Ask Paul: Should I buy a second investment property at 42?

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Hi Paul,

I am a single parent of two teen boys and have had to learn financial literacy since my divorce.

I earn $123,000pa and have a property valued at $880,000 ($192,000 owing) and a newly built duplex investment valued at close to $900,000 ($690,000 owing) and renting at $750 a week.  

Ask Paul Clitheroe Should I buy a second investment property at 42

My home and investment property are 8km from the Adelaide CBD in a desirable suburb, and capital growth has been significant since I acquired it.

I am paying principal and interest on both, so it doesn't leave a lot left over to save or to take out equity, as I am making additional payments out of my salary to service the loan on the rental. 

I have only $16,000 in offset savings and $4000 in a Vanguard exchange traded fund that just sits there - I don't contribute to it but do contribute 2% extra to my super each pay cycle.

My super balance is $170,000.

I am 42 and concerned about my retirement. Should I be tweaking some things here to maximise returns by retirement? 

I have considered trying to take out equity to buy another investment property as the property market in Adelaide is going crazy. It would put me under pressure, but I feel if I don't take risks I won't get ahead financially.

Your insights would be appreciated! - Sheree

Sheree, you are certainly demonstrating plenty of very effective financial literacy. Good on you.

I, along with many others, have spent much of the past four decades trying to help build people's financial literacy skills.

One thing we do notice is that we humans tend not to put in the effort into getting better with money unless we absolutely have to. A big part of the problem is that financial literacy will not make any of us rich in the short term.

We all know that 'If it looks too good to be true, it will be'. Anyone promising us short-term wealth with little risk is a liar or a crook. I'll give lottery-type games an exemption here.

Except as a hobby, with losses kept to small amounts, I hate gambling. We individuals will lose.

One of my favourite 'Paul's money tours' takes in a horse-racing track. The punters park some distance away, not often in flash cars.

The bookies, who of course are not gamblers but risk managers, park at the members' stand, often in very flash cars. So exactly who are the losers here? Lotteries at least are fair.

People put in a small set amount, generally understanding that a big win is millions to one and incredibly unlikely.

Impressive results

The basics of financial literacy are all about spending less than you earn. This is far from an exciting concept. Even saving is defined as 'postponing consumption'. The problem is that few 
of us like postponing consumption.

It is sad that it took a divorce to cause you to focus on financial literacy, but I am just delighted that you have. What you are doing now is impressive. Your strategy will bring you financial independence in the years to come.

Let's look at that. First up, you have the critical age advantage. Finally figuring out financial literacy at my age of 69 is good but far from ideal, as my best earning years are behind me.

My wife, Vicki, and I are in wealth-reduction mode, not wealth-creation mode. That, by the way, is what we should be doing.

I see little point in decades of saving and investing if we don't then, in a financially literate, age-based way, draw on our wealth. Vicki and I had between us the grand asset base of $2300, namely her Datsun 120Y and an ageing car my parents had kindly given me.

That was about 44 years ago.

Over the next 44 years, we postponed consumption, invested, as you are doing, on a regular basis and paid off our home.

To little surprise, nearly half a century later, this has paid off in the form of financial independence. But we see no point in grimly hanging onto what we have built. We don't want to take our wealth back to $2300, but dying, hopefully in the distant future, with 
our 'peak wealth' is not our plan.

At 42, you have already created a terrific asset base. Looking at the equity in your home, investment property and super, you are already above $1 million. You are adding 2% to your super on top of your compulsory contributions, paying principal and interest on both your properties and have a cash buffer for emergencies. Very importantly, you have a solid salary and can save, which is your wealth-creating engine.

This is great. But you do need to have a hard think about the extra investment property. I was in Adelaide recently for work and it is indeed booming.

The challenge I have for you is risk. If you just keep doing what you are doing for, say, another 20 years, you will create a very solid base of assets and, I would argue, financial independence. I accept that this is the low-risk, get-rich-slow path.

I can't disagree that a well-located property, bought at a reasonable market price, will add to your wealth over 20 years. However, it is riskier. As you say, you would be under pressure. I don't mind risk and a bit of pressure; I agree it is how we get ahead. But you have a great asset base and going back to potentially zero at age 42 due to excessive risk is a terrible idea.

Sensible risk is okay

I need you to do your numbers very carefully. The key rule here is 'don't lose what you have created'. Please run a careful risk assessment. Things to include are your job security and income insurance. Then play devil's advocate. Write down what could go wrong: higher interest rates, a recession, you can't rent the property and so on. With this done critically, don't overextend yourself.

I would encourage you, if you decide to buy another investment property, to take less risk than you could technically afford to take if you really geared yourself up. Sensible risk, I am happy with.

Risk that could destroy all the effort you have put in, I am not.

If you keep doing what you are doing and make a sensible decision about extra risk, I am certain you will achieve your financial goals. All the best with that!

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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.
Comments
Lisa Ormenyessy
January 15, 2025 5.35pm

If Sheree were to pay interest only on the 2nd investment property she would reduce her peronal income tax considerably and have more income to pay of her PPR and other investment property - then review.

Adam Khoury
January 18, 2025 1.37pm

Also a good option :)

David Stableford
January 15, 2025 5.51pm

You're set up very well but are missing a very big wealth building opportunity, don't think about another investment property, you don't need the pressure and are already well invested in the property market.

If you are earning 123k per year then you are nowhere near up to date with your superannuation concessional contributions, which you can back date for 5 years. So if you "top up" your super concessional contributions every tax year you will receive roughly 17% of what you pay into super returned to you as a tax refund.

My rough calculations, I think you have around $70,000 available to pay into super. If you did this in one lump sum you would receive $12,000 back as a tax refund. You do not need to top it up all at once but you can only go back 5 years, so if you paid $12,300 into super in 2020 then you were $12,700 short of the concessional contribution cap that tax year so if you paid an extra $12,700 into super this tax year, you will receive $2,159 back as a tax rebate, if you don't you will lose the opportunity for 2020.

If you're concerned about retirement TOP UP SUPERANUAMTION this will also diversify your investment portfolio into the share market.

I wouldn't advise this to somebody who was not financially literate or disciplined but with the amount of equity you have in your properties I would release equity into an offset account and pay what you can/want into Super and leave a chunk of money in the offset account as savings.

I'm not a financial advisor, I'm a self taught financially literate person who likes telling people how to make their money work for them. I presume you're on the most competitive mortgage rate? if not then change it asap! Mine is 6.2% variable at the moment

Geoff Greenham
January 16, 2025 6.51am

Property should not be allowed for investment but for shelter only.

It's advice like yours which only adds fuel to property prices.

You and your like should be ashamed.

Andrew Bates
February 6, 2025 12.42am

Not sure why this comment from Geoff was posted on your web site. He has really no idea what fuels the property market. Stop giving the village idiot a voice, please!!!

Geoff Isadik
February 6, 2025 11.55pm

Property investors have very little impact on the property market. The property market is driven by supply and demand. Stop putting the blame on investors who provide homes for people who can not afford to buy a home in this difficult property market.

Greg Byrne
January 17, 2025 2.08pm

As an owner of two investment properties and about to sell them , If I were giving any advice to anyone right now, I would say don't do it . This is the wrong time. The time for getting a fair return from investment property has long past, and will only get worse. I very must respect Paul, but I also acknowledge that as an advisor he has a duty of care and ethics to present any advice without leading or misleading the reciprocate.

Alexander Waters
January 19, 2025 4.55pm

Could you expand on why you wouldn't buy investment property now? I'm about to do this through SMSF as a first time property investor. A little spooked by the whole process.

Adam Khoury
January 18, 2025 1.34pm

Hi Sheree,

You are doing really well! Great job!

With your level of income, and 2 dependents, you may not have the capacity to purchase another investment property, but if you do it's probably going to be for a much lower price point than your local area has on offer.

I would focus on paying down your owner occupied mortgage.

You could look at purchasing another property via a self managed super fund, but you would need to seek advice on this from a Financial Advisor and or Accountant.

One of the comments above suggested making additional super contributions, which may also be a great strategy.

You're going really well, so stay positive and don't put yourself under unnecessary financial stress, as it just isn't worth it!

Adam :)

Ann Cameron
January 19, 2025 7.35pm

If we had believed what "well-meaning" people said, we'd still be either working or on CL age pension instead of retired and living well. If the sums add up and you're prepared to tighten the belt, sacrifice short term gratification and manage the risk by buying well, now is the best time to invest in property. The ideal time never comes. We were very low income earners, but a company called Cashflow taught us how to invest in property when we were in our 50s and we've never regretted it. Property was tangible to us, unlike shares etc that needed knowledge and computer savvy we simply lacked. We learnt to make our money when we bought, looking for ways to value add, eg turning a 2 bedder into a 3 inexpensively, and looking for passive income. Our worst nightmare was dealing with RE agents, many of whom were averse to speaking truth. Result - when tenant was good, we managed it ourselves, following Qld RTA regulations. Unless you buy too dear, poor quality or wrong place, property always goes up in price over time, while we've had shares that got wiped out. Buy the land, not the building. Buy for Joe Blow in mind, not for Home Beautiful. Do your due diligence and go for it.