Ask Paul: When should we buy a second property with equity?

After buying a unit, James and Minna would love to upsize to a home with a backyard for their Border Collie. So when is the right time?

Reader question

Hi Paul,

My partner and I, both 24 years old, have just purchased our first property together - a unit in Sydney - with the help of the government's first-home buyer scheme.

We were often told that now was the right time to buy, and after a seven-month search, we decided to take the plunge. We both work full-time and are already thinking ahead - our goal is to build a property portfolio and purchase a second property within the next two years.

We have a dog - Amora, a three-year-old Border Collie, so upsizing to a home with a backyard - and more bedrooms - is a priority for us.

We understand we'll need to stay in our current property for at least a year before considering any moves. So we're taking this opportunity to look at our options. Our mortgage is $660,000 and we have a redraw account.

With our mortgage, at what point would you recommend purchasing a second property if we were to use the equity from our first home to upsize? - James

Paul's response

You know James, my family and friends often ask why, after more than 40 years of answering people's questions on TV, radio and in Money magazine, at the age of 70 I still enjoy doing this.

The answer is that I love hearing people's stories and having a crack at answering their questions. Sure, I don't get a lot of information in a hundred or so words, but I feel that I get the essence of what is happening in people's lives.

We all have different challenges with our personal finances. There are many ups and downs in life and one way or another, money plays a part. This is normal life. I try to answer based on the practicalities of money, but I also try to bring my own experiences to the story.

So, your story made me smile. It is not often I hear from two 24-year-olds who have purchased their first property and are planning their next acquisition. What I also enjoyed is that you added a bit of colour for me - your three-year-old Border Collie. Let's chat about that later.

Hearing from your generation gives me so much pleasure. Our kids are in their early to mid 30s, and much to our son's alarm, he is nearly 40. We have four grandkids, all under six. Despite starting small investments for them, and the older three are now quite interested in their bank account, for them money is just something to be converted into toys.

What I much enjoyed about your email was that at 24 I was yet to meet my wife, Vicki, and a bit like my grandkids, I saw money as something to be converted into goods, in my case, beer or golf balls.

You two are all over the fundamental principles of money. The earlier you start the better, as you let compound returns work for you. Somehow, and I'd love to know how, you have started the wealth creation process very early in your lives.

Maybe it was your parents' influence.

Interestingly - and listen up parents (and grandparents) - it does not seem to matter whether your parents were good or bad with money, the critical factor is that money, for better or worse, is discussed at the dinner table, in the car or wherever the subject pops up. In the area of financial literacy, we see kids who are good with money regardless of their parents being good, bad or indifferent with money.

The main factor seems to be that money is not some hidden secret, it is discussed as the kids grow up.

Doing all the right things

Whatever the reason, you are both good with money. I don't need to be Albert Einstein to work this out. You've sussed out the first-home buyer scheme and taken advantage of it to buy your first home.

You also have a redraw account, which along with growing equity in your apartment becomes the way you purchase your next property. All this also tells me you understand saving. Too many people don't. Saving does not happen by accident. It comes about because you spend less than you earn.

At some stage you may decide to start a family, so now is a good time to invest with two incomes, but please don't leave yourselves with no lifestyle options after your repayments on two properties.

I'm not particularly concerned about diversification at this early stage in your lives, that can come later. It is early days in the wealth-creation process for you both, but compulsory super will be starting to do this for you. The next bit you can do yourself. The size of your next mortgage is a direct reflection of what you are earning and can save. As two smart young people, it is hardly likely that at age 24 your salaries have peaked out.

Keep building wealth

Continuing to build up your asset base will pay big dividends in time to come, so buying an investment property in the next couple of years makes sense to me.

My only concern would be that you overextend yourselves. Using the equity in your home is fine, but it is the repayments I am concerned about.

The rent generated would cover a fair bit of your mortgage repayments, but obviously you would also have insurance, rates, agent fees, maintenance and so on. Costs in excess of your rent would, of course, be tax deductible, which should help a lot.

Remember that you have, in all likelihood, four or more decades of work ahead. Mind you, the way you are going, financial independence is likely to come early for you both, but a key part of your money planning is to have fun. Vicki and I had next to no money when we met, but our first step was to plan a trip to Europe.

Our primary funding mechanism for that was a giant beer can money box. We put our change in it every day after work, and after a year we had our spending money. I can appreciate this concept won't work in a world of tapping your cards, but our money box beer can was an excellent form of saving.

Finally, your Border Collie. As our kids grew up we had a Beagle for some 14 years. Winston was the most gorgeous, lively, heedless animal I have ever met. We loved him. But our middle daughter and son-in-law have a Border Collie. He is a terrific dog who comes to us quite a bit.

It is such a shock to have a granddog that not only does not open the fridge and consume the contents, he does not hide and bury remote controls and mobile phones, but listens and is obedient!

To finish with a money analogy, I am glad you two are not the Beagles of money. I and all the team at Money wish you long, happy lives. I know I don't need to worry about money with you both, just keep doing what you're doing.

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