Is it worth keeping our townhouse as an investment when we buy a new house?

Q.

My partner and I are aged 38 and 35 respectively. We own our townhouse, valued at $500,000 with a mortgage of $307,000. Our combined income is $145,000, and we are about to inherit $370,000. We would like to buy a house with the inheritance, borrowing $400,000. Is it worth keeping our townhouse as an investment? The property is well located, rent would be $420 a week, future appreciation is certain, as are good quality tenants.

The problem with what you propose is that you will have a large non-deductible mortgage of $400,000. I assume you are living in the townhouse now, so you could sell it free of CGT and this would free up almost $200,000 for a deposit on your home. I believe a better option may be to sell the townhouse and eventually borrow back for a similar one - then you could borrow 100% of the price of the new one and it would all be deductible.