Q: We are fortunate to have paid off our mortgage and have no debt. We have switched the full amount of mortgage payments into an investment fund.
I'm wondering if it might be smarter to instead borrow to buy a rental property, and hopefully earn capital gains on it.
The investment fund only earns returns on what we put in, but an investment property might earn capital gains on the full amount. If the rent could cover most of the mortgage interest, and we kept paying off the mortgage at the same rate we are now, we might be able to pay off an $800,000 house in around 15 years, by which time it may be worth far more.
While I'm certainly enjoying being debt-free, I'm wondering if getting back into debt for this type of investment might be the way to go. On the other hand, I worry that the housing market is overinflated and could face a big correction.
A: It 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.
Borrowing to invest
Q: I have a mortgage of $230,000 on my home that is valued at $1.5 million. I also have a share portfolio worth $250,000.
I'm paying interest on the mortgage and earning dividends on the shares. I can't offset any of the interest expense against any of the dividend income to reduce my income tax.
Could I sell $230,000 of the shares and use the money to pay off my mortgage? Then ask the bank for a loan of $230,000 (using the equity in my home as security) and purchase the same shares back again? Now that the loan is for the purpose of investing in shares, could I claim the interest as an expense when filing my tax return?
A: You 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 sharemarket 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 analysing your cost of living down to your Netflix and Spotify subscriptions.
All in all, it's a clever idea that might work — but only "might".
Benefit v Super
Q: Last week's correspondent describing the difficulties of having the benefit cut if a beneficiary earns over a certain amount made me think about those on NZ Super.
They are also beneficiaries, but if they continue to work their benefit is not cut after they earn x amount. It's taxed, but that's to be expected.
To me, this illustrates the punitive attitude so many people have towards any beneficiaries other than those who get the Super. The irony is that a lot of people over 65 are far from poor, but everyone accepts that they should get the benefit anyway.
A: Ooooh, 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.
Working for Families
Q: Both you and the reader in your last column, writing about how hard it can be to get off the benefit, missed something vital: Working for Families.
It can be possible to take advantage of either the kids going to school, which would give at least 25 hours a week, or the free childcare hours, to work.
Then one can ditch the benefit, have the children's support paid directly instead of MSD taking it, and get paid Working for Families as a top-up. What's not to like? It is, after all, why Working for Families was introduced.
A: You'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".
Inland Revenue says more information about what to do when someone comes off a benefit can be found by going to ird.govt.nz and searching for "I am coming off a benefit", and more about the different types of Working for Families payments can also be found at ird.govt.nz, by searching for "Types of Working for Families payments".
"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."
Remember the animals
Q: I absolutely agree with you about donating to charities in someone's name at Christmas. Much more in keeping with the Christmas spirit of giving, rather than the Christmas capitalist push to get us to buy ever more stuff that is not needed — dreadful for the planet and a shocking education for children!
But last week I couldn't help but notice the absence of any "animal charities" in your list. While many of these may not have a formal (corporate) "Christmas Gift Programme", all struggle for funds, and an impulse to help animals resonates deeply with many people. Any registered animal charity would be happy to send the acknowledgement you mention (as well as send the giver a tax receipt!)
The SPCA is probably up there with the other charities listed in terms of brand recognition, but I'm putting in a plug for a much smaller registered charity of which I am currently secretary — the Community Cat Coalition Inc. It helps stray community cats by de-sexing them, feeding de-sexed colonies, and finding good homes whenever we can.
For example, $65 buys a de-sex, $250 buys a trap, any amount contributes towards much-needed cat food and/or veterinary care. Thank you for considering.
A: The 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!
Happy holidays everyone
In a strange year, I received one of the strangest letters ever to this column. A reader had mentioned that she suffered from arthritis. In came another reader's suggestion: "Many years ago my late eldest sister was treating her disabling arthritis by consuming two prunes that had soaked in gin for 24 hours.
"She was a keen seamstress and needlework enthusiast, but in her condition these crafts were no longer possible. After only a few weeks of the treatment she had resumed all activities, being able to thread needles and do crochet." He added that he had also found the treatment worked, and wondered if it would help the reader.
I thanked him, and added, "I've just Googled 'gin-soaked prunes for arthritis' and up came a few articles that say gin-soaked golden raisins may help with the disease! Anyway, I will forward your letter to the reader. I'm sure she will appreciate your concern."
Who said this column was only about money?
Thanks are due not only to that thoughtful reader, but everyone else who has written to me this year, including the growing number whose letters don't make it into the column — sorry — and the grumpy ones.
Especially the grumpy ones, actually. Every good story needs conflict!
Have a relaxing break everyone. See you back here on January 29.
- 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 email@example.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.