Transcript generated automatically by AI and may contain errors.
Chapter 1: What is the main topic discussed in this episode?
Hello and welcome along to the Property Academy podcast by Opus Partners. I'm your host, Steve McKnight.
And I'm Andrew Nicholl.
Chapter 2: What are the pros and cons of co-investing in property with parents?
And this is the show that helps Kiwis go from zero to five investment property so you can be financially free and stick around for the next 15 minutes because you're going to learn the pros and cons of investing in property with your parents, how buying a rental with your folks can stop you buying your first home, and the four alternatives if co-investing is not right for you.
Now, just before we get into the pros and cons, I want to give you a real example of some Kiwis that we've been working with. So mum and dad are in their late 50s. They want to buy their first investment property with their daughter. And they're looking at a buy and hold strategy where they buy a property, they hold it for 10 to kind of 15 years or more. That's what they're thinking.
Now, they've worked with one of our financial advisors, and they're looking at a $900,000 property in Auckland, and they're planning to go 60-40 on everything with the daughter, right? So the parents will put in 60% of the deposit. The daughter's going to put in 40%. While the property's cash flow negative, The parents will make 60% of the top ups, the daughter will do 40%.
And then when they sell, the parents are going to take 60% of the proceeds, the daughter will take 40%. So all nice and simple. Now they're all in this meeting together and then Nefi, their advisor, starts just going over the risks again. So everyone's on the same page because there are some risks to co-investing with your parents that a lot of people just don't think about.
So if the daughter does this, she can't use her KiwiSaver for her first home to live in she won't be a first home buyer anymore. She's going to be on the hook for the whole mortgage if the parents decide not to pay or can't pay their mortgage top-ups. And if she wants to buy her own home eventually to live in, it's going to be harder for some reasons we're going to get into later in the show.
And the daughter said... I understand. I'm really happy with these risks. And this is a really good example of knowing what you're getting yourself into when it comes to property. And if some of those risks I just talked about to you are unfamiliar or you thought, hang on, what? Then make sure you listen to the whole episode because you need to know both the pros and the cons.
But let's start with the good things about buying with your parents. What do you see as the advantages, Andrew?
I think the first thing is it actually just gets you started sooner. So parents, generally speaking, will have a whole lot more equity and you as a starting out worker probably got good income and probably minimal expenses. So together you can combine those powers and borrow more than maybe you could have done if either side of the transaction are doing it alone.
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Chapter 3: What real-life example illustrates the risks of co-investing?
And I'll give you an example, like if you bought a 700k property with a 20% deposit, going 50-50 means $70,000 each rather than just 140, which is double the money. And in the example that Ed just spoke about, the daughter, she wasn't able to buy an investment property of 900k on her own. And the parents, well, they don't have enough income themselves to service the mortgage on their own.
So the parents' equity plus the daughter's income, that was able to get across the line with the bank, but it doesn't always work like that because some banks will say each household, essentially, so the first household being mum and dad, the second household being the daughter, They have to be able to service 100% of the debt all the time.
Even though they're not going to operate that way from a practical standpoint, the bank still wants to know that if something happens to one of the households, the other household can carry the weight. Now, some banks will allow the combined households to use their combined income, but it's not always like that. So that's pro number one.
Pro number two is that the parents get involved in investing and it's not just a warm fuzzy feeling, unlike a gift or a loan that mum and dad are going to give the daughter. They're actually all working together and it's not a charity. This is a joint venture.
So I do think this is a great way, particularly if mum and dad are more enthusiastic about building their wealth now, getting younger people, getting their kids involved in it and getting them thinking about investing for the future. I think that's awesome.
Yeah, whereas if mum and dad were just taking out a load against their house and then gifting it or loading it to their child, they're not sharing in that capital growth or it as an investment. Now, I think there are some other pros here as well. Like we've got, they're sharing the risk, they're sharing the cost.
So let's say one person loses their job or goes through a rough month, they're spreading some of that risk. And then as you said before, they've combined their borrowing power here. But there are some cons where things can get messy. And you really, really need to understand that, right? Like what about that KiwiSaver we talked about earlier?
Yeah, I think that's a big one. So KiwiSaver makes a big chunk of a deposit for a first home. Now, if you've already got a home, i.e. your name's on the title of an investment property because you own an investment property, your KiwiSaver's locked up now until retirement. You can't actually take it out to then buy your first home to live in.
And that's just a rule that KiwiSaver have, and I think that's the right thing to do. But what that means is that when the daughter goes to buy her first home in, say, five years' time, She has to use her actual cash to be able to do that. And I think that is something that you really have to consider. Again, the money's still there for retirement, but that could be 40 years away.
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Chapter 4: How can co-investing with parents impact your ability to buy a first home?
at a bank to go buy a home for you to actually live in, they're not going to say, okay, $850,000, you own effectively 40% of that property. You're responsible effectively for 40% of that mortgage. And so we are going to assess your application like you've got $340,000 worth of debt already. No, no, no, no, no, no, no, because you're totally liable for that $850,000 mortgage.
So the bank will look at it as if you have $850,000 worth of debt, and then how much extra are we able to get you? So that means that the bank will look at your mortgage application when you go to buy your first home or your next home or your next investment property as if you have all of that debt, whereas actually you're only responsible for a portion of it.
And remember, under the new debt to income ratio rules as well, that's exactly how the Reserve Bank tells the banks to assess your application. You're responsible for all the debt, and so they are going to assess your application like you have all of that debt. And that could just mean you've got to have a lot more income if you're going to be able to get a mortgage to buy that first property.
So it can just slow you down. Now, if you've got a huge income, if you've got great income, maybe that's not going to worry you too much, but it is a risk that you really need to consider.
And I think another really interesting component to a situation like this is, let's say the daughter's single. She meets a nice young partner and they move in together. Three years down the track, they would be likely considered de facto.
Now, under the laws of New Zealand, because that property is in her name or partly in her name, that property or at least the 40% ownership stake that she has is considered relationship property. So if now her and her partner split, he or she can make a claim against the equity in that 40%. Now, the problem here is, well, what if they don't have the money to pay that person out?
And then do they go to the bank and get a loan? And if they can't, they might have to sell that property. And again, all of a sudden, because Sally couldn't keep it in her pants, now mum and dad are having to sell a rental property earlier.
Well, actually, there's just a bit of nuance to that that I've only recently come across. So I've been reading more about relationship property. And it turns out in New Zealand, if she bought this property before the relationship started, it might not be considered relationship property because... Yeah, I know, you're giving me the look now, Andrew. Because...
She purchased it before the relationship started and the property was not for the benefit of the relationship. So let me give you an example. Let's say it was a family home and Sally and the new boyfriend live in it. Well, the property was used for the relationship and so it becomes relationship property.
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Chapter 5: What are the advantages of buying property with your parents?
But if you don't figure that out up front, it might become a bit of a fight later. So for instance, I remember, Andrew, when you were doing your first renovation and flip, you bought it with Alice Stewart. Was that the girlfriend at the time? Yes. And you put in more deposit than her, but you guys agreed that you were going to split the profits 50-50. Correct.
And so that's a good example of where, again, people might come in with different amounts of deposits or different contributions, but you might decide how you want to split it, right? So just have that conversation. Otherwise, two people might be on very different pages.
And then I'm kind of thinking, okay, well, now as a parent of two, what if I help out Eliza because, you know, I think, oh, yeah, she's been a good child. I want to do something with her. Has she? All of us, it's this imaginary world. And then a few years later, Alexander says, hang on a minute, Dad, you did something with her and you did nothing with me. Does that mean you love her more?
To which you answer, of course, of course.
You're the second child. No one loves you.
But there are a lot of complexities to family dynamics with money. And what the last thing you want to do is create unnecessary tension over the Christmas turkey.
One day when your will's being contested, little Alexander is going to clip this part out of the podcast and play it to the judge.
It won't be the first time that this podcast has been taken out of context and used against me.
So let's say that a family are listening to this and they decide that co-investing isn't for them. What are some alternatives where parents can help their kids?
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