Ask Paul: Is $860k of debt too much at 33?

A 33-year-old casual pastry chef has amassed two investment properties, a six-figure share portfolio and $860,000 in debt. Worried he may be overextending himself, he asks Paul Clitheroe whether he's taking too much risk, or simply building wealth faster than most.

Hi, Paul, I've been a subscriber for a few years, loving all the stuff you've taught me.

I am 33 years old, working as a casual pastry chef. I own two investment properties.

Property one I bought in 2020 for $515,000, now valued at $730,000. This property has a loan of $510,000. With Macquarie Bank's variable interest-only loan, I have built up some good equity in this property over the years.

I pulled out some equity to buy my second property in Ulverstone, Tasmania, for $450,000. That loan is $360,000 with a third-tier lender.

Combined, I have debt of $860,000, but both my properties are rented out.

I have $70,000 in super, $55,000 in a Vanguard account (investing in ETFs like VAS) and $45,000 in a CommSec account.

I have no student debt. I would like to retire early and be financially stable. Is there anything you would recommend I change with my current strategy?

Should I keep buying properties, or sell them and invest in shares solely, as there are so many risks and headaches when it comes to managing properties?

Should I be worried about the amount of debt I'm accumulating, or should I not worry about it since I'm young and the property growth will allow me to buy more properties? - Amila

Paul's response

Crikey, Amila, I am embarrassed. At age 33 you are smashing it with your finances. This is not exactly an endorsement of my skills, but at age 33 my wife and I owned a $90,500, mainly mortgaged, semi-detached home on a busy road opposite an industrial state.

Fortunately, my Dad had gifted us his secondhand car at trade-in time!

I had started a business, ipac securities in a one-room service office with my three terrific partners.

One minor problem was we could not afford to pay ourselves for three years, but over time the business grew to a large company. My wife, Vicki, was our source of income as a school teacher.  She remains amused at those years I was a dependent on her tax returns!

I may have answered a key part of your question. We reached pretty solid financial security by age 50, due to taking sensible risk.

We both felt the business would work and invested many unpaid hours in it. Like your properties, at times it was hard and many problems came along.

But the time to take risk is when you are young. You won't reach financial independence investing into a bank account earning taxable interest.

It seems to me your properties are doing well, my view is to sell losers and stick with winners. It is certainly easier to borrow to buy properties than shares, but the world has changed with the new rules on negative gearing.

You could look to smaller commercial properties, where the CGT rules have not changed, but here we move to your own personal comfort with debt.

You are off to a great start with wealth creation. You can continue on this path with property, but I do like diversification. I know you have super, Vanguard and some cash.

You could 'suspend' debt at your current levels and add to shares via ETFs or super. Super you will not access for many decades, so maybe just go with employer contributions?

It is an easy option to just add to Vanguard, or you could look at an investment loan to add gearing to shares.

Frankly, you are locked into a path to early financial independence. You are following all the key 'rules of money'. From here it is a personal path that depends on your attitude to risk and how much effort you are willing to put into time-heavy assets such as property.

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