Ask Paul: Where should I invest my inheritance?
Q. We live in Brisbane, with two children aged 6 and 4. We own our home ($150,000 mortgage) and an investment property ($125,000 mortgage) that is is positively geared.
My husband and I have separate businesses. Unfortunately, neither makes much money, and we get by with the help of parent payment and family tax benefit.
I am about to receive an inheritance of $800,000.
I would like your advice on how to spend the money wisely and set up for the children's future. With the extra asset, our government payment will probably drop to a bare minimum if any.
The two things I thought of doing are: use $150,000 to pay off the mortgage on our home so we own it outright; use $100,000 to add a deck and room extension and other changes to our home, which will upgrade it from three bedrooms and one bathroom to four bedrooms and two bathrooms.
Our house backs onto a bushland but currently the only way to see it is through the windows from each bedroom.
With the renovation, the new lounge will open onto the deck with views to the bushland.
We want to do the renovation to enjoy living in the house ourselves but I believe if we spend $100,000 and get all the things we want done the value will at lease go up $100,000, which also make it a sensible investment.
With the remaining amount, I plan to buy two investment properties with less than 50% borrowing.
With smaller mortgages, they should be positively geared, which will cover the mortgage payment and possibly provide us some extra income for living. In the long run, these could be our children's inheritance.
My questions are:
- Should I put some of these money into our super, then invest the rest somehow? Or perhaps pay it all into super, then self-manage it?
- Should I set up a family trust and put all the money into the trust, then use it to invest?
- Is buying properties a good idea, or are there better ways to set up for our children's future?
A. Wow, Li! This really is a life-changing event for you.
With two small kids and your businesses not making a lot of money, the timing of this inheritance is just perfect. Paying off your home mortgage of $150,000 is a no-brainer.
I am also very supportive of the $100,000 renovation for two reasons.
First, it will improve your property and your lifestyle. That is important but, as you say, it will also increase the value of your home by the amount you spend.
So I'd do your planning and get on with this. Knowing renovations, I suspect the $100,000 will turn into $150,000 but as long as it adds that much value to your house it is not an issue.
You will still have a significant balance to invest - I'd say around $550,000.
There is no point in paying off tax-deductible debt on your current investment property; the rent is covering the interest as you say it is positively geared.
Now we turn to other options. Always deal with investment issues first and tax second.
I really would prefer you not to have 100% tied up in property. I have no problem with property in a growth location and in a country with a growing population but 100% in anything makes me nervous, be it property, shares or cash in the bank. Spreading risk just makes sense.
So how about buying one more investment property with a solid deposit, as you suggest, around 50%? I do like the idea of the balance being put into super as a non-concessional contribution.
You can do this with your fund or both of your funds - that decision I'll leave to you.
In terms of structuring, I am not really sure a family trust is the way to go with a new property investment.
You are not earning a lot of money and the cost of establishing and running a trust is high. I am not convinced you will get tax benefits that outweigh the costs. Seek tax advice if you want personal guidance on this matter. Be cautious - we advisory-type people make good money out of complexity but will you!
With super, again unless you have a real desire to self-manage, I think that a low-cost fund will do the job for you.
I am seeing funds now offering indexed balanced global investment portfolios for a few hundredths of 1% a year.
Again, a self-managed fund is expensive to establish and maintain. I have one and I am happy with it but I do get heavily involved in investment decisions.
Unless you have well over $300,000 in your own super fund, the costs are too high. I know I am making a fuss about costs, but if as I expect we have a period of low returns, fees on a self-managed super fund can absorb a third of your returns.
So I think we have a pretty good plan here.
About a third of the inheritance goes to paying off your mortgage and a renovation that makes life more pleasant for you family and also adds value to your home.
Another third or so towards an investment property, and while I would always recommend you keep some cash on hand for emergencies, topping up your super and making sure that the fund holds a good balance of Australian and overseas investment makes a lot of sense to me.