PROPERTY

Ask Paul: Should we keep our old house as an investment property?

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Hi Paul,

We have recently purchased a vacant block of land and are going to build a new home to live in.

The total value of the land and house is about $900,000 and it should be completed in June 2021.

ask paul clitheroe money magazine should we sell our investment property to pay off our home

We paid off our current townhouse, valued at $630,000,  a couple of years ago. Our yearly combined income is $200,000 and we have savings of $100,000. 

Once the new house is completed we will move in and our townhouse will be vacant.

We are contemplating selling the townhouse to pay off the majority of the mortgage and having a small amount of debt; or keeping the townhouse as a rental and providing some income while still paying strata fees and other bills associated with the property.

What do you think would be the smartest option with our townhouse? - Paul

Good question, Paul. This is an issue that many of us will face at some stage in our lives.

With your income, savings and this very low-interest-rate climate, you could certainly afford to hold the townhouse. We can safely assume interest rates will remain low for some time, so in my mind this leaves us with two main variables.

First up are your job security and family plans. That, of course, only you can determine, but you should consider the impact 
of a job loss or reduced income if a family is something you are planning.

Secondly, we need to look at the rental and growth prospects of your townhouse.

It sounds as if you have owned it for a fair while, so that should be a useful guide to its investment potential, but pretty obviously it needs to be in an area with good growth prospects and all those critical features such as public transport and access to schools, jobs, medical services, food and entertainment.

It sounds like you have paid it off in full, which is great, but I do encourage people to save via an offset account.

The downside here is that you may have no mortgage on your investment property and a non-deductible mortgage on your new home. In different times with higher rates of interest this would be a bit of a problem, but less so now with low rates. If you have used an offset account, you can, of course, use that for the new home, keeping tax-deductible interest on your investment property.

My view is that you should always try to hold good property if you can, but you will need to consider this in the light of your personal situation.

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Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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