Now it’s time to invest

Alex has paid off the mortgage, so ....

QWe have recently paid off our place of residence valued at $420,000. We are business owners (30 and 31) earning around $130,000 a year. We recently purchased a rural property of about 1.5 hectares and plan to build. Do we rent out our house in our home town in country South Australia that is paid for, or sell and build our new house and then buy an investment property in Adelaide?

Good question, Alex. First, congratulations on paying off your home – that is a great start. I assume that when you say it is paid off, you have done exactly that and have no mortgage. If so, we have a tax issue. If you rent it, the income will be taxable. Yet the new mortgage on the home you will build is not tax deductible. History also says that well-located, central property in a capital city tends to grow in value more than property in regional areas.

I’d like you to discuss this with your accountant. If you have paid off your home via an offset account, meaning the mortgage is still in place, then that would shift my thinking somewhat.

But my view is that selling your home, building a new one with little or no debt and then borrowing to buy in Adelaide makes a fair bit of sense. I would argue that the city investment property should grow in value more strongly over time, the interest on your loan is tax deductible via negative gearing and you have a new home to live in with little or no debt.