Money matters: Lure of rental pickings can trap unwary

By MARY HOLM

Q: My wife and I are among those "new" landlords who have invested in rental properties. We have three small rental properties in our town.

All three properties have 100 per cent mortgages. That is, over the three years it took us to find these houses, we borrowed all the money from the bank to pay for them, using the equity from our home plus that of the investment property.

While the bank was always keen to give us the money, we feel we may not have been given good advice.

One piece of advice was that the rent we could charge could go up by $10 per week per year.

This hasn't happened. In fact, we have had to lower substantially the rent on all the properties.

Our dilemma soon will be that the interest-only we have been paying on all the houses is about to expire, and there is not enough money from the rental and our wages (my wife works part-time) to cover the principal and interest payments the bank will request we pay.

We have thought about selling one or two of the properties, but the market is such that we would lose heavily. Any suggestions?


A: This sort of situation makes me mad. Too many New Zealanders have got caught in it.

First, friends or relatives tell you of people who have made heaps in rental properties.

Then you get a brochure in your letterbox about a rental property seminar, run by a local real estate agency.

At the seminar, they tell you it's all pretty foolproof. And, they say, why muck around making $300,000 on one house, when you could make $3 million on 10 houses?

Then you go and talk it over with your bank. If you've got a mortgage-free (or low-mortgage) house to use as extra security for a loan - and a reasonable income and track record - they lend.

It all seems grand. But:

* Your friends and relatives don't realise that borrowing to the hilt to buy the properties might have worked brilliantly when inflation was high and house prices were soaring, but it's pretty risky now.

* Some real estate people will say almost anything to get a sale.

I went to one of those seminars a while back. They said house prices and rents would rise fast. Soon after that, they fell fast. I shudder to think what happened to the starry-eyed people at the seminar.

* Banks have got plenty of money to lend these days. Just because they'll give you a mortgage doesn't mean they've given their stamp of approval for what you plan to do with the money.

Very often, all that matters to them is getting their money back.

OK, I'll get off my soapbox now. None of this is much help to you, although I hope it will warn others. So, what should you do now?

First, I would go to the bank and explain your situation. Banks say they don't like foreclosures, so they'll try to help you avoid disaster.

They might, for instance, let you continue on interest-only payments for a while longer. Or they might extend the term of the mortgage, so you can pay smaller amounts. That would give you some breathing space.

Secondly, I would put all three properties on the market.

That triples your chances of getting a reasonable price for at least one of them.

If you tell the bank you plan to do this, it should make them more willing to help you. In any case, I think you've got to get rid of at least one or two of the properties, even if you take a loss.

It never feels good to do that. But what's your alternative? To do whatever you can to boost your income - perhaps your wife could work full-time - and cut your expenses, waiting for a house price boom that might take many years to come.

Surely you'd be better off getting out of this mess and getting on with your lives.

After you've sold one property and hopefully had some relief from the bank, you might find you can keep the other two properties going for a while.

Think in terms of putting those two back on the market in, say, a year, and selling one then. You could then sell the last property a year after that.

The advantage of selling in stages is that you're not getting rid of everything in the same market. With any luck, prices will be better in a year or two.

You might even find that the whole rental market turns around, and you keep the last property and do well with it. Don't count on it, though.

Good luck with the sales!

Q: Approximately four years ago we formed a family trust and put our home and small investments into it.

Interest off the investments is paid to me as income, which is the only income I have.

My husband is on New Zealand Super. I qualify for the Super later this year.

My question is: Can I receive both?


A: Yes, you can.

Every qualified New Zealand resident - from paupers to billionaires - receives NZ Super at age 65.

The payments vary depending on whether you're married, single living with others, or single on your own. But they don't vary with income, wealth or work history.

This makes us unique, says consultant David Preston, an expert in social security and pension policy.

"New Zealand has the only fully universal pension in the developed world."

In Canada and five other countries, mainly in Scandinavia, part of the pension is universal but part varies depending on the contributions made in your working life.

In Hong Kong, part is universal, but the other part is paid only to the poor, says Preston.

In most other developed countries, there's public assistance for the elderly poor, and others get a pension based on contributions. I'm still trying to decide whether our universality makes us lucky or silly.

Q: My wife and I have lent our sons in Australia, by a legally drawn up loan agreement, a sum of money for a finite term.

Interest charged is based on the New Zealand value of the loan at a rate lower than the Australian banks charge. The interest is credited to our NZ bank account quarterly.

We plan to declare this untaxed interest income next year as "personal loan" on the tax return. Our only other income is from local bank term deposits.

Is there anything more we are required to do?


A: Good on you for doing everything properly - drawing up the loan legally, having interest automatically credited, setting a finite term and so on.

Too often, casual family loans turn horribly complicated down the track.

I showed your letter to Inland Revenue, who had this to say:

"Assuming the taxpayers' sons are no longer residents of New Zealand for income tax purposes, then they need do no more than declare the income as interest in their tax returns, as they have suggested.

"Depending on the amount of interest received from this arrangement, they may become liable to pay provisional tax from the second year of the loan."

If that happens, the IRD will tell you what to do and when.

The spokesperson went on to say: "Because the interest on the loan is below market rates, the difference between interest payable at market rates and the actual interest paid under the arrangement may constitute a gift.

"Although the taxpayers are able to make gifts valued at $27,000 each in a 12-month period without paying gift duty, we do not know of any other arrangements they may have in place."

If you are making other gifts, and the total could be more than $27,000 each, you should talk to a tax adviser about it.

A couple more comments from me. Have you thought through what would happen if interest rates change, and your sons would be better off borrowing from an Aussie bank?

Or if one of them wins a lottery, or gets a big redundancy payment or inherits money?

It's good to have a clear understanding about whether early repayment is OK, before it becomes an issue.

Also, it saves a lot of ill feeling if you treat all of your children the same. Do you have any other children who would like to borrow from you?

* Mary Holm is a freelance journalist and author of Investing Made Simple.

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