Should I use an inheritance to buy a rental property for my 18 year old? – Mary Holm

Should a young man use his inheritance to buy an investment property?

Should teen buy a rental?

Q: I am a single parent of an 18 year old. We recently came into an inheritance. I have used part of my inheritance to pay off my mortgage. The question is what to do with my son’s inheritance.

Ideally it would be great to get him on the property ladder at such a young age by investing in an investment property with his money and the rest of mine. But given he is still at school, I would have to apply for the mortgage with him and help out with costs. I don’t know if this stacks up for me financially as I am now 60.

The money I would put into the property would be tied up for years until he can buy me out. It’s money that I could have used for retirement savings, which are relatively modest due to a relationship property settlement several years ago. Are we better to put his inheritance into an investment account?

A: In short, yes. I can understand the rental property idea. Your son would be “in the market”. But:

• It would be complicated, as you say, for him to buy property at his age.
• I don’t like to think of you waiting for him to buy you out. That could harm your relationship with him.
• Being a landlord isn’t always easy. How would you cope with the unexpected need to do major repairs? And who’s going to iron out issues with tenants?
• Perhaps most importantly, can you predict that home ownership will be right for your son? When he’s older he may prefer to use the money to travel or study overseas, or to start a business. In that case, he would have to sell the property – at who knows what price?

Despite considerable falls in house prices in recent years, as shown in the graph, many New Zealanders still think property is the best long-term investment. It might be, but a low-fee widely diversified share fund might do better. Past returns, over the long term, have been similar.

Kiwibank points out in the graph how rocky property returns have been in the last few years. The bank is forecasting 6% growth in house prices this year, but nobody really knows.

Keep in mind that the recent price falls are not an aberration. Reserve Bank data show NZ house prices also fell in the early 1990s, late 1990s, in 2001, in a big way during the 2007-2009 global financial crisis, and again in 2011.

And New Zealand house prices relative to incomes are still way out of line. In the 1960s, 70s and 80s, the average house cost two or three times the average household income. Then house prices rose, reaching more than 10 times income in 2021, says economist Shamubeel Eaqub.

The recent price falls have taken us back to around eight times income. But that’s still way above the ratio in most countries similar to us.

Looking beyond interest rate changes and market mood, it seems to me that in the long run, with a smaller percentage of the population able to afford their own homes, that will hold back price rises. It’s basic economics: if demand falls, prices fall – or at least don’t rise.

Meanwhile, of course, share prices could also go in any direction. But there’s no equivalent supply and demand issue holding them back.

To keep the young man’s options open – and to keep life simpler for both of you – I suggest you help him invest in a low-fee non-KiwiSaver fund. If he might withdraw some or all of it within, say, eight years, it would probably be wise to use a middle-risk balanced fund, with about half shares and half bonds or similar. The Smart Investor tool on sorted.org.nz will help the two of you find a fund.

NZ Super idea ‘bizarre’?

Q: In last Saturday’s paper a correspondent wrote about creating a fairer NZ Super system. Quite frankly, “bizarre” is the word that springs to mind.

You gave a very extensive reply covering various scenarios, and said it would be a “multi-nightmare”. Also, as you said, NZ Super is not an entitlement. I don’t know the figures, but I do understand that there are also some who don’t take it because they don’t need it.

The letter refers to a tertiary-educated Pākehā woman getting $750,000 from NZ Superannuation in her lifetime. What does education have to do with it? Also, the letter says, “Choose the average lifetime … start to pay $25,000 per person per year 16 years prior to death? (This information is well known and understood and easy to calculate.)” Really? I was 62 when my husband died, so what I had most of to give back to society was time, so I made the decision to spend most of it doing voluntary work. For three years I needed to nibble away at our savings, but I knew I would be okay because I would be eligible for NZ Super at 65, regardless!

Using the calculations(?) of your correspondent, I would have had no certainty about when I (a Pākehā, non-tertiary, female) would have been eligible for anything, so probably wouldn’t have chosen the path that I did.

A: And all the people who benefited from your volunteer work would have missed out.

But let’s be fair to last week’s correspondent. Under his proposed scheme, you would indeed have certainty. Women in your category would be told that your NZ Super would start at age X, with X being 16 years before the average person in your situation dies.

However, what happens when you – and about half the people in each category – outlive your payments?

On “what education has to do with it”, the Government website Education Counts says, “The higher the level of your educational attainment, the more likely you are to report better health…. Higher levels of education have also been shown to be associated with other measures of health such as higher life expectancy, and lower levels of smoking, obesity, disability and depression.”

There are also numbers to back up most of last week’s correspondent’s other assertions.

But you make a good point about some wealthier people not applying for NZ Super. As another reader says, “No one is obligated to register for Super. As a matter of conscience there will be a few who do not. I expect these fortunate few choose not to crow about it”. For that reason, there are probably no figures on this.

Tax inheritances

Q: Wow - the money spent on private education by that poor couple in last week’s first Q&A – the one about perhaps leaving more to their son than their daughter - obviously didn’t cover ethics, equality or fairness. But they got their money’s worth on entitlement studies!

I would consider inheritance split by need is by far the fairest way to do it. Having said that I also think inheritance should be heavily taxed to prevent the large and increasing gap between haves and have-nots. The two children have already benefited hugely from their parents and been given a significant head start on most Kiwi kids.

I wonder how boys with learning difficulties do in low-decile state schools? Makes you think.

A: Inheritance split by need sounds fair. Trouble is, there can be differing views on whether someone is in need or whether they deserve to be worse off because they’ve been lazy or careless. These things can be complicated!

On inheritance tax, I broadly agree. But we went into that topic in this column on October 12 last year, so let’s not revisit it now.

On schools, I’m sure some boys in low-decile schools do get help, while others don’t. But that’s getting beyond the scope of this column – as is the question of whether it’s mainly a school’s job to teach ethics and fairness. Interesting points, though!

‘I gave mine to my brother’

Q: Wow, did we women get schooled on the perils of “equality” in your last column! According to your (I’m assuming fairly elderly, male) contributors, we just don’t know how good we had it when men were breadwinners and we were unpaid labourers in the home.

And as for women being “currently preoccupied” with our hard-done-by status (that statistically women reach retirement with less than men) – just desserts for us radical feminists wanting political, economic and social equality, eh? On the subject of an inheritance being fair rather than equal, it comes down to empathy. My brother and I inherited our sister’s property equally. He didn’t have a house and I did, so it was a no-brainer to sign my share over to him, which our lawyer says is quite common.

If you care about your siblings and want the best for them – and if you can afford it – do the right thing. Life is short and people are precious.

A: It’s heartwarming to read of your generosity – and of many others, according to your lawyer.

P.S. Both the correspondents you mention had male first names. But I’ve no idea of their ages.

Spending numbers mystify

Q: I was mystified as to why the one-person and two-person spending in the Massey table of retirement savings, in the column two weeks ago, is different from the perceived wisdom – that a two-person household is cheaper to run (per person) than a single-person one.

Costs such as rates are the same whatever the number of people in the household.

In the table, the weekly spending for single choices metro is $769, which when multiplied by two is $1538, whereas for the two-person household it’s $1740.

And the savings needed for a couple, $1.142 million, is way more than double the $271,000 for a single person.

Can you please explain? Is the perceived wisdom incorrect?

A: I doubt it. For one thing, in the other three categories – no frills metro, no frills provincial, and choices provincial – spending by singles is more than half the two-person totals.

And that’s probably because, as you say, many costs – such as rates, rent, insurance and electricity – are no more, or not much more, for couples than for singles.

But perhaps that’s sometimes offset by the fact that retirees in two-person households are, on average, younger than in one-person households. That must be so, as many households that start retirement with two people end up with one person when the other dies. And, as we’ve discussed in the last few weeks, retired people tend to spend less as they get older.

Also, perhaps people who have been with a partner over the years have been in a position to save more, so they can afford to be more extravagant in retirement. But that’s just a guess. There are many puzzling things about the numbers.

Not enjoying head banging

Q: I’m not enjoying two of my personal finance favourites (you and the Opes Partners property investment firm) banging heads since February 8. While I haven’t actually taken up any of their services, I have listened and read Opes' output for two to three years now. They bend over backwards to point out potential conflicts of interest and generally hold a very balanced view.

I have no issue with them not including a heavy reliance on NZ Super in their calculations. As someone nearly 50, I hope it is still around for me, but for now, my least regrets approach is to assume little from the Government.

A: You’re being too negative about NZ Super. While it might be tweaked, I can’t see any Government reducing it much. Think of the votes they would lose!

Besides, contrary to common belief – partly arising from people reading about other countries’ situations – the experts say New Zealand can continue to afford NZ Super into the future.

It’s good to read your comments about Opes Partners’ information. And Ed McKnight from Opes tells me, “I’ve read the Society of Actuaries report that you mentioned. Loved it. And we are going to update the article on our website to include some new numbers and modelling around it.

“I’m also going to look at the financial advice we have at Opes Partners, to give more options to our clients. Letting them allow for real spending to decline.” Great!

* 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 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.