Pay off the loans first

Michael is keen to develop a property but ...

QMy

wife (24) and I (26) have had our house for about a year now. Our mortgage is $375,000, with a personal loan of $23,000 and a car loan of around $15,000. I have three questions: 1. Should I pay off the personal loan and car loan before I even think of investing? 2. Is Defence Housing Australia a good investment option? It gives you guaranteed rent for six to 15 years and the homes aren’t all that old so they don’t require renovations. 3. The house we are currently living in is in a prime development area. The property next door recently sold and is having four townhouses built on it. On the other side we have an elderly couple with a huge property. Is it a good idea to secure that land when it goes up for sale? Is it possible for a young couple like ourselves to develop such a property, including our land, or is it something where you need a lot of money behind you?

Crikey Michael, I’d need most of this issue to give you a complete answer! First, if those loans were at around the home mortgage rate of 4%, I’d be in no hurry. But my guess is they are closer to 9%, maybe more. If so, personally, I’d be clearing high-interest debt.

Defence Housing Australia is an option for you but you would want to be sure the property is in a growth location. That takes me to question 3. Here you help me a lot with the words that you are in a “prime development area” – clearly this is a real positive. But local developers will know this, so I assume the land next door will not be cheap. I imagine you would need access to over $1 million after buying the land to develop four townhouses, so this is a big deal for a young couple. Sure, it sounds as if it would work if you managed to get the land cheaply and had access to capital to build, as well as the time and skills to make this happen.

I appreciate it is not a very exciting option but you are young, only just in your new house and you have $38,000 in the car and personal loans. My preference is to get stuck into these but do pay off the highest-interest loan first.