NZ Herald 18 December 2021

AIt depends on your appetite for risk and hassle — and your personalities.

Your plan could work really well. The returns on rental property and shares — assuming your investment fund is largely in shares — are often fairly similar over long periods. But, as you say, you would have more at stake in a rental property because you would borrow to invest in it. So if all goes well you would get a bigger gain.

And while you’re right that house prices could fall, the same can be said for shares. Both have performed unusually well in recent years, so downturns would hardly be surprising.

The bigger stake you would have in a property would, of course, make a downturn worse. And because you have borrowed, you could find yourself for a while with what’s called negative equity — the property is worth less than the mortgage. That’s not the end of the world if you hang in there, but it can be unsettling.

However, it seems you have at least 15 years to play with. It would be extremely unlikely that a property you buy now would be worth less in 2036. As long as you wouldn’t panic and sell if the property market plunged in the meantime, you should be okay. And it’s quite possible your gain will be large.

What else could go wrong? It’s always wise to work through a worst case scenario. Here’s the worry list:

• Rates, insurance and maintenance might be higher than expected. Maintenance costs can suddenly include the need for a new roof or other major repairs.
• The renting market might change, making it hard to find good tenants — or any tenants at all for a period. It’s happened before. And there are, after all, a lot of build-to-rent properties being constructed now.
• A glut of rental properties could also push rents down.
• Your tenants might be overly keen throwers of parties — damaging the place and bringing complaints from the neighbours. Or they might be slow to pay their rent.
• You could hire a property manager, but that eats into your returns. And readers have told me of property managers who, themselves, cause problems.

Of course these things don’t always happen. But you’re unlikely to have a smooth ride through all the years. Owning a rental property is a much bigger responsibility than investing in a share fund.

Last but not least is the issue of your personalities. Would you take landlord problems in your stride, and take pride in providing good housing for a family? Or would you feel a bit uncomfortable having control over another person’s home, and be reluctant to raise rents or address any problems with your tenants?

Given your long time horizon, it’s quite likely you will end up better off if you buy a rental. But you’re doing fine financially anyway. You don’t have to do this. Take on a rental property only if it sits comfortably with you both.

AYou can claim anything on your tax return as long as Inland Revenue doesn’t take a close look. But how would you go if they did?

“In theory the plan to sell the shares, pay down the mortgage, then raise fresh funds to invest in the same shares will work,” says tax expert Greg Millar of Alliott NZ. “The purpose of the borrowing will be for investment and income generation.

“The plan, however, may be subject to tax avoidance. IRD could ask what was the purpose of the restructure? Based on the plan outlined there appears to be no reason other than to gain a tax deduction for the interest cost.” You have been warned!

Millar added that there would also be financial risk. The share market might rise between the times you sold the shares and repurchased. Then again, you might get lucky and the market might fall.

Another issue is whether you would be able to get a mortgage to buy the shares.

“Broadly speaking this is feasible from a lending perspective,” says mortgage adviser Bruce Patten at LoanMarket. “There is no problem having the purpose of borrowing the money to invest in shares.”

But, he adds, “What the writer needs to be aware of is the CCCFA (Credit Contracts and Consumer Finance Act) changes that have recently come into place, and whether the writer still meets the bank’s criteria to borrow that level of money.

“A lot of people are finding that when their approvals expire they aren’t able to borrow the same level as they could before, now that the banks are analyzing your cost of living down to your Netflix and Spotify subscriptions.

“The CCCFA is causing majors. Written to stop loan sharking, and poorly written at that, now the implications on the entire finance industry are huge,” says Patten.

All in all, it’s a clever idea that might work — but only “might”.

AOoooh, you are going to make a lot of superannuitants cross. Some hate to be called beneficiaries.

Before I’m flooded with complaints, let’s not reopen that debate — or the one about whether those getting NZ Super earned it. We’ve thrashed those out before.

While I’m sure you wouldn’t expect the government to keep paying under-65s full benefits once they are earning good money, your point about some people’s attitudes to beneficiaries is a valid one.

AYou’re quite right. I should have thought of that.

There are no fewer than four types of Working for Families payments, which help parents of children under 18 on benefits or lower incomes in different situations.

You can apply online, and Inland Revenue will send you “a notice of entitlement telling you which payments you’re eligible for, how much your payments will be, and the date of your first payment.”

Says Inland Revenue, “More information about what to do when someone comes off a benefit can be found here: I am coming off a benefit (ird.govt.nz), and more information about the different types of Working for Families payments can be found here: Types of Working for Families payments (ird.govt.nz)

“Our online calculator can be found here: tinyurl.com/WorkFamiliesCalc (scroll down). People can use this to understand what they may be entitled to once they come off a benefit, so that they can make an informed decision that is right for them and their whanau.”

AThe list I ran last week started many years ago with just a couple of charities. Now there are 11. And I welcome newcomers that have Christmas gift programmes, through which you can buy, say, a goat for your relative to give to a family in need.

But if I start including every charity that can say “$50 would buy this, and $100 would buy that”, it will take up the whole column. I have to make the cutoff somewhere.

If, next November, you have a Christmas programme set up, get back to me. In the meantime, you’ve given your charity a nice plug!