »
Living to 85 years old seems a tad non-conservative, since you've already made it to 36+. Isn't average lifespan (which include infant deaths) over 80? Personally I assume at least another 10 years, into our 90s. 

And yes, with the 4% rule you'd need $1.5 mill. If you save about $80k per year (guesstimate based on your numbers) and invest the $400k now you'd have about $1 mill in 5 years. This is using stocks with real return of 7%.
« Last Edit: January 18, 2016, 11:24:50 AM by Scandium »

kiwigirls

  • Stubble
  • **
  • Posts: 163
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #5 on: January 19, 2016, 03:27:45 PM »
Agree with previous posters about using the 4% rule for calculating your stash.  Its a robust way of getting the ball park retirement figure you need.  That 1.5m figure excludes the house you live in but includes shares, cash & investment properties.  When you get closer or have a better idea of how that will be comprised you can detail the cashflow from your investments and see how it will work in practical terms. 

You mention you have had success buying and selling houses - was that in NZ?  Our property market differs from the US/UK in a lot of ways - the buyin cost is high and returns of 4%-5% for good areas with good tenants is normal for NZ.  Most people in NZ who invest in property are negatively geared on their properties (ie rent doesn't cover mortgage and expenses) and are making their profit from the capital gain on the property (which is not  taxed in NZ).  And in the meantime you get to offset the losses against your taxable income.  You can find higher returns on higher risk areas (Palmerston North & Dunedin where you are renting to students so the wear and tear is higher)  or in rental units in big cities (but you won't get the capital gains quite the same).

Shares or Property - either way will get you to your goal in about the same time.  Its just a matter of which you prefer and which suits your risk profile / skill set.  What won't get you there in the same short time frame is cash.  You simply won't get the returns in this low interest rate environment sufficient to grow your stash.

I recommend that you read a couple of respected NZ financial commentators; my favourites are Mary Holm maryholm.com (fan of index funds) and/or Martin Hawes martinhawes.com (fan of active shares & Listed Property trusts) for a kiwi perspective.  For rental property try Ollynewland.co.nz.

kiwidollabill

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #6 on: January 20, 2016, 01:57:10 PM »
Where abouts in NZ are you?

I'd suggest speaking to someone at http://www.superlife.co.nz/ or go to one of the investment seminars run by them.  You can open a low risk (ETFs and Bonds) investment account which you can draw down on very easily. 


LolaWoofgang

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #7 on: January 20, 2016, 09:10:47 PM »
Hi All,
Thanks you so much for your input! I will definitely check out all the recommendations.

We're based in Wellington.

Cheers,
Jennie

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #8 on: January 21, 2016, 08:51:21 AM »
Out of curiosity, in which parts of the US can you get a 7-9% return on a rental property? Sorry if this sounds like a naive question but say if we exclude mid-western states, can we get that type of returns in the suburbs of say Washington?
DC-area property values run high, which is to say, cap rates run low. Low-cost smaller cities are generally better for finding cap rates in that range. However, I hear Baltimore still has some fertile grounds.

What's wrong with the Midwest?

I'm in the SE myself and my county has a no-shit glut of properties in the 7-9% range. I actually have my cash-flow spreadsheet open right now, working out the timeline for the next two buys.

kiwidollabill

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #9 on: January 27, 2016, 02:51:39 PM »
Hi All,
Thanks you so much for your input! I will definitely check out all the recommendations.

We're based in Wellington.

Cheers,
Jennie

Nice part of the country, I grew up just outside of Otaki and it was always a treat to go into 'the city'

As per my recommendation, I'd open a superlife portfolio with a risk profile you are happy with.  Property in welly has done ok in the last 12 months but there is no fundamental driver indicating it will be positive over the next 5 yrs.

Stay away from investing in StartUps unless you know ALOT about the industry they are active in and can afford to loose 100% of the money invested.   

Mike666

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #10 on: April 20, 2016, 01:16:22 AM »
An interesting topic similar to one I posted a year ago - http://forum.mrmoneymustache.com/investor-alley/funding-the-lifestyle-in-nz-with-an-income-fund/ and with great contribution from kiwigirls and others to both. Thankyou. Related, here's an update and sanity check request please (as it's related it's hopefully not thread hi-jack):

Now 13 months on, we're about to pull the plug on Singapore escape the IT rat race and move to our place in the Sth Island.

Since then we're now sitting on NZ$1M in cash and have subdivided our 5 acre property that we own outright (value approx NZ$550-600K). The old house and paddocks are currently rented generating $250pw – which covers annual insurances etc. Our plan is to live in and renovate the old place ourselves over the next 12mnths and then hopefully re-rent it out (2.5 acres with paddock, orchard, barn, established veg patch etc) with the goal to achieve a NZ$480-500 pw rent return.  We will then build a modest cottage that we will live in on the other 2.5 acre plot (say NZ$300K build cost) - with us doing some of the labour, and perhaps with a loan/mortgage funded by the rent return and underwritten by the property title(s) so that we can protect our cash stash.  We will still need to generate a 3-4% return on what is left out of the NZ$1M cash stash after relocation, setups, 2nd hand car purchase, renovations etc. So I’m assuming we’ll have $800K left – hopefully a little more.

As part of our transition plan, last year we put NZ$355K into a HSBC NZ term deposit generating 2.8% interest expiring in Oct this year for some cash to assist with the moving costs (not great return but we have to keep our funds in HSBC for account management reasons at present).We have zero debt, no kids and turning 50 this year. Our estimated annual living costs will be NZ$29K per year. A 4% return on $800K covers this but 3% doesn’t. We are active garderners and will be growing our own produce after Yr1. The potential exists to generate additional but speculative income streams from the first property besides rent e.g market garden, yoga instruction etc. If we pull the trigger next week - a new contract may mean staying another year BUT our hearts are not in it and we want to leave - I'll give 3 mnths notice to the existing tenant and we’ll hopefully commence our new adventure in NZ  in August - notwithstanding our desire to move we are having MAJOR lifestyle change butterflies :)

My question and sanity check (similar to the main subject topic) is to revisit where to invest that NZ$800K to generate inflation adjusted cashflow in NZ for the long term?

As before I am very grateful for constructive feedback please and especially any guidance.

Thank you.
« Last Edit: April 20, 2016, 01:21:59 AM by Mike666 »

kiwigirls

  • Stubble
  • **
  • Posts: 163
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #11 on: April 20, 2016, 01:39:12 AM »
Welcome back Mike - glad to get an update on you one year on.  I am not surprised that you have butterflies - its a big change that you are contemplating.  But its all going to be fine  xx

Investing wise you are coming in on a pretty hot NZ market - she is trading at a 25% premium to other markets.  But no matter you are interested in the dividend returns so as long as our companies continue to pay out good dividends you can ignore the market fluctuations.   I still think a 60% Equities/ 40% bonds is a good start but if you are prepared to take on more risk move closer to 80%/20%.  As per dollabills advice Superlife is the best of the low fee fund managers if you want to keep life simple.  If you want to be more involved open a broking account with anz or asb to buy 20% NZ shares  (buy Smartshares ETF if you want easy or buy 15 blue chip shares direct) 40% International (bulk of that VTS.ASX say 30% and remainder 10% VEU.ASX) and remaining 40% bonds - recent 5 yr bonds for ANZ and Contact Energy have been 4% and 4.12% respectively.  Maybe stagger your bonds so they mature one year after each other.

Good luck and keep us updated.

kiwidollabill

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #12 on: April 20, 2016, 08:46:33 PM »
An interesting topic similar to one I posted a year ago - http://forum.mrmoneymustache.com/investor-alley/funding-the-lifestyle-in-nz-with-an-income-fund/ and with great contribution from kiwigirls and others to both. Thankyou. Related, here's an update and sanity check request please (as it's related it's hopefully not thread hi-jack):

Now 13 months on, we're about to pull the plug on Singapore escape the IT rat race and move to our place in the Sth Island.

Since then we're now sitting on NZ$1M in cash and have subdivided our 5 acre property that we own outright (value approx NZ$550-600K). The old house and paddocks are currently rented generating $250pw – which covers annual insurances etc. Our plan is to live in and renovate the old place ourselves over the next 12mnths and then hopefully re-rent it out (2.5 acres with paddock, orchard, barn, established veg patch etc) with the goal to achieve a NZ$480-500 pw rent return.  We will then build a modest cottage that we will live in on the other 2.5 acre plot (say NZ$300K build cost) - with us doing some of the labour, and perhaps with a loan/mortgage funded by the rent return and underwritten by the property title(s) so that we can protect our cash stash.  We will still need to generate a 3-4% return on what is left out of the NZ$1M cash stash after relocation, setups, 2nd hand car purchase, renovations etc. So I’m assuming we’ll have $800K left – hopefully a little more.

As part of our transition plan, last year we put NZ$355K into a HSBC NZ term deposit generating 2.8% interest expiring in Oct this year for some cash to assist with the moving costs (not great return but we have to keep our funds in HSBC for account management reasons at present).We have zero debt, no kids and turning 50 this year. Our estimated annual living costs will be NZ$29K per year. A 4% return on $800K covers this but 3% doesn’t. We are active garderners and will be growing our own produce after Yr1. The potential exists to generate additional but speculative income streams from the first property besides rent e.g market garden, yoga instruction etc. If we pull the trigger next week - a new contract may mean staying another year BUT our hearts are not in it and we want to leave - I'll give 3 mnths notice to the existing tenant and we’ll hopefully commence our new adventure in NZ  in August - notwithstanding our desire to move we are having MAJOR lifestyle change butterflies :)

My question and sanity check (similar to the main subject topic) is to revisit where to invest that NZ$800K to generate inflation adjusted cashflow in NZ for the long term?

As before I am very grateful for constructive feedback please and especially any guidance.

Thank you.


^ Posted above is great advice. 

I'd be double checking your $300k budget on a new build and cost to renovate/rent the current cottage.  I'd compare this to the cost to renovate to live in and then sell off the other section.  Might result in the larger capital pool to de-risk against the return you need for living costs (since its close to the wire). 

Where abouts in the lovely SI is your spot of paradise? 

Mike666

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Where to invest $400k cash in NZ? We are mortgage free.
« Reply #13 on: April 26, 2016, 12:35:20 AM »
HI kiwidollabill

Thanks for your reply.

Top of the South.

The Mary Holm site is very good :
http://www.maryholm.com/heraldholm.php?article=821


« Last Edit: April 26, 2016, 02:43:28 AM by Mike666 »