Paul’s verdict

If you keep all three properties, start to spread your risk

It has been a truly strange year, Hayley. For some four decades, I and pretty much any other commentator on money has pointed out that over some 7000 years of human history, markets of all types have gone up and down.

At times we see extreme booms, at other times extreme busts. Some of these can be quite terrifying, but the common theme, of course, is the recovery.

What causes these huge downturns is easy to see with hindsight, but wars, plague and pestilence are up there. I would hate to count how often over my 40 years of talking about money I’ve pointed to some form of plague as a pretty normal risk. Nothing clever there – plague is well documented. But it is a bit like talking about the 1000-plus people who die each year on our roads. I expect that, but don’t expect it to happen to me or anyone close to me!

So, it is with great surprise I find myself living in the “Covid years”. The most unexpected part about this is that, thanks to vast government spending, most assets have either gone up or held their value. Sure, sharemarkets took a big dip in March 2020 and property went very flat. But with record low interest rates and bucketfuls of money to support us and the economy, asset values have gone crazy.

Property, shares, historic cars, quality art, you name it and it has done pretty well. As you point out, you made a decision to stretch yourselves and held property in the right locations through a very large “Covid boom”. I’ve long preferred people to invest in big cities, near public transport, health care, jobs, schools, entertainment and good coffee and have been very suspicious of lifestyle property, such as a beach house. However, in particular as people can’t travel and can increasingly work form home, regional property has also boomed. I’ll bet you did not expect to see increased equity of $500,000 in a year.

Your question, though, is the right one. Do you “bank” some of this boom and reduce the non-tax-deductible debt on your home?

I know the rent from your properties covers repayments and running costs, and you have very little other debt. Another factor I would take into account is job security, or at least the ability to secure employment if needed. Once you factor that in, then we have a pretty simple set of facts on which to make a decision.

With so much equity in your home, I hope the interest on your mortgage is around 2.5%. This is a key issue. The second item we need to look at is the return on your properties. If you expect less than 2.5% a year, it’s simple, you would sell one and pay down debt.

In any population growth area, it is hard to see how property would return under 2.5% a year. Sure, some years property will go down, but over time you would expect well-located property to return more than 2.5% a year – that is barely meeting inflation. What is also important is that you have property in quite different locations: Mount Eliza, the Sunshine Coast and Bendigo.

On a straight return basis, I suspect you would keep all three. Other issues pop up, though. It is risky having most of your money just in residential property. Interest rates could, and will at some stage, go up. Unemployment may rise and you may lose tenants. What if you lose your jobs or become ill?

You need to write a list of the factors that are important to you. On one side write the reasons to keep all three properties; on the other side write the reasons not to own three properties. Here you are looking at risk and return, then you overlay that with personal things, such as how much risk you are happy with, your ability to sleep at night with debt and so on.

My crystal ball is no better than anyone else’s. But if we turn to history, you would expect your properties to produce higher returns in the longer term than the costs of running them. So, providing you are not forced to sell in a downturn, you should continue to do well. Equally, you could say “Crikey! We have done well” and bank some of your returns and pay off your family home. Risk is very personal and here we are chatting about your personal views.

If you keep all three properties, please start to spread your risk through superannuation and other assets such as shares. Frankly, at age 34 you are in a fantastic position, and whether you sell one property or not is unlikely to have a huge impact on your financial future. When the kids are in bed one night, if you like a glass of wine, I’d enjoy one together and chat about your attitude to risk. I think there lies the answer to your question.

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