Ask Paul: I owe $800k on three properties during a pandemic


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Dear Paul,

I am a single income earner, aged 36, and am on $120,000pa with some perks such as a company house and matched share options in the mining industry.

I am currently on the highest level of share purchase at $570 a month and salary sacrifice about 2.5% pre-tax into super with matched contributions.

paul clitheroe

Currently I have three investment properties:
1. Value $580,000, owing $350,000 on an interest-only loan;
2. Value $380,000, owing $265,000 on a principal and interest (P&I) loan;
3. Value $373,000, owing $217,000 on a P&I loan. 

Recently I had an issue with one of the properties that was not covered by insurance and, after the repairs and lost rent, it reduced my savings to almost nothing.

Currently I save $3000 a month and am building my offset account back up to my desired level of three months' income to start. Overall the properties covered themselves with a small profit before the recent setback.

My question is, do I just reduce my exposure and have a good savings bank for any future setbacks? Or should I start to diversify with shares outside the mining industry by adding some exchange traded funds or similar?

With the recent pandemic I feel quite exposed and for peace of mind would like to move towards a position that is comfortable in times like these. - Rohan

Well, one thing is for sure Rohan. Please, do not buy any more properties.

This is a comment I have been making for about 40 years. No single investment class will be the "right" investment over the longer term.

Shares will have bad moments, cash is safe, but with very low returns. Property is good when the going is good, but can be bad during a recession and high rates of unemployment. As you have found out, it can also be capital expensive with repairs and maintenance.

You have plenty of equity in these properties and thankfully you generate very high monthly savings from your job. What worries me is not just repairs, but if something happened to your job, or your properties became unexpectedly vacant.

Providing these properties are well located, and with your well-paid job, I am confident that in the long term they will prove to be good assets. But you are heavily exposed to property and this also makes me nervous.

Clearly, selling one would reduce debt levels and leave you with a solid surplus of cash. So much information is needed to make this decision, though, things like your job security, the location of the properties, tax implications of a sale and so on. I'd suggest a good conversation with your tax or investment adviser is needed to come to the right decision.

Regardless of your final call, I do agree with your comments about diversification. I would prefer to see every investor with a spread of assets.

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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. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
john scott
July 15, 2020 9.18pm

Hi Rohan

1) Opt for cash instead of share buy option of the mining company.

2) Pay off any personal loans like credit card, car loans etc if you have any.

3) Build an emergency fund equivalent to 3-6 months of your salary before doing any investments.

4) Maximise your total super contributions to 25k if possible.

5) Do not sell your positively geared property if they are in good location.

6) If you still have any money left to invest, buy low cost diversified ETFs regularly.

7) Do not buy any more investment properties.

Jim Lee
July 16, 2020 9.15am

The golden years of property investing long gone (early 2000s), good luck anyone sink in $650K - $1m a property, most properties will not grow !

July 17, 2020 12.33am

1. Put your least performing properly on the market but don't sell at a loss.

2. Invest any profits from the sale into ETFs to build your diversified portfolio.

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