I think this is a really great question and worthy of exploring. Many of us get caught up with trying to pay our house off without giving consideration to what alternatives there might be to advance ourselves financially. In many ways our home can be considered an asset, although it doesn’t pay us to own it, but we can leverage off it to invest in other assets which will provide income and hopefully greater financial choices in the future.
I’m going to try and keep this real simple to demonstrate my point because that’s the purpose of this blog, even though there may be many variables that could alter the outcome.
So you purchase your house for $300,000 and you have a loan on it for $300,000. You take a principle and interest loan and begin to pay it off and in 15 years you have paid your loan down to $150,000 and the property has doubled and it is worth $600,000. In this scenario after 15 years you have equity of $450,000 being the difference between the value and what you owe.
Now let’s look at purchasing a house to live in and an investment property at the same time. Both properties are $300,000, so the total cost is $600,000 and you take an interest only loan on both properties for $600,000. The reason I have suggested interest only in this scenario is to assist with managing the cash flow and depending on the type of investment property you buy, both scenarios should result in roughly the same out of pocket monthly commitment after you receive your rent and any tax deductions if applicable.
So, in 15 years you still owe $600,000 because you haven’t paid the loans off and the 2 properties have doubled to a value of $1,200,000 so your equity in this scenario is $600,000 which is $150,000 more than in the first example. Now if you add a second investment property so you have a total of 3 properties and they are all purchased for $300,000 and you take an interest only loan on all 3, then in 15 years you owe $900,000 and the properties are valued at $1,800,000. Your equity position is now $900,000 which is double that of scenario 1.
The point I am making here is by focusing on acquiring more assets as opposed to just wanting to pay off debt can be far more financially rewarding. Managing your cash flow when buying more assets is critical but can certainly be done effectively by selecting the most appropriate properties to buy and the finance arrangements to go with it.
Can you afford to buy in this suburb? Find out how much you can borrow
Back in 2000, Garry Harvey was a 26-year-old Victorian looking to buy his first home. Now, still shy of his 40th birthday, YIP’s runner-up for Investor of the Year 2012 has amassed a diverse portfolio of 39 properties that return more than $500,000 a year in rental income and have given him $2.75million in equity to work with. Garry is a fan of buying in bulk, and he has made the most of a strategy centred on subdividing blocks of units.
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