Auckland Central housing and the million dollar mindset

There is a state of disbelief that house prices in a number of emerging Auckland city suburbs are hitting $1m. I can only think this is because we think $1m is a lot of money. It isn’t. In a world that pays investors 4.5% there is only $45,000 of interest income on a $1m term deposit. Once we back out inflation and tax you'll be left with $20,000 of real net income. Wow!

My point is that for all of the hard work and sacrifice involved in saving $1m, the benefit is a paltry $20,000 per year. Wow again! That is hardly the lifestyle of the rich and famous. Don't be surprised to see people working into their late 70s in the future because they won't be able to live without a salary.

The other dilemma is where to invest your wealth. Banks pay nothing and the NZ sharemarket, like all sharemarkets, was invented by the rich to steal from the middle-class. Hmmmm ... property? An economist said recently that to be a millionaire in the 1960’s (the “Monopoly Millionaire”) today you’d need to have $30m invested. I haven’t tested that figure, but it feels about right. And looking around, you’d have to say most people won’t earn that much in their lifetime. To be an old fashioned millionaire is still as rare as it was back then. $30m is a long way off $1m, and yet so many people are caught in the $1m mindset. I’m not suggesting everyone needs $30m but I am suggesting that for many, aiming for $1m is selling yourself short. You won't be rich if you buy a $1m owner-occupied property and it takes you 25 years to pay it off. You’ll simply have a $1m property with no debt and nothing to live off. Worse still, if you get divorced part way through, you might not even have the million-dollar house!

Making your home your only investment is a common trap for those on “high” PAYE incomes. Over the life of the mortgage the interest cost alone will be another $1m, so imagine what could be achieved if you could invest even half of that in other investments. It seems crazy to me to gear yourself up to the eye-balls on an owner-occupied house to an extent that you cannot make other investments.

Everyone will have a different view of what well-off means and that will, to an extent, be dictated by your cost of living. No wonder Kiwis outside of Auckland look at property price here with bemusement! In an Auckland context, you'd need about $3m of net assets to generate a meaningful passive income. That's the equivalent to saving $60,000 per year over 25 years. With the price of houses, low wages, mortgage commitments, cost of kids, and the cost of private schools most investors would struggle to consistently save, let alone save $60,000 per year. So it comes as no surprise that property and leverage are the tools of choice when it comes to building wealth, provided house price go up! It’s a formula that has worked and will continue to work for investors that put in the hard yards and buy well. Even in this market there are still properties out there generating net yields of 6.00% in good suburbs. You have to work hard to find them, but they’re there. And 6.00% is a better return than in the bank, especially if you factor in inflation.

I recently purchased a Home and Income property in Mt Albert with a net yield against purchase price of 7.00%. As for building up a portfolio and hoping that prices will go up, that is a bit too passive for my liking. There are plenty of punters out there that buy anything, or pay $20k to be mentored by a "property guru" and then they still go out and buy anything! Save yourself $20k and read a book. If you can find and buy undervalued properties (rule of thumb 15%+ below market) then you can build up some initial equity. This helps take away the fear that property prices might fall. I always pay principal and interest on my mortgages. It's a good habit to pay-off debt. Your equity grows and your properties become cash flow positive quicker. Your bank will also like you more, as paying off "principal" is model behavior. If you buy below market value, and you buy enough property (see Confessions of a Mortgage Broker), then after 15 years you could have $2m-$3m of net invested property. And if your properties are delivering at least 6.00% net yields, then you’ll have enough passive income to survive in central Auckland, or retire "rich" if you live in Mangatainoka.

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