澳洲Australia property Don't Pay Your Debt Off! | Sydne


在澳大利亚 I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo


An interesting e-zine arrived today. Something that sits true with me.
Food for thought - thought I'd pass it along.

Do you make choices and decisions according to what’s in your best interest? The problem with this is that most of us are limited by paradigms that prevent us from seeing all the options available to us. “Don’t Pay Your Debt Off” until you understand what it could cost you to do so.

People’s paradigms when it comes to debt are often what keeps them poor. I have exhaustively covered the topic of debt previously… looking at the three very different types of debt so I will not repeat that here. Today I want to share with you a specific comparison of how much better off a person could be by not paying down the principal component of their home loan; that is having their home loan converted to interest only.
Increase The Gap

The important thing to focus on is increasing the gap between what you owe and what you own… and not necessarily by reducing what you owe. So let’s look at an example of how you may best be able to do this.

I am going to assume that you have a total of one million dollars in borrowings across a few investment properties. I’ll also assume that inflation is running at 3% per year. This means the real value of your loan would be diminished by 3% per year… or $30,000 each year.

By maintaining those borrowings and not paying them down, time and inflation are paying down the debt at a rate of $30,000 a year. In time, what starts out to be a sizeable loan shrinks to almost nothing. While the number stays the same the true value diminishes over time.

I remember as a kid finding a dollar in the street. I was with four others so I used the dollar to shout us all a chocolate flavoured milk. Had I put the dollar into a drawer and kept it to this day it would not buy me one chocolate milk. That’s an example of time and inflation working against me… but by understanding it, when applied to borrowings, it can work for me.

>Most people can’t physically work enough hours to earn enough extra money to pay an extra $30,000 down each year. However, if you let it, inflation will do the work for you.

Even though this news is startling for many real estate investors, it only tells part of the story. That’s because you’ve also freed up the money you were putting towards principal… and now you can use this money to secure another property.
Take A look At The Numbers

It may be possible to control a property capable of generating about $35,000 average annual net gain to you… or $673 a week.

The cost to control this property? $48 a week.

The difference between Principal and Interest; and Interest Only repayments on a typical $250,000 loan, $47 a week.

Note the word I used was control, not own. A friend of mine once said: “I don’t care who owns the Ferrari as long as I have the keys”. Control (not own) the property so that all gain in its value is yours to keep – that’s the objective – not necessarily being debt free.

Your choice:

1. Pay down your debt by $47 a week… or
2. Increase your net worth by $673 a week.

So, if you take the money you were using to pay down principal, and divert it to just one extra property, you’ll have $673 a week which can be tax free. This is the same as boosting your wages income by more than $41,000 per year before tax.

Letting the power of inflation pay down your debt, you can free up cash to reinvest into more real estate and enormously expand your net wealth.

Changing your loans to Interest Only doesn’t mean you can’t pay down the principal, you still have that option. It just means it is now an option, not compulsory. It is at your discretion so you are in control, not the bank.

If you are not looking to leverage into more property and expand your asset base, or if you can afford to do both… then paying down the principal on your home loan makes great sense. I am not suggesting what you should or should not do… rather pointing out wealth creation choices. You see, a change in paradigm that leads to a more comprehensive understanding of the power of debt (good and bad)… could mean that options you didn’t even know existed, open up before you!

Happy Investing.


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Hi Rick,

Good article!

Your choice:

1. Pay down your debt by $47 a week… or
2. Increase your net worth by $673 a week.Click to expand...
One thing I didn't understand is how me saving $47 by switching to IO loan from P&I loan on a $250K mortgage help me to service IP(s) loans worth million dollars assuming 3% inflation and thereby reducing the value of debt by 30K.

Also,

It may be possible to control a property capable of generating about $35,000 average annual net gain to you… or $673 a week.Click to expand...
How does that stmt fit into the above scenario of saving $47 per week.

I am just trying to understand the numbers that's all.

Cheers,
Oracle.  

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Rixter said: ↑
The important thing to focus on is increasing the gap between what you owe and what you own… and not necessarily by reducing what you owe.Click to expand...
Most who owned in Sydney & outskirts last few years decreased the gap.
Rixter said: ↑
By maintaining those borrowings and not paying them down, time and inflation are paying down the debt at a rate of $30,000 a year. In time, what starts out to be a sizeable loan shrinks to almost nothing. While the number stays the same the true value diminishes over time.Click to expand...
Yet margin calls & repos are at all time highs.
Rixter said: ↑
Had I put the dollar into a drawer and kept it to this day it would not buy me one chocolate milk. That’s an example of time and inflation working against me… but by understanding it, when applied to borrowings, it can work for me.Click to expand...
The comparison of paying for equity in RE is equivalent to putting money in a drawer tells me the author has nothing better than an idiotic argument to make his case. Ask him if he would like an abacus with an instruction manual.
Rixter said: ↑
It may be possible to control a property capable of generating about $35,000 average annual net gain to you… or $673 a week.Click to expand...
Tell that to the record # of ppl in default.
Rixter said: ↑
So, if you take the money you were using to pay down principal, and divert it to just one extra property, you’ll have $673 a week which can be tax free. This is the same as boosting your wages income by more than $41,000 per year before tax.Click to expand...
Actually it's not the same, but hey who wants to let counting get in the way of get rich story.
Rixter said: ↑
Changing your loans to Interest Only doesn’t mean you can’t pay down the principal, you still have that option. It just means it is now an option, not compulsory. It is at your discretion so you are in control, not the bank.Click to expand...
Well at least there's one thing I agree on.
Rixter said: ↑
I am not suggesting what you should or should not do… rather pointing out wealth creation choices.Click to expand...
Wow, how could I ever had the impression you were suggestion I should not pay principle. I was just my imagination.
Rixter said: ↑
the power of debt (good and bad)…Click to expand...
Ahh yes, regurgitated garbage.
There's no such thing as "good debt", which is why it's on the liability side of the page.

Carry on.  

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I don't think we will ever really pay off our debt either.
As Rixter's post states, the ratio will reduce.
If we didn't have repairs and maintenance..maybe it would reduce, ..or more likely, we would just buy more.

I don't like having 1 mil + in debt...but it is better than not having any properties.

As long as our debt is "good" compared to "bad", that is my main concern.  

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Its an age old argument and one which will never be won or lost.

From my personal experiance IO is not all beer and skittles. This theory is an economists dream, not a investors reality. It is based on the concept of "ceterus parabus" or "All things being equal" - when - unfortunatly they never are.

I dont doubt the numbers. For about $50/week you could purchase another IP. However in order to do so, you need 20% equity as a deposit, and after all costs (stamp duty etc) it is actually closer to 25%. Where is that coming from?
By having your loans on P&I it will cost you extra each week. Does this mean you 'could' buy an extra rental property? no, becuase you hit the finance brick wall. It does not matter if a loan is on P&I or IO - the bank calculates the cost at P&I. So you cant borrow any more money anyway.
Plus, due to the compounding effect, over a period of 4-5 years, on a loan of about $400k you are $80k worse off. That is $40k in additional interest, plus you have an extra $40k in debt which you didnt repay.

By having your loans on P&I you can actually accumulate more properties sooner, as you accelerate the "gap" which you refer to. Your IP's become (more) cashflow +ve sooner, you can borrow more money sooner and you can stop working sooner.

I just wish that someone had told me this 7 years ago when I was listening to the "IO is the best" arguement. I could have (at least) another 3IP's now. :confused:

Again - its an argument which will never be won or lost - you just need to make up your own strategy.

Happy (debt free) living :p  

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Piston Broke said: ↑
The comparison of paying for equity in RE is equivalent to putting money in a drawer tells me the author has nothing better than an idiotic argument to make his case.Click to expand...
Now there's a kettle calling a pot black if ever there was one with all the total off task side winding spin.  

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I see debt, in the long term, as more of a tool. It ramps up as I build the portfolio, then over time reduces until one day there is none of it left.

As I get older, I feel I can accept less risk. I manage my risk by reducing the amount of debt I hold over the longer term. In time, the debt is gone, and I own assets making an average return, but with very little risk.

Of course, this is just my plan, and represents what I want to do, not what is necessarily the fastest way to build equity.  

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Piston Broke said: ↑
Most who owned in Sydney & outskirts last few years decreased the gap.
Yet margin calls & repos are at all time highs.

The comparison of paying for equity in RE is equivalent to putting money in a drawer tells me the author has nothing better than an idiotic argument to make his case. Ask him if he would like an abacus with an instruction manual.

Tell that to the record # of ppl in default.

Actually it's not the same, but hey who wants to let counting get in the way of get rich story.
Well at least there's one thing I agree on.
Wow, how could I ever had the impression you were suggestion I should not pay principle. I was just my imagination.

Ahh yes, regurgitated garbage.
There's no such thing as "good debt", which is why it's on the liability side of the page.

Carry on.Click to expand...
I tried to give you Kudos, but it wouldnt let me as it seems I've given you too much already!!

Well said. Its a balance - you dont want too lazy a balance sheet if you are young etc.., but you dont want to be overleveraged either, and in particular, the older you get the lower your gearing needs to be.

There are too many average joe punters on 70k pa with stars in their eyes and no clue who read the OPs postings and gear up and up. With no fat on such low incomes for IR raises, property price falls, job losses, sickness, etc..

The winner is a balanced combination of (1) sensible risk management, (2) cashflow, and (3) asset base, in that order, over the longer term to be a winner.

Otherwise you may get there, just like Paul the Octopus is right 6 times in a row. For the all the other unlucky octopuses, not so much their lack of skill!!  

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I still like the idea of reducing debt as I go. Admittedly, I am only paying a small bit off at a time and a high percentage of my loans are IO.

Yes, yes I know inflation will 'shrink my loans' and that's good but when I decide I've got enough properties, I want all of the rent to be going in my pockets, so this may mean selling off part of the portfolio bla bla bla.

To each their own, I just like the idea of dwindling debt.

Regards
Marty  

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kissfan said: ↑
To each their own, I just like the idea of dwindling debt.Click to expand...
yes, to each their own....I prefer gathering equity..:)  

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Thorpey said: ↑
yes, to each their own....I prefer gathering equity..:)Click to expand...
I like to gather equity as well, don't get me wrong.

I only pay off a small bit of debt at a time. This will gather momentum at a later date.

Regards
Marty  

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Thats Ok when you are young but I didn't want any debt in my retirement...to each their own...I bought more property than required then when prices doubled sold down so I own everything and have plenty in reserve to fund my travelling, new car, and anything else I want.

I live off the rents and spend the interest on the invested money. I am from the old school and would not feel right spending money from equity, thats just me.

There is no one size fits all...you just have to find the right plan that suits you. Mine fits me very well :D

Chris  

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chrispy said: ↑
...I bought more property than required then when prices doubled sold down
ChrisClick to expand...
Ahh now this is the most intelligent post so far.

Why?
because there was no black/white debt is good/bad.

Debt is just a tool.

And just like with any tool, the quality of the product depends on the crafter.  

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I dont understand the paying down debt concept.

If someone has 6 ips worth 300k each, with say a 50% lvr they could sell 3 and own the other 3 outright. Just working on 3% inflation as capital gains, this would give them $27k PA gain.

But if they kept all 6, they would have a $54k PA gain.

If you work it out the historical average of about 7% capital growth, it becomes $63k compared to $126k.

The longer the properties are kept, the lower the LVR becomes which in turn increases the net rent return as well. So you can keep all the properties and still live on the rent and also keep capital gains for some time in the future.

Selling to pay off debt just reduces the the advantage of gearing that makes property such a great investment in the first place.  

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Intrinsic_Value said: ↑
Debt is just a tool.Click to expand...
Is it a good tool? ;)  

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Rixter said: ↑
Is it a good tool? ;)Click to expand...
it can be, only if you know how to use it to your advantage....  

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peastman said: ↑
Selling to pay off debt just reduces the the advantage of gearing that makes property such a great investment in the first place.Click to expand...
Here here. Kudo's to you. Sometimes we as investors can lose sight of forest for the trees.  

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chrispy said: ↑
Thats Ok when you are young but I didn't want any debt in my retirement...to each their own...I bought more property than required then when prices doubled sold down so I own everything and have plenty in reserve to fund my travelling, new car, and anything else I want.

I live off the rents and spend the interest on the invested money. I am from the old school and would not feel right spending money from equity, thats just me.

There is no one size fits all...you just have to find the right plan that suits you. Mine fits me very well :D

ChrisClick to expand...
That's the way I'm thinking.

Regards
Marty  

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eternit said: ↑
it can be, only if you know how to use it to your advantage....Click to expand...
Correct its good debt.....in the hands of user who knows how to use it to attain 'their' objectives.

We are all governed by 'our own individual' paradigms.  

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peastman said: ↑
I dont understand the paying down debt concept.

If someone has 6 ips worth 300k each, with say a 50% lvr they could sell 3 and own the other 3 outright. Just working on 3% inflation as capital gains, this would give them $27k PA gain.

But if they kept all 6, they would have a $54k PA gain.Click to expand...
How about owning the 6 IP's with no debt?! ;)

Regards
Marty  

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