If the $28k Personal Loan was used for investment with the Family, wouldn't it be a tax deductible loan?
In the event that it isn't, I would be hacking away at that loan as hard as possible as the longer the Loan exists, the more (bad) interest you will be forced to pay – wasted money.
Put the $8k in the Personal Loan in my view.
There is an argument that if you compare the interest saving from paying the $8k into the Loan to what the return might be if you invested it elsewhere, you might do better to invest it elsewhere, but even if you were to get a better return elsewhere, you still have the loan interest which diminishes the return, and the key word is MIGHT get a better return.
At least if you pay down the loan with the $8k, you KNOW you will definitely save some interest. 

Apart from the obvious nightmares that go with building a house from scratch, there is no rule that says it will be a bad investment. Building a house can be a stressful time.
The depreciation on a new building is excellent, so the tax returns will be good from that respect and this is one of the more overlooked aspects of property investing. If you build at the right price and can achieve a decent rent return, you can end up with a pos cashflow property after tax – tax free profit and the property costs you nothing.
Also, as far as I know, and I will stand corrected if wrong, the PURPOSE of the finance for the Land AND the Building is investment, therefore you can claim the holding costs from day one, even though there is no tenant in the property. Check with an accountant on that one. You would want the house to be built and a tenant put in within the same financial year I think.
Try to buy a block of land that will allow you to build multiple buildings on it (2 or more).
The only other problem I can see with building from scratch is the end cost of the new property may be too high for the equivalent existing homes in the area, so you may struggle to get a good valuation on it, and may not get that good a rent return either.
For example; you spend $300k on your new place, but the existing, but newer homes similar to yours are going for about $250k. You are over-capitalised a bit, and after 1 year it is just like all the other established newer homes around, so may in fact drop in value to what the established ones are worth. Run the numbers carefully and know the values in the area very well.
Personally, if it's your first investment; you may be better to buy an established, newer (less than 10 years old) property to get the right value, maximise the depreciation/tax advantages and you can still add value to increase the equity faster.

A few things to consider:
To me, selling the I.P now, especially if you can get another $50 p/w rent, is killing the cashcow . This extra $50 (less management fees) would be useful towards either paying off more of your PPoR mortgage, more into your super, or more off the I.P loan. In my opinion the most expensive money you have right now would be your PPoR loan – it's not tax deductible.
Superannuation, in my opinion, is for the uneducated investors and those who are not doing anything at all towards their future retirement/wealth. It is linked heavily to the stock market, and can therefore suffer great returns and great losses. I wouldn't want to bank my retirement money on a possible super pay-out sometime in the future. Is anyone guaranteeing your return on your super money? I didn't think so. I would rather have total control over my money and use my knowledge to invest into good, safe property with a good return.
If you sell the I.P now you will have to pay a good deal of Cap Gains Tax on the profit, and you will lose out on the nice tax deductions that come with I.P's, and any future cap growth and rent increases from it.
 You will still have the PPoR, without the tax deductions, still with the loan, and no income from it in later years. There are many stories of older people who own their own million dollar homes, but can't afford to maintain them, or suffer a lifestyle change because of the costs of the upkeep on the house – rates, maintenance insurance etc.
In a nutshell; you are both on good incomes, have several years left before retiring and already have some good assets in your 2 properties as well as the super-annuation.
I would be looking at a plan to keep acquiring more property, keep going with the super (but don't go mad with it in my opinion), and maybe look at directing some investing dollars into shares if you wish. I think shares are in a similar basket to the super and managed funds – therefore tread very carefully in that area.
When you hit retirement you can always sell off some of the properties and retire the debt on the I.P's and the PPoR. By the time you retire the properties (if well selected) will have increased significantly in value and you should be able to be debt free with an on-going passive income (rent).

I think everyone on this forum is doing/has done it the way you are; going without, saving hard and planning for wealth creation.
The rest are all signing up for another store card or a new plasma (or both).
As an "old" bloke of 46, I can say that I've been there and done that (not the mines – the "going without" part), and I didn't start until a fair bit later than you. I saw a lot of weekly pay go down the toilet (literally), but made up for lost time thankfully.
If you are going out to the mines good on you, and well done for starting down the right path so young.

There are two schools of thought on that:

1. sell the property and take the cash profit and use this as deposits on more properties, thus minimising the debt. This improves the LVR (Loan to Value Ratio) and the cashflow, but the R.O.T (rate of return) drops with more cash used. The good news is that the more cash is used, the better the chances of finding a positively geared property.
2. access the increasing equity to do same as above. no cash is needed in this option.

The problem with option 1. is when selling the property there are selling costs and CGT, which eat up a good chunk of your profit and then there is the trauma involved with selling the property.
The problem with option 2. is you can only access a certain percentage of the equity and because there is no cash involved, the rent return may not cover the interest payments on the higher amount of borrowed funds. The good news is you can keep acquiring properties with little or no cash and increase the portfolio and widen the base of wealth, and your R.O.T can be very high.

My personal view is if you can obtain properties that are CFP (this is more difficult to do in the current climate but can be done) then it is better to go with option 2. Buy and never sell is my philosophy.

The problem with creating equity with capital improvements alone is you need to be very careful about costs, time and the state of the market. Many people try to do this and end up only adding the same amount of value to the property as the cost of the improvements.
A well selected property in an area with good cap growth prospects will increase in value anyway.

If you manage your debt well and don't get too over-exposed with high LVR's, having more debt is not an issue, as all the other factors are contributing; rent, cap growth, tax deductions etc.; you simply add more zeros.

For example, if you have one property worth $200k with an annual 8% cap growth rate, and 7% rent return, on 7.5% loan interest,  LVR of , say, 60% then there is no difference between that and if you had 10 properties all the same and it is a fairly safe position of debt relevent to equity.

Hi IslandGirl,

I've read all Margaret's books and have been a Destiny client for over 3 years. My investing is only done her way these days and it has worked well.
I can't remember her ever slagging anyone off; she does always give you the heads up on the different strategies, dangers, benefits etc around.
She is nothing but professional and has lots of integrity. She has even won Australian Business Woman of The Year.
Her method is safe, sure, long-term investing. She doesn't sugar-coat or beat up her philospophy, hence it may come across as uninspiring.
I found it the opposite; here was a way to get rich safely and securely and with no hit to my hip pocket.

That inspired me.

I've been a Destiny client for about 3.5 years now (in Melb). I cannot recommend them highly enough. They can be as hands on or off as you like and will hold your hand as you go if you need that.
I am on the phone regularly with my guy in Melb simply to discuss the future and strategies, and even have him analyse the deals I find at times.
They even have focus groups every second week or so with like-minded investors who are also clients usually.
The property tracking software is absolutely brilliant and the on-line support and over-all network they provide is worth every cent.
The property investment plan costs around $350 or so from memory, and you don't need to sign up as a client to have it done. This involves a finacial analysis and 10 year plan.
They are specialists in property and won't try to flog you a managed fund etc.
They also do mortgage broking. Give them a call; the first consultation is free and no obligation.

There was a case in the courts a couple of years ago between the ATO and a guy who capitalised the interest on his investment loan while paying down the PPoR loan.
I think the ATO denied his tax claim, he sued the ATO and it went to court. Correct me if I'm wrong if someone can remember this case.
The ATO lost the case for the time being, but the message was that it may not be a rule in the future, so it may not be a good idea to take the risk.
Besides; I think it's a bit "robbing Peter to pay Paul" anyway – you are making a bigger loss through the increased neg gearing which would cancel out a lot  or some of the gain you make in decreasing the PPoR loan.

Speak to your accountant.
Is the property in your name, a company name, etc – these things affect the outcome.
The sale of any income producing invetment that increases in value is subject to CGT.
If it is your sole source of income, any profit from the cashflow will be taxable as well.
The good news is that if you don't earn much income from the rent after expenses and your tax rate is very low then you won't have a lot of CGT tax to pay most likely.

I am no accountant, and you will need to speak to one about this, but I'm fairly sure you cannot rent the t'house to yourself.
If you have a company, you may be able to buy the t'house in your name and then rent it to your company, but as I said; talk to the accountant.