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

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. 

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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