Risks in buying an investment property
My husband and I (both aged 28) have a mortgage of $250,000 (on a house worth $510,000). We have two kids and may have more. We live on one wage of $80,000. We have no debts (besides HECS-HELP) and have $15,000 in shares.
What should we do now? Should we buy an investment property or pay down the mortgage or buy shares? Ideally I'd like to buy an investment unit or house on the Sunshine Coast in Queensland. Justine
It really interests me to read questions from Money readers such as you, Justine. It keeps me in touch with such a broad range of age groups and real-life situations. My first thought is to go back to when Vicki and I were first married and in the young-kids stage. We had two children, a son and then a daughter, in our late 20s and early 30s. Like you, we debated a third child; in fact, we debated this for about five years and then had our third child, a gorgeous daughter who is now 23.
Our path with money may not be your path but what makes sense to me as I look back to early family life, or really at any stage, is to look at cash flow. I imagine you would have after-tax income of about $65,000. Your repayments on your mortgage would be around $25,000, leaving you with $40,000. You don't mention any cash savings, so I suspect you would have a big mortgage on a second property.
The rent may well cover the repayments but you would need emergency money in case the property was vacant for a while, and to cover maintenance and all the usual costs. My concern here is that with a young family and possibly more kids to come you would put yourself under too much financial pressure. This, of course, is where our money paths may differ. Vicki and I are conservative, and we would have built savings in our offset account to give us a bigger safety margin while we were growing our family. It looks to me as if you have your money well under control and you are confident that adding to debt will be manageable for you. But we would agree that debt means risk.
If you don't have a good deposit, your lender is still likely to lend you the money but use your current house equity as security. So if things go wrong, which could be issues with tenants, your partner losing his job, having an accident and so on, then you potentially lose both properties. Sorry about these really negative thoughts but I find if you plan for bad things to happen, they won't. Equally, in all likelihood things will go well and the extra risk you took would then pay off.
I would also take into account the growth prospects for where you want to buy on the Sunshine Coast and in particular the rental prospects. It certainly would be a good idea to look into the market at openhouse inspections and also see what rents are being achieved.
In your shoes, I would be building savings in an offset account and then buying at a later date with a bigger deposit. This, though, is a personal judgment based on your situation and risk. Whichever way you go, well done in building the wealth you have already.
One thing I can say is to spend as much time with your family as you can – they grow really quickly.