Hi everyone, My wife and I currently own a townhouse in Melbourne. We have a bit of equity built up now and so have started thinking about an investment property. We have no other investments outside of our primary residence.
A friend has mentioned to us that instead of buying an investment property, why not just focus on paying down/off your home loan as quickly as possible. Basically he says any money you put in is earning a guaranteed interest rate (Eg, home loan rate is around 7%) and is also risk free and tax free. And once you have that paid off, no one can take it off you and you’re free to start investing.
He said that this is much better than buying an investment property because you’re not making a loss (Eg, negative gearing) and as I said above, it’s guaranteed and risk free. With such a huge culture of property investing in Australia, what do other people think?I too have struggled with this dilemma for the last few years and decided to just pump it into the mortgage for the reasons your friend said.
We now have 95% equity in a house last valued at $340k in SEQ so really we could look at several IPs, its just that with two kids living away at Uni and a third to go, cashflow is probably needed for that plus …whatever I look at, (with the exception of student accom) the figures just don't add up so why go there??
Most money commentators like Paul Clitheroe, Noel Whittaker and Scott Pape say the same thing
No single 'right' answer as everyone is different.
Initially we endorsed the concept of paying off our own home before starting to invest but had grappled for many years about what to do. Eventually we decided to commence our investment journey before we had completely paid off our home.
One day we sat down and really looked at the pros and cons of each option. The clincher was when we realised that we were due to pay off our home about the same time I was due to retire.
We started investign and fast forward a 'few' years and we now have a sizable portfolio. On top of this we have also laregly paid off our home at the same time.
We got the best of both worlds.
Some things you may want to consider are; you age; your goals; yoru other investment and superannuation resources; other financial commitments; your risk aversion; family situation; work plans and security and so on.
Good luck with the decision.
I think it all comes down to return.
With investment properties the idea is to leverage so parting with a small amount of money can lead to a very low return when things go well. Imagine if you buy a property that costs you $50 per week. Paying $50 into your home loan may save you 10 years off the loan and $200,000 interest. But $50 into a new investment property could lead to $500,000 in capital growth over the same period. In addition the rents increase and this $50 a week that it costs you will gradually decrease and it will be paying you money after 5-8 years. You can then use this income to pay off your home loan faster.
Then there is even a better way and that is to do both. If you have enough equity you can borrow any funds for your investment property and for the weekly shortfall. You can then put all your cash into the non deductible home loan. You get the benefits of both paying your home loan off early and having the investment property growing in rents and value
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Thegoat,
as I say time and time again, every situation is different and you need to research and do what is right for you. What is right for your friends may not be what is right for you.Playing the devils advocate, what if you had bought 2 propeties 10 years ago for say 150k and your own property was worth say 200k with a 150k loan, each investment borrowed for fully at 150k and just paid minimum payments on your PPR and used the extra funds to help purchasing the investments and interest only payments on the investments.
Given that property has doubled in value about twice in the last 10 years at least that would mean a collective value in property of aroun $2m and even if you still owed the full 450k over all the property you would have equity of over $1.5 mil. Could you have saved this much in 10 years?
Yep, I know this is a basic view and might not even be what I would do, i just expess it as and example. There is also no way of knowing what the next 10 years may bring either.
What I am trying to say is, do not listen to only one opinion. As you are doing here, get some alternate views, read a few books, talk to some people with experience in the field, then finaly make a decision that is right FOR YOU.
Good luck
You must be logged in to reply to this topic. If you don't have an account, you can register here.
