Occupations: Manager and part-time office administrator.
Income: Peter earns $80,000, plus super, and Sarah earns about $25,000, including super. They receive rent from a house, $275 a week, and from a city apartment, $300 a week.
Assets: Smaller house they live in, worth $320,000, with a mortgage of $30,000; larger house in same area is worth $400,000, with $80,000 mortgage; a small investment apartment in the city, worth $170,000, is fully mortgaged.
Savings: Peter has about $47,000 in super and Sarah $20,000.
Debts: $6000 for the car, which will be paid off by the end of 2004.
Monthly expenses: $7055.
Goals: To have a holiday each year, have another baby and move into the larger house. We need some financial guidance.
* Not their real names.
Peter and Sarah are a professional couple and have a 20-month-old son. They hope to have another child this year and wonder if it is wise to keep the house they live in as an investment, even though it would be positively geared.
They plan to move out of it in the next year.
Sarah wonders if they should sell the house and use the money to pay off their other house and pay for $150,000 worth of renovations that they are contemplating.
"If we sell this house we would like to buy another house for about the same price in the same area but fully mortgage it so it can be negatively geared," Sarah says.
"We like the idea of investing in property and this area has had strong growth in the past few years and we think that this will continue, although to a lesser extent."
Sarah owns the house they live in. The larger house and the city apartment are in Peter's name.
"We hope to have another baby in the next year, so my income is not guaranteed and we plan to move into the larger house at the end of next year," Sarah says.
Sarah says they save very little and she is concerned that they have relatively low super balances. Peter contributes an extra 3 per cent to his super fund and Sarah is paying an extra $30 a week into hers.
"Last year my fund earned negative returns, which was more than the total sum I contributed as I had not worked a full year," she says.
Sarah says her knowledge about super is limited and, as most super funds at the moment are not producing returns, she and Peter are more comfortable about investing in property but are not sure if this is the right thing to do.
"We have about $10,000 in a mortgage offset account on the house we are living in," she says.
"Of this $10,000, we have earmarked $2500 for investment or education expenses. We are contributing $20 per week to this.
"We both enjoy reading and watching movies as well as spending time with our son," Sarah says. "Most weekends we try to get away and do a large walk - spending a day at the Botanic Gardens or the Dandenongs, for instance, and have lunch or breakfast out."
Richard Goudie, a financial planner and authorised representative of RetireInvest, who is also a member of the Financial Planning Association, replies:
I recommend you keep your existing one once you move into the larger house. I would not be too concerned that your existing house, which will become an investment property, will be positively geared. Because it is in Sarah's name, the income from it will be taxed at Sarah's marginal tax rate.
Given that Sarah may be taking some time off paid work if you have another child and that she has the lower marginal tax rate, the income from the new investment property will be taxed at a relatively low rate.
You mentioned the prospect of selling the house you live in now and then buying an investment property in the same area. I feel this will be a very costly exercise, with few benefits. You will have to pay legal costs, agents' fees on the sale, stamp duty on the purchase and a range of bank fees.
It is very important to remember that any interest charged on a debt for your family house is non-deductible, so you cannot claim the interest as a tax deduction.
Because of this, I think it is extremely important to repay your non-deductible debt as quickly as possible, and I would use all available funds to repay it.
Once your car loan is repaid, redirect the money to your house mortgage. You should direct all your savings into this mortgage.
You are both making extra contributions to your super funds. I believe this strategy is very wise as funds built up in super will fund your retirement. If the money in your super funds is invested in a balanced or growth fund, you will have exposure to the three main asset classes - cash, property and shares.
It's important that investors don't look at their investments with a 12-month view. Shares will outperform other asset classes over the long term.
Remember, given the recent strong performance of property it could well be the next asset class providing negative returns.
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