Home away from home
Gill South explores the pros and cons of buying an investment property for your kids.
You’re a parent whose mortgage is close to paid off and, with interest rates so low, and a fear that your children will never be able to buy their own homes, you’re thinking that buying an investment property might help them.
Martin Hawes, chair of the Summer KiwiSaver investment committee and a former financial adviser, says it’s a very nice sentiment.
‘‘What I would say, is that you make sure you put your own oxygen mask on first. You’ve got to make sure your own situation is good before you help the children,’’ he says.
And make sure you are fully able and committed to the management of the property, he says. Even if the rental property is managed, there’s still quite a lot of things you have to do.
Meanwhile, all the fundamental investment decisions still all apply, like liquidity, return on investment, the amount of risk, and the management, says Hawes.
What if things change? What if the kids move to Sydney?
‘‘It’s a very generous gift, I applaud the sentiment, but there are other ways,’’ he says. For instance, you could contribute to your kids’ KiwiSaver accounts instead.
‘‘It’s a very generous gift, I applaud the sentiment, but there are other ways.’’ Martin Hawes Summer KiwiSaver investment committee chair and former financial adviser
Will your children be able to handle the responsibility?
Stuart + Carlyon director Mark Patton thought about buying an investment property recently for his university student daughter in Auckland.
He did the numbers, and in theory it made sense, but in the end he and his wife agreed that their daughter wouldn’t enjoy being, in effect, a landlady to her friends.
For him, it would have been a risk at this point. The house could be in a landslide, or it could become a leaky building.
‘‘I thought I could do better. I could put it into the business and keep flexible for other things that might come up. Even if I could do
it, it would stretch me. Then, if interest rates went up, I’d have an illiquid investment,’’ he says.
And it’s getting tougher to be a landlord these days.
When it has worked for parents and kids
Harcourts Christchurch agent Debbie Pettigrew and her husband have twice co-owned homes with their sons and have just bought with her daughter.
‘‘In the first case, we bought it with our oldest son. He moved in and got flatmates, we kept it in joint ownership until he and his partner wanted to buy their own, real first home and we bought him out. Then we got our second son in. We initially rented it to them at a peppercorn rent, just covering the mortgage, then they bought 50 per cent and then they moved on to buy their genuine first home.’’
Now Pettigrew and her husband have just bought a house with their eldest daughter, where they will co-habit.
‘‘It’s given her a first home – and, if it doesn’t work out, we’ll sell our share and they can buy it,’’ says Pettigrew.
It’s not always been easy, she says. You have to make sure you have it all legally documented to save any ill feelings in the future.
‘‘If you die, as parents, you have to make sure that you have that well and truly set out.’’
And if one party wants out, the other party has the ability to buy that share at market value.
The popular step for parents
It is popular to buy an investment property in the town your child has chosen to study in.
Lowe & Co agent Ashleigh Abels says there aren’t enough rental properties in Wellington at the moment, so parents are stepping in.
‘‘They’ll do it for the first child and then the rental is available for the other children coming through. Then, once all the kids are done with university, they’ll look to sell them again. It’s like interim housing,’’ she says.
Abels thinks townhouses work well for these buyers. They are bigger than apartments and, with multiple levels, it suits multiple flatmates.
‘‘It’s easier for studying,’’ she says. ‘‘And townhouses will also have big capital gain, as Wellington goes more towards higher density housing.’’
Tommy’s Real Estate agent John Kettle, who recommends three-bedroom properties to parent investors, is marketing an apartment in the city centre’s Holland St, with two separate entrances. The property is broken up into a two-bedroom apartment and a studio.
The property could have a yield of around 5.5 per cent, which is good for the current market, but Kettle says parents are less concerned about this.
Your kids may not want a house bought for them
Eightfold Financial Services adviser Chris Stevens says your kids won’t always thank you for stepping in.
He had a friend who bought a rental in Dunedin for his kids going to university there, but it was a wasted effort. ‘‘They refused to live there. They wanted to flat with their mates,’’ he says.
Think through the financial implications for the family, he says. If you’ve got more than one child, are you going to buy one for each of them?
‘‘Make sure that it’s financially feasible,’’ he says. ‘‘Yes, you can do things for your kids, but you don’t have to do everything for them.’’