Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald March 11 2006
Q&As: A landlord's nightmare.
Credit cards v eftpos.
Optimism, pessismism and oil prices.
Question: My wife and I went down the rental property path in 2000, with great expectations of a rosy future.
Within a year we had two properties in Auckland and were ready to sit on it for 10 years.
Last year, the second property had some financial problems: the bank interest had gone up, and the rent had dropped $50 a week.
After a freak storm the house also proved to be a colander, although the insurance fixed the damage.
We decided to get out, because we already had lost too much money. Eventually, after 8 weeks, the house was sold for $270,000 - $5,000 more than what we paid for it.
As you can understand, after the land agent's fee, the lawyer etc. we lost a few dollars. We only hope to retrieve some money as a tax loss in next year's tax return.
The first property was going very nicely - financially that is. The rent is keeping up against the bank's interest.
However, it also joined the many other houses with leaky house syndrome. And with lawyer's fees, and extra body corporate levies fed to us through the office of Property Investment Corp, it is very stressful!
There is nothing you can do to help us other then sympathise, but if you have any suggestions to ease the stress, this will be greatly appreciated!
Answer: In what has been a dream property market for most, you've had more than your share of bad luck - although some might say it's more like bad management, as it sounds as if you didn't get the property structures checked out well enough before you bought. Hindsight is wonderful.
It sounds, too, as if you may have stretched yourself too far financially.
Generally, it's a good idea to buy two properties rather than one, as it spreads your risk. But it's unwise to get into any investment in which a foreseeable rise in costs and/or a fall in income would find you struggling. You don't want to ever be forced to sell an investment that fluctuates in value, in case the forced sale happens when prices are low.
I might be being unfair here, though. Perhaps you could have coped with the rising mortgage and falling rent if the house hadn't been leaky. In any case, you do have my sympathy.
I'm afraid I haven't got any brilliant suggestions, other than that you should probably stick with that first property if you can. Usually, properties are at least fairly good investments over the long haul. And maybe things will turn around for you and its value will soar after you've fixed the leaks.
Has anyone else got any ideas?
P.S. I hate to say this, but I'm not sure that taking a tax loss on the property you sold would be a wise move.
You could do so if you bought the property for the purpose of selling it at a profit. In that case, if you had indeed sold at a profit, you would have had to pay tax on your gain. So, because you sold at a loss, you can deduct that loss.
The only trouble is that when you eventually sell your other rental, hopefully at a gain, Inland Revenue may then ask why you are not treating that property in the same way, and paying tax on that gain.
"We wouldn't necessarily treat all of a taxpayer's properties the same way if they claimed - and we accepted - they had bought one property for resale purposes," says Graham Tubb, Inland Revenue's national manager of technical standards.
But if Inland Revenue investigated you, the onus would be on you to prove you had bought the two houses with different purposes.
Did you realise, too, that if you have been deducting depreciation on the house, you will face a depreciation clawback?
To calculate this, start with whichever number is lower, your original cost or your sale price. In your case, that is $265,000. You have to add the difference between that and the depreciated value to your other taxable income.
Adds Tubb: "Your readers might not realise that the clawback of depreciation doesn't just arise on sale, but also on a change of use from business to private use for example. Another less common example is the distribution of the property by a trustee to a beneficiary."
In either case, your "sale price" would be the market value at the time of change, even though no money changes hands.
Question: Re Visa cards vs eftpos, as in the last two columns, don't forget the loyalty schemes offered with some credit cards.
We get a nice set of Liquor King vouchers every few months from our Westpac hotpoints, which help take our minds off the amount of money we've spent to earn them!
Answer: Nothing like a bit of oblivion. And you're quite right, of course. I haven't heard of any eftpos cards offering loyalty rewards, but many credit cards do.
Note, though, that credit card rewards aren't always all that significant. According to the Consumers Institute, on many credit cards the fees outweigh the rewards if you charge up about $100 a week. It's only the big spenders who get big rewards.
Still, if you're also picking up loyalty points in the same scheme from retailers, credit card purchases can certainly push things along.
For example, I buy petrol and other items from retailers that give Fly Buys points, and pay with my Visa, which also gives me Fly Buys points. The combination gives me a trip or two within New Zealand each year. Not bad.
Question: Last week in your column a pessimist was in a quandary about how to invest savings in a critical energy-resource environment, and an optimist was looking positively to the future with the added insight that optimism is better for our health and happiness.
Optimism is more attractive than the gloomy pessimistic state. But both are unhealthy mindsets.
The optimist is overlooking the fact that oil has passed peak production when the demand is rising enormously. The oil that remains is more difficult and increasingly expensive to access. Hence the rise in oil price, which will continue.
The optimist also assumes that in the end technology will deliver, and we will be able to carry on with steadily improving and consuming lifestyles. Market forces will get us through.
The pessimist is in the unhealthy position of perhaps understanding the limitations of the system (earth) and its environmental capacity, but may be a voice in the economic wilderness of shortsighted optimism.
Alternative fuels are viable for the future but not for the continuation of our present level of energy consumption (manufacturing, transportation, private vehicles, institutional and home energy use).
To this person it seems like there are few in positions of responsibility and power who take these issues seriously and call for change, let alone bring it about. He/she becomes indecisive and depressed.
A more healthy position is that of hopeful realism - to not bury our heads in the sand, but to acquaint ourselves with the well researched information, and to look at more radical change for the prolongation of planetary life and a habitat for our children.
Many recognize we are coming to an unusual confluence of factors - population pressure, fossil fuel depletion, climate change. Investment for the future of our children becomes more important than investment for my future.
Answer: I don't want to go too deeply into issues like future oil prices in this column. There are so many people who seem to have expertise on both sides of the argument, and I'm sure we could fill the column with pros and cons for the rest of the year. There are other forums for that discussion.
Still, thanks for your letter, which sums it all up rather well.
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.