Time to build up wealth

QMy

wife and I are both 33. We work full time and our combined income is $200,000. Our house is valued at $1.2 million and we have a $260,000 mortgage. We have $70,000 in an offset account and $200,000 in combined super. We have no children.

We recently purchased two blocks of land ($230,000 and $290,000) and have a 10% deposit on them. They have increased in price by around $100,000 each. We have been approved financially to build one home on each block and are wondering if it’s a good idea to do this and start a rental property portfolio.

Or should we sell the land and put the profits after capital gains into our current mortgage. Or is there a better plan for our financial situation?

Well, Matt, you and your wife are in a great financial position at an early stage in your working lives, which is very pleasing to see. Based on what you tell me, this is not really the time to take taxable profits on your blocks of land and to pay off your remaining mortgage, which should not be costing you much more than 3.7%pa. Your incomes are high and this is the time to create investment wealth for your future.

My major reservation is around your plans for a family. Don’t get me wrong, I reckon that if kids come along it is a great thing. But before you borrow to build two houses, I do want you to do a stress test on your finances to make sure you are going to be OK if you are on one income for a while.

The other issue is to be sure your land is in a growth area. But given the blocks have recently appreciated by $100,000, it seems to me that they must be well located. Before you hit the go button, just make sure you have a quality builder and a fixed-price contract and also talk to local agents about a realistic level of rent, and then double-check your numbers. If in doubt you could always sell one block.