While going through my reader case queue, this one caught my attention. This reader about to give birth and it immediately took me back to my labour and first months with Little Matchstick.
Wow, time flies. He’s already 6 months old but it somehow feels like it was just weeks ago that he was born, but also at the same time a whole decade. Time feels weird when you are a mom. Kind of like how time gets warped when you’re retired and travelling.
Anyway, I digress. I’m really interested in this reader case because not only is this reader going to be the mom of TWINs, she’s also doing it alone at age 42. Someone needs to give this woman a medal because having been through birth and taking care of a kid, I have so much respect for single moms. I have Wanderer to help me 24/7 and the ability to not work and yet it’s STILL hard. Kudos, reader, kudos.
So, without ado, let’s get into this reader case and hopefully take some of the load off this mom’s plate because I know how little time she’s going to have after the twins arrive and Mathing that Shit up may be the last thing on her mind for a while.
Hi FireCracker,
I’m a 42 year old New Zealander, who’s about to have twins. (As in, within the next 2-4 weeks). I’m a single mum, and I’m interested in your thoughts on real estate vs. shares.
I started in real estate 12 years ago, and NZ real estate has gone up quite a bit, so this has worked out for me so far. However, I’m really curious about how it would compare to selling some rentals and investing in the S&P 500 instead.
Here’s where things are at:
Savings:
Shares in S&P 500 = $78,000
Kiwisaver (I think this is like 401k?) = $14,700
Cash Savings $61,000
Earnings:
As of right now, I earn $753.55 per week in rental income = $39,184 yearly.
That’s post expenses, and doesn’t include 10% put aside for property maintenance, and also doesn’t include 20% I put aside for tax.
Spending:
Current monthly spending is around $2800.
Properties:
I own my own house (no mortgage)
Rental property income – 4 properties:
Approx combined rental properties value: $1,190,000
My own house value approx: $450k
Debt:
There’s $220k left on one of the rental property mortgages, the rest are all paid off. (I sold my most valuable property in 2021 to pay off the rest.)
Right now, the rental income is enough for me to live comfortably.
I’m not sure whether this will hold true when the twins arrive (I suspect it won’t) however I’ve worked up until now as a freelance copywriter, so it’s possible I can build this business up again once the twins are a bit older (2-3 years) in order to supplement income.
I’m curious – how does this income compare to selling the houses, investing in the S&P 500, and withdrawing as per the 4% rule?
I’m not sure how the bond market works, or whether it’s possible to buy bonds in the US if you live in New Zealand, however, that’s another thing for me to consider (having read your book.)
All the best,
Curious Kiwi
First of all, I have to say kudos for not only birthing twins for doing it as a single mom! You are very brave. As an older mother myself, my body hurts from carrying my son around all day, but I’m so grateful I waited to be financially set and healed from my childhood trauma before having kids because it has made all the difference. And from looking at your net worth and real estate holdings, it looks like you waited until you’re financially set as well!
That being said, real estate is less passive than ETFs. When it comes to needing things to be passive when you have a little crap-monster demanding your attention every second of the day, I’m grateful to not have to deal with broken toilets, leaky roofs or chasing after deadbeat tenants. I can barely manage this blog, never mind trying to manage multiple properties. So, I’m curious to see if the ROI on these properties are worth the extra work, which will inevitable by much more difficult now that CK has to be feeding her babies around the clock.
As we always say on this blog, let’s MATH THAT SHIT UP!
Summary:
Summary | Amount |
---|---|
Rental Income (gross): | $39,184/ yearly |
Rental Income (net): | $39,184 * 0.9 (maintenance) * 0.80 (taxes) = $28,212.48/year |
Spending: | $2800/month or $33,600 |
Debt: | -$220,000 |
Investible Assets: | $78,000 + $14,600 + $61,000 = $153,600 |
Properties: | $1,190,000 (rental) +$450,000 (primary) = $1,640,000 |
In NZ, the real estate agent fee is 4% on the first $400K and 2% on the rest. However, since CK didn’t break down the value of each property, we’ll have to assume a worst-case across-the-board 4% fee when selling. This means that her rental properties would be approximately worth $1,190,000 – 4% = $1,142,400 after accounting for selling costs. Then after paying back the remaining mortgage of $220,000, she would net $922,400. She can redo this calculation with the actual prices broken down when she sells.
Given that her net rental income (after taxes and maintenance costs) is $28,212.48, this means her ROE (return on equity) is $28,212.48 / $922,400 = 3.06%, which is less than the 4% SWR on a diversified portfolio of stocks.
That being said, in the US and Canada, you can get the 4% yield tax-free after retirement because there’s a 0% tax bracket you can use when you’re below the standard deduction with $0 earned income in retirement. Plus, capitals and dividends are taxed more efficiently (to see how this works, reader our book). But in NZ, dividends are taxed similar to regular income. The difference is that the dividend tax rate caps out at 28% where as the top income bracket is 39%. Since the dividends she’s getting won’t reach the top dividend tax bracket, it’s just as tax inefficient as the rental income.
There’s also a rule called the “Brightline test” which states that if you own the property for less than 10 years, you’ll be subject to capital gains tax.
Disclaimer: I’m not an expert on New Zealand tax laws, so you should definitely double check with a local tax professional before selling your properties and/or buying shares.
So, even though moving to a portfolio would be more passive and provide more diversification, she has to be careful when she sells her properties to avoid paying massive capital gains taxes.
She could try a staged approach, where we sells the oldest property first, after it’s met the “brightline test” rules, put that into shares to reduce the amount of real-estate she has to manage and increase diversification.
Right now it seems like, after taxes, the income from the properties versus the yield from the portfolio is a bit of a wash and the only advantage comes in the form of less work and diversification from shares, but let’s let the numbers tell the story:
Given that she needs $2800/month or $33,600/year live on, her FI number is $33,600 x 25 = $840,000.
She has $153,600 in investible assets which generates $6144/year of passive income based on a SWR or 4%. Assuming no other income, dividends should be taxed at a rate of 10.5%. After taxes, that becomes $6144 – 10.5% = $5498.88. Add that to her current $28,212.48 net rental income, we get $33,711.36, which just barely covers her current living expenses.
If we were to sell her properties (following the “Brightline rule” to avoid capital gains taxes), her investible assets would go up to $922,400 + $153,600 = $1,076,000, giving her a yield of approximately $43,040. After taxes, that should yield $36,487.18 (again, this is just an estimate, please consult a tax professional). She is FI with some wiggle room, given her current spending of $2800/month.
That said, given that she now has to support 2 extra freeloaders precious gifts of life, which, in the first year would cost $250 USD/month each by my estimates (if she buys most things second hand and doesn’t need childcare), so that’s $411 NZ dollars/month each or $9864 NZ dollars for both kids. Her yearly expenses become $33,600 + $9864 = $43,464/year, which means she would be short $6976.82/year and will need to supplement with some freelance income. Or maybe she can rent out part of her house. She will need to recalculate her new expenses and FI number once she learns how much it costs to raise the twins.
Even though they’re taxed similarly, she’s still slightly ahead with the shares since she doesn’t have to put aside 10% annually on maintenance and a portfolio is much more passive, giving her the time to raise her twins. However, it makes sense to convert her real estate into shares gradually to avoid the massive capital gains hit. The other option is to increase rent to get a better ROE on her investments and improve her cashflow. But that still doesn’t help make it more passive or diversified. She bet hard on real estate and it’s work out for her in the past but maybe it’s time to take her foot off the gas, reduce the risk, and her workload. After all, those kids aren’t going to raise themselves.
Speaking of which, my freeloader is calling for his milk machine. Off I go…
What do you think? What would you do if you were CK? Would you sell the properties and invest instead? Raise rent? Pay off the mortgage? Let me know in the comments below.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we’re trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $45.08 USD/month with SafetyWing Nomad Insurance
Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!
Travel for Free with Home Exchange: Read Our Review or Click here to get started.