Income: Salary, $54,000 before tax; Rent, $1500 a month.
Assets: Investment property worth $700,000; Superannuation $135,000.
Savings: Nil.
Debts: $170,000 on her investment property.
Monthly expenses: Loan repayment, $1036; line of credit payment $460; credit card, $200; living expenses, $650.
Goals: To buy more property, repay her debts and ensure that she is financially secure before she marries and has children.
* Not her real name.
MARIA, 32, is single and living with her parents. She does not pay any board or bills.
Her parents gave her and her sister $70,000 each for a home deposit 13 years ago. Maria and her sister pooled the money and bought an inner-city house for $220,000. Maria bought her sister out five years ago and has rented the house out ever since.
"Fortunately capital appreciation has worked well for me as the property is now worth $700,000 and is in a very good location," she says.
Maria is contemplating buying another investment property and has had approval for a $300,000 loan. She does not want to sell the first property.
"I don't have a share portfolio but I could buy shares using the equity from my investment property," she says. "I have also thought about managed funds but I prefer tangible investments."
Maria says she is an impulse spender.
"I'm not very good at sticking to a budget," she says. "I can't really save - I prefer to owe money on something such as a car, a house or furniture as I feel it is a form of forced savings.
"I can be impulsive at times and usually put something on my credit card if I don't happen to have the cash for it at the time."
Her parents also encouraged her to make personal contributions towards superannuation. "They both were migrant labourers and didn't discover the benefit of super until it was too late," Maria says.
She would like to know what to do with the investment loan: "Should I pay it off before buying another property or use more of my equity to negatively gear?"
Maria, who is in the final year of a part-time business degree, also loves dining out, dancing and going to the gym.
Anne Graham, a certified financial planner with McPhail HLG Financial Planning and authorised representative of PACT and member of the Financial Planning Association, replies:
Maria, you are set up well for the future; your debt is manageable, you have good assets, a reliable income and surplus cash.
Generally it is good to reduce debt as quickly as possible. But because your loan is being used to generate income, you receive tax advantages for having this debt. At this rate, you will repay your loans in about 14 years.
A house that you live in, your main residence, is exempt from capital gains tax and can stay exempt for up to six years after moving. However, you can only have one exempt property at a time.
If you have no intention of selling the property and you continue to rent it out, I suggest you get a registered valuer to give you a sworn valuation on the property at the end of the six-year rental period. That will be your cost base for CGT purposes when you sell the property. Consult a tax agent about CGT.
You have a healthy amount in super but due to preservation rules you will not get access to most of it for about 28 years. I suggest you maintain your contributions.
It is important to have a diverse investment portfolio, so you may wish to consider investing in assets such as equities and listed property. You can invest in either of these directly or by investing in managed funds.
Buying another residential property may be an attractive option, especially if you were to move out of your parents' place. Property prices are rather high at the moment whereas other investments, such as some shares, are beginning to represent value for money.
You sound unsure about whether to reduce your debt or increase it significantly. At the moment, you have a good cash flow surplus so you could manage another loan. If the loan is used for investment purposes then the interest may be deductible, making the strategy more effective. But you need to remember that a gearing strategy is generally recommended for a minimum of seven to 10 years. So you need to think about your future commitments, which could include having children or breaks in your career.
You also need to have some cash on hand for short-term expenses and emergencies, particularly when you have borrowed for a rental property. This cash should be held in a high-yielding bank account.
It is a good idea to take out income protection insurance and to consider other types of insurance, including health cover. You should also ensure that your will is up to date.
If you would like a Money Makeover, send your details, including a daytime telephone number, to: Money Manager, The Age, GPO Box 257C, City Mail Processing Centre, Victoria 8001, or email: money@theage.com.au
