By MARY HOLM
Q. We have an opportunity to acquire, by private treaty, one of the best coastal properties in my home town down south (registered value around $1.4 million).
We have toyed with the idea of moving from the city for years. Because we have reservations about doing it while we are just 40 (with three kids of 5 and under), we view the opportunity as a "trial two-year" move.
We can negotiate a settlement on the property in 2005 (so the move would not be until then), with a deposit of $100,000 now. By that time, at 8 per cent compounding, the value of the property should be $1.63 million.
It also has a few acres which could be subdivided and which in 2005 should be worth around $400,000.
We are fortunate our existing home is a large land-holding in Auckland, which should sell comfortably for around $1.1 million on projections to 2005. We have existing debt to just under $100,000.
We would raise the $100,000 deposit using our existing property. Then we have until 2005 to prepare plans for the new property so its spare land could be marketed promptly after settlement.
So, to summarise, after the sale of our existing property for $1.1 million less debt and deposit, we have $900,000 toward the outstanding purchase price of, say, $1.3 million.
We expect to have a wealthy relative provide cover for the $400,000 balance until the subdivided land is sold at that figure or so.
It's a 'time of life' decision, Mary. We think that if we are going to try it we should do it before the kids turn 10.
The home can be run as a B&B and wedding/conference venue - a much needed business in this destination.
A. It's often useful, when you're facing a big decision fraught with uncertainties, to do a realistic worst-case scenario.
If you feel you could cope with that, you can go ahead confident that bad luck won't spell disaster.
In your case, let's say the owner insists on $1.5 million for the land. You borrow $100,000 for your deposit and arrange to pay the rest in 2005. In that year, to your horror, you get only $900,000 for your home.
That's quite possible. The values of higher priced properties tend to be more volatile, rising fast in booms such as that of the past year or two, but also falling further in slumps. And who knows when the next slump will come?
After you've repaid your debt, you have $700,000 for the new property. So you have to find another $700,000.
Meanwhile, the wealthy relative has fallen in love with somebody, died, and left all her or his money to the new sweetheart.
What's more, a zoning change means you can't subdivide the land.
At that point, you either:
* Sell the new property which, because of the property slump, brings in only $1.2 million. You still owe $1.4 million on it. You take the extra $200,000 from the proceeds on your current home and you're left with $500,000. Or ...
* You manage to borrow $700,000 and move to the new property for a couple of years.
Your B&B and venue business doesn't go as well as expected, and you can't meet the mortgage payments, so your debt increases to $750,000. Your kids hate the local school and you can't bear the thought of cleaning up after another group of piggy guests or drunken wedding revellers.
You sell in a hurry and get only $1.3 million. After repaying your debt, you have $550,000.
Either way, you're returning to Auckland able to buy a house worth about half the value of your current one.
There are, of course, steps you could take to forestall some of this. Perhaps you could get a committed price from the seller of the land, and maybe also a written commitment from the wealthy relative, with a contingency plan if that person dies in the meantime.
Most importantly, perhaps you can make certain, before you buy, that the land will be subdivisible in 2005. Ask the local authorities. The success of your plan really depends on that.
With those "guarantees" in hand, I reckon you should go ahead. If everything else in my little drama happens, you still won't end up badly off.
Let's face it, even without the guarantees, a couple in their 40s with half a million dollars to their name are hardly in deep trouble.
* * *
Q. I found your first item in last week's Weekend Herald interesting. The correspondent, who has $240,000 from a marital settlement, says, "I am going down to Winz tomorrow to collect the approximately $150 a week that I believe I get unemployed".
Is this not a popular misconception of the middle classes? They pay their tax because they believe they will get things such as unemployment pay if they are not working. But is this true? I think not.
When you walk into Winz they will say you could invest that $240,000 at 8 per cent. That's $19,000, and you get nothing from us - end of story, please leave now. Yet you don't even question it in your reply.
A. Not so fast. You're right that there are income and/or asset tests, not just for the unemployment benefit but for all benefits and supplementary payments except NZ Super.
If you have significant other income, your benefit will be reduced. And beyond certain income levels - which vary depending on your circumstances - you won't get any benefit.
"As a general principle, people are expected to use their own financial resources to support themselves and maximise the income potential of their resources," says a spokesman with the Ministry of Social Development. But, he adds, Work and Income gives clients time to arrange their affairs.
"For example, a person with cash assets, such as those derived from a marital settlement, who indicates their intentions to Work and Income to purchase a home in the future, would be able to invest their money and apply for a benefit."
In the meantime, if the money is earning interest, that could affect the amount of benefit paid. But once the home is bought, the money is generating no further income, so it wouldn't affect the benefit.
Last week, I suggested the woman buy herself a home, but keep aside some money for retirement saving. If she does that, her benefit will be affected only by the income she earns on the savings.
That leads to the question of whether she should put all her money into her home, leaving no income-generating investments to reduce the benefit.
I think it would be a bad move. It seems silly to alter otherwise sound plans just to maximise her benefit for what, hopefully, will be a short time before she finds work.
What's more, Work and Income doesn't look kindly on people who obviously try to rig things.
While spending $240,000 on a home probably wouldn't seem unreasonable, if she had a million-dollar settlement, spent the lot on a home and then asked for a benefit, eyebrows would rise.
"While clients are entitled to rearrange their financial affairs as they see fit", says the spokesman, "Work and Income has the discretion (under Section 74 (d) of the Social Security Act 1964) to take into account any efforts a client may take to intentionally deprive themselves of income or property."
Other examples of such efforts are making large gifts to a family member or trust.
Getting back to you and your sad tale, I can understand that getting nothing for 10 years after paying taxes for many years might seem unfair.
Keep in mind, though, that Social Welfare benefits currently make up almost 30 per cent of Government spending.
If everybody held out their hands, including millionaires, those taxes you paid for many years would have to be at a much higher rate.
For more information on how income affects benefits, see
or phone 0800 559 009.
The people at the call centre will be able to give you broad information about your entitlements. For more precise info, you'll need to see a case worker.
* * *
Q. A quick note about the letter on individual share ownership. As an adviser I run portfolios with individual shares in them, so I obviously think it is a good idea.
You are correct in saying the paperwork can be overwhelming. But it is easy to get rid of it. The cost of using a custodial or trustee service is around 0.4 per cent a year for a portfolio of $100,000-plus, and less for larger ones.
For this they get all the mail, bank the dividends and provide reports on how it is all doing, together with a tax summary. Most of them can also cope with multiple currencies.
Your only other cost is whatever advice you need to make the buy/sell decisions. This varies from nothing for d-i-y upwards.
As long as your advice is OK, then the lack of capital gains tax should mean you do fairly well.
As an adviser I find the biggest problem with such a service is people reacting to the inevitable large movements in the individual shares' values. They get overly excited when things double and depressed when they halve.
If this exposure to volatility doesn't bother you, then I recommend such services to people.
It is the best way of providing an income for oneself or one's clients from portfolio investments that I know of. (One of my major problems with offshore share index funds is that most of them provide no or only a little income).
A. Some good points. But, as I read your letter, I begin to wonder about one of the oft-quoted advantages of individual shareholding - that it is cheaper than using a share fund and paying fund management fees.
If you use a custodial or trustee service, you're also paying management fees.
And if you're paying for advice on what to buy and sell, whether directly or via brokerage, you're incurring a cost that people in index funds don't incur, because the funds don't pick shares.
Does that advice do you any good? As I've said many times, I'm yet to be convinced that it does.
As for providing an income, it's true that offshore index funds bring in little or nothing, because overseas companies pay much lower dividends than New Zealand companies.
This next bit might be hard to swallow in light of recent history. But research does show that companies that pay lower dividends tend to have higher long-term growth, as more of their profits are reinvested in the business.
If you invest in shares or a share fund that doesn't produce enough dividend income, you simply sell some shares or units to get the income you need.
Over the years, you will in most cases simply be realising some non-taxable capital gains - gains that probably wouldn't have happened in companies that pay higher dividends.
That famous academic paper Dividends Don't Matter is, broadly speaking, right.
I have to admit that you and the previous two letter-writers on this topic are swinging me around a bit.
If you've got lots to invest; you don't waste money on advice; you are really broadly diversified; and you use a good custodial service, individual share ownership may be the best way to run the New Zealand share portion of your portfolio.
I still think, though, that those with less than, say, $100,000 to invest in local shares are better off in an index fund. And I still strongly favour index funds for offshore investment.
* * *
Email us your question about money
Or post it to:
Money Matters
Business Herald
PO Box 32, Auckland
Scott Guy was 31 when he was shot on July 8, 2010, at the end of his driveway.