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