Ask Paul: Should I buy another rental or pay off debt?


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Dear Paul,

I have just received $120,00 from selling a rental property I owned with my parents. Now I do not know what to do with the money.

I have another rental property which, after trying to refinance, has come back with zero equity. I'm not too concerned about this as rent of $2150 a month more than covers the mortgage of $370,000. 

ask paul clitheroe should i buy another rental or pay off debt

I own the house I live in, owing $380,000, and it is worth about $470,000. I would like to buy another rental property but don't know if it's better to pay down my debt. I have also got $130,000 in shares. - Paul

It is a strange old world, Paul. In pretty much any other time in my 40 or so years discussing money, for someone with a couple of properties and sizeable, non-deductible debt on your home, I'd be saying put it into an offset account on your mortgage.

Incidentally, this is not a terrible idea. If your mortgage is, say, 2.7%, at least you would effectively earn that, risk and tax free.

So that is the safe and conservative route. The issue for you is that in a time when property and shares are pretty frothy, can you earn more than around 2.7% elsewhere? Despite strong markets, I would have to turn to history, which clearly shows us that over the long term you can indeed earn more than that, in fact, several percent a year more.

So, what you do depends on your risk profile and also your current situation. You sound pretty young. If so and you are in a good job, it seems to me that you can take a long-term view. If markets fell for a few years, you could sit this out.

But if you were closer to retirement or in a less stable job, I suspect the offset account may well be more appropriate.

Take stock of your financial position, your attitude to risk and your goals.

If your answer is you can take risk, sure, another property may be fine. Or you could diversify and look at shares. This is not a cop-out on my part; what I want to do is to give you the formula to make the very best decision. This is critically attuned to your personal situation.

I have to say, though, that too much risk can bring complete financial failure. Too little risk can see a failure to build a decent pool of assets. Analysing your situation and attitudes will give you the answer.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.
Nicholas Benson
May 5, 2021 5.35pm

If he owes $380,000 he obviously doesn't own the house he lives in. To own it he would owe zero ! People who say they are home owners and owe money on a mortgage are home BUYERS!

Freddy Frederickson
May 7, 2021 12.05pm

Well, Nicholas, he may not own the house outright but his name is on the title therefore he is the owner. The fact that the bank has an encumbrance on the house is neither here nor there. A buyer, by definition, is somebody who is intending to buy, or in the process of buying, not somebody who already has a house.

So let's uncouple the pedant wagon shall we.

Lincoln Sheppard
May 10, 2021 8.04pm

Well said Freddy

John Welsh
May 6, 2021 12.15pm

Debt =House $380000 so if $120000 is tax free I would Use $100000 to reduce my home loan and keep $20000 as a buffer for the rental for repairs when property is not rented

The more u can knock the debt on you home down the better you may get a bad illness or lose your work .If u own your home you will always have a roof over your head that you can't lose

Claudia O
June 8, 2021 6.08pm

Here having a mortgage for your home is partially tax deducted so I see no interest on paying faster a 2.7%.

More interesting is to search a small rental propriety where the rent covers the new rate and keep that 120k.

I might push the 120K in a Vanguard fund...the raise is around 7% per year