Is it time to sell the investment property? - Mary Holm

Should I still hang on to that investment property? Photo / 123rf

OPINION

Q: We are a couple in our mid-50s. Our combined income only recently increased to $210,000. We each have around $70,000 in KiwiSaver. Minimal savings. In 2021 we purchased a two-year-old investment property in a good location for $830,000. We borrowed the full amount, interest only for the first five years. There was no top-up required at time of purchase – the rent income covered the expenses.

We subsequently downsized our family home (value $750,000 with $55,000 owing). It needs renovations. The plan (while still saving a decent weekly amount) was to renovate without borrowing. Once the home mortgage was paid off and renovations complete (our target was five years), those same funds would pay down the investment property.

Fast-forward. Our renovations budget and then some has for some time been used to top up the investment property. Our savings are significantly less, as we still need (not want) to renovate. Conscious of our age, should we just sell the investment property?

A: I think so, but let’s look at the arguments on both sides.

You were brave, or some would say foolhardy, to buy the rental property, borrowing the full amount – which you were able to do because of the equity in your home.

Although you didn’t have to put extra cash into the property after the purchase, presumably rising interest rates are why that has changed. I doubt if anyone in 2021 foresaw such a rapid increase in mortgage rates, so I’m not criticising you. But now you have to face up to the new circumstances.

Some would say to hang in there, as interest rates seem likely to fall at least a bit in the next year or two. And property values have been rising (although who knows what the future holds?). What’s more, you’re on pretty good incomes, and could probably cut your spending a fair bit if you really had to.

But you’ve got the five-year deadline hanging over you – after which your mortgage repayments will jump because you’ll also have to repay principal. And in the meantime, you’re not making much progress on urgent-sounding home renovations.

If you sell the rental now, are you likely to get back the price you paid? It might depend partly on when in 2021 you bought. House prices rose extraordinarily through that year, from a national average of just under $840,000 to $1.06 million, according to the QV House Price Index. Last December, the average was $905,000, but it’s probably a bit higher now.

If I were you, I would put the property on the market for a fairly high price, and don’t rush to sell. That means disruption for your tenants, so I suggest you cut their rent, even though that will worsen your cash flow. You don’t want to lose them in the meantime.

Worst-case scenario: After you sell, you end up with a debt to the bank. But on your incomes, you’ll manage.

The clincher for me is that you sound rather stressed. You don’t need that.

Good luck! Let us know how you do.

Q: I think your column last week did not properly acknowledge the difference between minimising the tax you pay, and dodging tax you are obliged to pay.

It would be quite irrational for someone to structure their affairs in a way that did not minimise their tax. Effectively, they would be deciding to pay the Government money they are not obliged to. Anyone is free to do that, of course, but it is wrong to criticise people who choose not to so do.

Tax dodging (such as by failing to declare income or exaggerating deductions) is a quite different thing, of course.

A: There’s a fine line here, but I expect you and I would put the line in a somewhat different place.

In my view, those who have to file tax returns should add up their income, subtract genuine expenses, and pay tax on the resulting net income. The use of trusts and other structures or manoeuvres that complicate that calculation to reduce tax might be legal, but I reckon they are not moral.

You might want to ponder the quote in the next Q&A.

Q: Those who object to paying taxes should be told of Oliver Wendell Holmes Jr, who said: “I like to pay taxes. With them, I buy civilisation.” Perhaps anyone who really objects to paying taxes should be allowed to opt out of doing so. In return, they must be obliged to opt out of using anything paid for by tax. That includes politicians. Especially politicians. No representation without taxation. While such non-taxpayers may be able to pay for their medical and security needs out of their own pockets, I doubt even the richest people could afford their own private road systems.

A: A great idea – if only it could be made to work.

And I love the quote from Holmes, who Wikipedia says is “among the most influential American judges in history, noted for his long service [and] pithy opinions”.

Several readers have sent suggestions on how the whole tax system could be improved. I’ll run them next week.

Q: I write with a smile on my face regarding the decimal changeover mentioned last week.

While I agree with the spirit of your response to the writer bemoaning the “rip-off”, I do need to say that all was not quite equal.

My sixpence pocket money bought a TT2 for fourpence and a packet of four pieces of chewing gum for two pennies - tuppence.

However, when the sixpence became five cents, it was no longer enough, as fourpence became four cents and tuppence became two cents!

And no, I did not go broke, although I do remember feeling aggrieved.

A: I’m right there with you in the lolly shop, counting out my pennies! The tuppenny chewing gum was PK, juicy fruit or arrowmint. And you’re right, the Junior Sweet Buying Public was ripped off. How could I have forgotten that!

Q: I am the convenor of the New Zealand Society of Actuaries Retirement Income Interest Group. I enjoyed reading your answer to “How to make your retirement savings last” in the Herald last week. Thanks for mentioning us!

You might be interested in our 2023 update to the study. We conclude that the Rules of Thumb continue to give a reliable, useful steer, suitable for a range of personal drawdown priorities.

You will see that we now recommend a safe emergency fund of one to two years of costs, separate from the drawdown funds. This could be used to meet some of the extras that one of your correspondents mentioned.

A: Thanks for pointing me, and readers, to the update, which can be found at tinyurl.com/ThumbsNZ. I like the emergency fund idea.

More on spending in retirement next week.

Q: You ask in last week’s Herald if anyone has found any money through the IRD’s unclaimed money site. I didn’t find any personally, but I looked up my elderly neighbour and there were some funds there owed to him.

I took him the forms and told him to claim it. He said it would relate to holiday pay from a previous employer that he never received when he left and had written off. He was delighted with my discovery and didn’t have a computer, so it was likely that he would never have received it otherwise.

A: What a good neighbour you are!

Q: I read your story about monies owed, looked up various family members and let four of them know they were owed money. Also a couple of other organisations I have been involved in. So thank you!

A: A pleasure. Readers who haven’t yet checked if there is money waiting for them or people they know can check at tinyurl.com/NZUnclaimedMoney.

Q: I clicked on the lost money link out of curiosity and was pleasantly surprised to see just over $100 from an insurance company. I no longer have any paperwork, so it remains to be seen if my claim is paid. I do have an uncommon name, so am hopeful. I now have my colleagues checking themselves and family members!

A: Perhaps there’s a message here for others. While it’s good to get rid of many old papers, perhaps keep a few. Anyway, here’s hoping you succeed.

Q: I clicked on your IRD “unallocated monies” link and saw my brother had $2800 there… he was very happy!

Strangely it was from ASB, his bank of many decades, so it was odd they did not bother to contact him themselves. Thanks so much!

A: I hope your brother shouted you! And I also hope he challenged the bank about why they hadn’t contacted him about this.

Q: I am a retired chartered accountant so have some knowledge of how business operates. About three years ago, I received a letter from a company which at first glance I considered to be a scam. The letter informed me that they held in unclaimed money the sum of $86,000 from my mother’s estate.

As she died in 2001 and I had been the executor of her estate, I thought this could not be correct. However, it was true, and this company has a business set up to trace the owners of unclaimed monies.

It beggars belief how lax some banks and other financial institutions are in handling deceased estate money, or attempting to trace the rightful owners. Very few people know what happens to unclaimed money and how or why it ends up with IRD.

A: It’s good to know that your “lost money” turned out to be real. But other readers should be warned that it’s common for scammers to say they have money for you, sometimes posing as Inland Revenue or another government agency. Next thing, you find yourself paying them for access to that money, and then... nothing! Be wary.

As MoneyHub puts it, ”Do not click on email links regarding unclaimed money, especially if you do not recognise the sender’s email address.”

“Be vigilant and remember that the IRD will never ask for your details (by email). If you receive emails regarding unclaimed money, the best course of action is to go direct to IRD’s website and log in to myIR to put in an official claim.”

Q: In 1969 I took out a life insurance policy for $6000. I kept up the premiums until 1980, when I cashed the policy in and was refunded 90 per cent of the premiums I had paid.

The policy was with a mutual fund, which was then sold to another mutual fund, which was then sold to the Colonial Bank of Australia.

Somewhere along the way (before I cashed in the policy), I became the owner of some CBA shares, and in 2012 I was contacted by an Australian company specialising in recovering forgotten funds.

Long story short, after they took their 30 per cent commission, I ended up with just over $6000 for the shares and about 30 years of unclaimed dividends.

A: That’s great that it worked out well. I presume you explored the option of claiming the shares yourself without the Aussie company’s intervention. It’s fair enough that they get some reward for their work, but 30 per cent sounds a bit stiff to me. Still, without them you may never have known about the shares.

Mary Holm, ONZM, is a freelance journalist, seminar presenter and best-selling 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 mary@maryholm.com or click here. 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.