Inheritance and buying a house

[Epponnee]

We are currently in need of some advice/wider views regarding buying a house. Background: DH, me and 3 DC (9,5,2) currently live in a rented house in NZ (Auckland north shore - very expensive but beautiful area). We have lived in this house (owned by lovely landlord with no current plans to sell in near future) since we moved to NZ about 5 years ago. The housing market is crazy and we never thought we would be able to buy so we expected to rent for foreseeable future. We love our area and our house. I have been SAHM since DC1 and DH has well paying job but with high cost of living we haven’t been able to save a significant deposit. I am currently in education to get a professional job with next few years as youngest DC starts school.

However, DH and I have recently received a completely unexpected inheritance and we need to decide what would be the best option:

1. Put all inheritance towards deposit on large house in our expensive area. We can then afford dream house with plenty of room for visitors (all family overseas). This will still leave us with an expensive mortgage but as I plan to go back to work soon it will be manageable.
2. But smaller house/attached house in our area with half inheritance and invest half for retirement (currently have minimal retirement savings and we are both in 30s - we planned to address this when I start working again and we are dual income household). House would most likely have space for us but not as much outdoor space and no extra for visitors. Mortgage might be slightly higher than current rental but affordable with comfortable lifestyle.
3. Continue renting and invest full inheritance. We love NZ and don’t have any plans to leave but renting gives us flexibility. Also the market is so crazy that it seems impossible for it to continue to grow so perhaps investing in something besides housing is a good plan?

So WWYD? We are really finding it difficult to see an obvious choice so would appreciate any opinions.

Number 2. Don't plan your future around potential visitors. Not wise at all.

Yes, a big house and garden is nice but if you can buy and avoid expensive mortgage PLUS have some left over to save up, then that's the way to go.

If you or DH get ill or can't work for some reason, the big house with expensive mortgage will be lost.

Continuing to rent would be foolish.

Option 1.5
Spend about 75% of the inheritance on a house and put about 25% into pensions.
Buy a house which is neither large nor small but medium size, and will meet your family's needs for the next 5 years or so.

sensible to buy in Auckland, it’s a squeezed city due to the geography. Agree with PP about scenario 1.5

Thanks to you both for the input.

Yes, planning around visitors is probably a bad idea but before covid we would have visitors for about 8-12 weeks a year so having an extra bedroom is such a bonus, especially now that all DC are in their own rooms (previously had a cot in our room so had that extra space). Having an extra room for that time means we can all enjoy extend family so much more. It’s hard to decide not to have that space and either accept shorter visits or see them less. But the thought of one of us not being able to work is definitely something we need to consider. I don’t think we could afford the big house on just one income.

Option 1.5 leaves us with almost the same house but maybe more land - so possibility to extend/renovate (but not immediately) and create more space. By that time DC1 might be very close to moving out (probably 5 years from now realistically) so we aren’t gaining house space for the next 5 years unfortunately.

If anyone knows the NZ market we would be looking at a house worth $1-1.2 milNZD for option 1, $800,000 for option 2 and then rent is currently $600/week in Albany but we are happy to look anywhere North Shore/Rodney (Omaha/Silverdale probably).

Renting seems like the worst option but spending so much money on a house is difficult for us. The previous city we lived in had a complete real estate crash after we bought at a high and has really left us very cautious of investing too much in real estate.

Yes @HerRoyalNotness Auckland housing is squeezed definitely, new housing is so expensive and with long build times. Combined with high foreign investment, it’s hard to imagine prices going down significantly any time soon. That’s our worry about continuing to rent. The other side is that housing is unaffordable for so many that how can it continue like this?

As a kiwi who knows the housing market pretty well (and who's bought and sold a few times over the past 15 yrs) I think you need to have a sit down with a real estate agent, and a good look at sales in the area. So many go for auction particularly in the area(s) you are looking at, and they go for insane prices, far in excess of any guide price on the listing. Also look at sites that will give you an idea of what the most recent sales prices are in the streets you look at to get a true indication.

I think you will find you struggle to get option 2 at the budget you have suggested, as most 4 beds (based on number of DC you have) are going at the 1mil plus mark unless you move south of the Harbour Bridge, and even then they are pushing well over. I live an hour south of Auckland and properties here are going for 750K+ for 3brm.

They always say the NZ market will slow/stop/reverse. It doesn't. We don't have the stock to meet demand, and prices will continue to rise. The one thing you are guaranteed though, is a rental market for any house you buy, as there are even less rentals on the market than there are homes for sale.

Thanks @hazeleyednerd

We were trying to make more of a decision before we start getting real estate agents involved but that’s probably a sensible next step. We would be looking at a 3 bed with two DC sharing (current set up and works well enough) as we are definitely priced out of the 4 beds if we want to go the lower deposit option. We could look at other areas to get a bit more house. This market is so crazy and we had just accepted that we wouldn’t be able to buy and found a great rental (that was a whole different struggle) so it’s been such a shock to have to think about all this.

We’ve been going off the RV on trademe, but is there a better guide for realistic pricing?

@Epponnee

We’ve been going off the RV on trademe, but is there a better guide for realistic pricing?

A 3 bed might be a doable, but I think it might still be a stretch. our market is insane. there are many real estate agents who are happy to have a quick chat about the realities of the market specific to the areas that you are looking at and it helps to know what houses are actually going for, rather than the listing price.

Houses sell for far in excess of Rateable Value, sometimes double or more. Market Value can range hugely. The banks tend to go with a value that is in the market value range, though often in the more conservative side (desktop valuation), however if there is a dream home, you can get a professional valuation done for approx 350 that the banks will accept for mortgaging.

There are a lot of sites that can help, and give good information on the market, but also on the specifics of the area as well. Another option too is to find a mortgage broker, they do all the leg work re loans, can help work out what you can reasonably afford, and tend to have a fairly good knowledge of the local market. Their services are totally free as well.

Realestate.co.nz
Oneroof.co.nz
Homes.co.nz
Qv.co.nz

There are many others, but those are the ones I use the most, and that provide the most useable information without a fee. Some of the others charge quite a bit.

I suggest taking a look at the addresses of a couple of the properties you have looked at on TradeMe and entering them into homes.co.nz - it will give you a sales history, details of whether is on market and for what, and also the recent values/sales history of properties in close proximity.

One other heads up, when looking at properties, have a look at their district and regional council rates - you can get this for free by entering the address into the rates database search field on the relevant council websites. Also whether water is metered or not. Rates vary massively in NZ and can hugely affect your affordability.

Like I mentioned earlier I live approx an hour from Auckland. I am in a 3bed, 85sqm home with a 2 car garage and a 525sqm section. I pay a little over twice in district & regional council rates what my friends who own a 6bed, 250sqm home in Botany, Auckland. We pay the same in metered water charges. On a weekly basis I pay $75 towards this, on top of home loan, home and contents insurance and life insurance (all of which are required for a loan these days).

One other recommendation I can make - interest rates have never been so low, and they have started to turn around again.
When doing the affordability math, add up rates, insurances etc, and what you can afford each week. Consider how affordable this will be when factoring in interest rate rises. A jump from 2.5 - 5% can have a hefty impact on the monthly home loan payment.
Rates generally rise 5-10% yearly as well, and water charges also rise.
Always try to factor in what you could afford if you had to drop your income, or got injured (ACC only pays 80% of your wages while off for example), and allowing for rising interest and rates charges.

It's never been a better time to buy though, with the interest rates as low as they are. Properties are just going so much faster, and for more than you'd expect, due to a lack of supply.

Option one, stretch yourself now and you will be thankful in a few years.

Lucky you being in auckland :)

Agree option one. Buying the bigger house is not ignoring retirement planning. When all your DC have flown the nest you can downsize and invest the rest as a retirement fund. And in the meantime you and they get great quality of life including priceless relationships with extended family built on having them for extended stays.

Whose side of the family did the inheritance come from? Either you or your DH need to protect your financial interest in the inheritance so that it doesn't become matrimonial property. The lawyer will prepare the documentation.

I'm another Aucklander and know the market well. I now live south of the city but worked on the shore for years and still spend quite a bit of time over the bridge. Albany is a lovely area; I can see why you would like to stay there.
@hazeleyednerd has given you fantastic advice.
Like a previous poster, I think those figures you quoted are unrealistic, sorry to say.
My advice would be to buy as soon as you can. Don't even consider carrying on renting. The inheritance has given you a wonderful opportunity to enter Auckland's (crazy) property market. I think it will be a long while before prices reduce, if indeed they do, and interest is cheap at the moment.
Having said that, I think I would get as large a home as you can in a conservative manner. Maybe the 1.5 option. Do not overstretch yourselves as being able to afford your new home without financial stress is important. I presume that once our borders reopen you would want to occasionally travel 'home' which is a big expense for a family of five. Your lender (or better still, a broker) will crunch your borrowing potential assuming interest rates increase or in case you take longer than hoped to find employment once your little one starts school.
Further up the shore towards Rodney/Hibiscus Coast or north-west towards Dairy Flat could see you getting better value for your buck. You mention Omaha but that is much further away towards Matakana.
Moving away from Albany could involve a change of schools but you will have good options in that regard. And a move could also impact on your partner's commute to work. (Having said that, I live near Ardmore Airport spend up to two hours a day driving to work in Mt Eden!)
Until you said you could have overseas visitors for up to three months a year, I would also have said it was crazy to buy a larger house in anticipation of guests. I wonder though if a large rumpus/garage arrangement could accommodate guests or older kids without the cost an extra bedroom adds to the purchase price. This might also be good for any future working from home arrangement. If you need to compromise on the number of bedrooms it might be possible to have a pre-fab type building out the back to give some extra space.
I'd definitely be trying to stash some of your inheritance into retirement savings. I presume your partner is already receiving Kiwisaver? The balance could be used towards your purchase as it would be your first home in NZ. However, the budget you are looking at would preclude you also receiving the first home grant. I wouldn't suggest you invest a lump sum in Kiwisaver as you never know how your circumstances might change, but the windfall could give you a bonus headstart on retirement savings elsewhere.
Please keep us posted on your progress through this decision-making.
Let's hope we are out of lockdown level 2 sometime soon!!

Me again.
@TacCat49 - to use the famous MN phrase, "Did you mean to be so rude?". I'm quite sure Epponnee and her husband are quite capable of managing their own affairs.

I meant to strongly advocate against your Option 3. Secure investment options pay appallingly low interest. In this market, I don't think you could do better than investing home ownership.

26SueblueNZ
Well I'm sorry that my comment offends you. I am very aware of the Auckland area and the NZ market as well. You wouldn't believe the number of people who don't know about inheritance law in NZ which I'm sure is quite different to the UK. I don't think my comment is rude: I think it's quite helpful.

By that time DC1 might be very close to moving out (probably 5 years from now realistically)

I am intrigued to know why your eldest will move out at 14 (you say s/he is now 9)?

In answer to actual question, how stable is your DH job, and what sort of job/stability will you have. That would maybe be the decider as to whether to stretch yourself on the house or not. Also, do you intend to stay in NZ indefinitely (I’m assuming you aren’t native as all family abroad?)

But definitely buy, renting is wasted money. As others have said, a compromise - with some of the inheritance put into your pension as well as a house - would be the better option.

I think you are being slightly unrealistic about Auckland prices if you want space, in saying that my friend just paid $1.5m for a 4 bedroom in new lynn and Albany or other bits of north shore will be cheaper.

I would stretch as much as you can to be honest to be in the location you want to be in with enough space. House prices are likely to stabilise but not drop, the only problem will be mortgage rates are due to go up, we are going to fix for three years shortly.

Thank you so much to everyone for all the invaluable advice. Not having any family here who have been through this process means we don’t have anyone who would have mentioned all these little things.

@hazeleyednerd and @SueblueNZ me and DH will be going over your posts together. I think we will get some more info and talk to a real estate agent and broker and try to find a house/area that we can buy into. Also, I don’t know why I typed Omaha - I meant Orewa. I think if we put most of the inheritance towards a house we will be able to find something that suits us and will allow us to afford the mortgage even if the rates go up. We’ll have a look at putting a lump sum in kiwi saver too - thanks for that tip!

@BertiesShoes yes DC1 would be only 14 but I meant that we can try to find a house that will suit us right away for the next 10 years or so, or buy something small that we plan to extend in 5 years but then DC1 will only have 4-5 years before they are an adult so we’ve had the smaller space for most of the time they are at home with us. I’m not explaining myself very well but hope that makes a bit of sense.

We are not from NZ and haven’t really had to make a decision before now about staying indefinitely. We love it here and as the DC get older it seems more likely that we will stay but while renting it seemed like we always had the option of moving away easily. Buying a house is a bit more permanent but I think everyone has said that continuing to rent is the worst option so we will look at buying and we can always sell if we want to leave. It seems like the Auckland market is pretty safe (unlike our last city which crashed and we lost our deposit when we came to sell).

Thanks again everyone, we really appreciate it.

Definitely option 1. Live for the moment, you do not know how long you will have. A larger house is an investment.