A Question for the Finance Gurus

[TheGuy]

Hi Guys

Can you please give me your input on the following 2 scenarios about investing in Property.

I recently bought a small Townhouse as an investment to rent out. Which is going really well so my plan was to pay the bond out of my own pocket and then put the rental income towards the bond as well. This way I calculated I would be able to pay off the place in roughly 8 years.

Now last night I was reading online about not paying off your bond early and re-investing the money.

So I thought if I keep paying the way I'm paying now in a Years time I'm going to have quite a big surplus which I could take out of the bond of my current place and then use it as a deposit to buy another place. Then I can rent that place out as well.


Now my question is which option in your opinion is the better option and why?

 

[Ou grote]

There's a lot of variables involved, like rates and taxes, body corp levies, your tax situation, the interest rate etc...

Best to speak to an expert and provide all the numbers.

 

[vash87]

So you want to reinvest the money you are getting from rentals, while still making payments from your own pocket?

It makes sense, but it's quite complicated. Even though an investment can earn an interest rate higher than the one on your bond, the amount on your bond is large, and the bigger it is the more it earns interest every month.. compared to the small amount in your investment in the beginning. If you can get a decent return on investment, guarenteed over a long term and also maybe a nice capital lump-sum to start it accumulating some good interest, then go for it. Ofcourse, do your research.

Although maybe its best to just keep it simple. Your original plan was pretty good, and pretty safe.

You would also have tax concerns to worry about if your investment made any big capital gains. There are also taxes involved with all typical unit trust investment and endowment plans.

 

[HavocXphere]

No, put everything towards clearing current debt. After that you can do the same thing again if you feel like it. The reason is that on a risk adjusted basis, you simply won't beat the return implicit in paying off the debt early, regardless of what investment you go for. Its just not going to happen. Exception: Sponsoring drug dealers.

Now last night I was reading online about not paying off your bond early and re-investing the money.

I recommend you stop reading stuff from that source whatever it was. Its either useless advice or it is very situation specific advice & they didn't explain it properly.

 

[NiTeD]

Settle your debts first. If something catastrophic happens, like a new RDP development on the other side of your complex fence, you won't be stuck with a you unit that you have to sell at a loss.

 

[phoneJunky]

No, don't settle your debts. If you don't make a profit on rent income you don't have to pay tax on the money received (Not really that simple but in essence it is like that).

Just pay the bond amount and pay it of over 20 years. Rather invest the extra money you get in something else. I read a nice article about this situation, I will try and find it for you. But the only property you want to pay of over a short period is your primary property and the ones you don't rent out.

 

[Jola]

Just pay the bond amount and pay it of over 20 years. Rather invest the extra money you get in something else.

That's only valid if you can earn more, on an after tax basis, than the bond interest, over an extended period.

That's not likely.

 

[xrapidx]

I think the reason for not paying off the rental bond fast is you can write it off as a tax loss.

 

[Jola]

I think the reason for not paying off the rental bond fast is you can write it off as a tax loss.

Just means that you lose less - still beter to pay off the bond, unless you have a really good alternative investment (unlikely) !

 

[xrapidx]

Just means that you lose less - still beter to pay off the bond, unless you have a really good alternative investment (unlikely) !

I think it works if you have a bond in your personal capacity as well... so you basically leave your rental bond fully extended while paying off your personal bond faster.

 

[Jola]

I think it works if you have a bond in your personal capacity as well... so you basically leave your rental bond fully extended while paying off your personal bond faster.

Yes, that is an example of a good alternative investment.

 

[werner]

leverage, great on the way up.

*****s you nine ways from sunday on the way down

 

[TheGuy]

Hi Guys

Here is the article about not paying off your bond early.

Read it and let me know what you think.

Also I see most of your advice is to settle your debt. Which makes sense to me in most cases but you get good debt and bad debt. Debt to cover your living expenses is bad debt but debt for wealth creation is good debt.

 

[creeper]

leverage, great on the way up.

*****s you nine ways from sunday on the way down

So True.

 

[Jola]

Hi Guys

Here is the article about not paying off your bond early.

Read it and let me know what you think.

Also I see most of your advice is to settle your debt. Which makes sense to me in most cases but you get good debt and bad debt. Debt to cover your living expenses is bad debt but debt for wealth creation is good debt.

He does talk about having alternative high yielding investments.

Make sure that you have these available before going this route.

You need to earn (after tax) more than the mortgage interest rate over the long term - investments like these are not readily available.

You also have to take the risk inherent in these investments into account. For example, gearing yourself up is high risk - ask the banks.

 

[TheGuy]

He does talk about having alternative high yielding investments.

Make sure that you have these available before going this route.

You need to earn (after tax) more than the mortgage interest rate over the long term - investments like these are not readily available.

You also have to take the risk inherent in these investments into account. For example, gearing yourself up is high risk - ask the banks.

So what it comes down to is he says we you have to look if you can find a higher Yielding investment then paying of your bond then you should rather go that route.

 

[HavocXphere]

Here is the article about not paying off your bond early.

Read it and let me know what you think.

I think the fact that its on a marketing site for a property sales company should have been a clue. Even better they asked a bunch of people who are inherently biased on the matter:

Kevin Penwarden, CEO of SA home Loans, strongly advises borrowers to register a bond amount that's higher that the initial loan requirement. This facilitates changes to the homeowner's financial and lifestyle needs

Look, the proposed M.O. can work, just like a lotto ticket can win. Its not a strategy though, its a gamble. The odds are stacked heavily against winning on both.

The main issue as I said is risk adjusted returns. On the one side you've got your bond on the other the "high yield investment". The bond you'll have to pay back come hell or high-water...no uncertainty there. Finance 101..."high yield investment" invariably carry high risk with them. See how its stacked?

negative gearing of rent-bearing properties can be good

lol. Negative gearing is inherently....negative. The disaster *might* be mitigated though if the bet comes right (e.g. property price soar).

 

[ice_cubes]

i also dont recommend paying off the bond of your investment property quickly...rent income is taxable & all related expenses are tax deductable....your interest, elec, water etc etc...if u wanna make serious moola, rather refinance & get a 2nd bond & withdraw cash directly from the bond (and u can use that cash as u please)...instead of waiting for your *traditional* taxable profit...if u withdraw moola 4rm your access bond, its seen as a loan (4rm a tax point of view)...but because u continue paying the bond,,the interest potion is still tax deductable...so in essence, you get a profit PLUS u dont ever get to pay tax...as long as u make sure u have enough cash surplus to pay off your bonds on a monthly basis.

ok, enough babble...good luck with whatever you decide on

 

[ghostbuster]

No, don't settle your debts. If you don't make a profit on rent income you don't have to pay tax on the money received (Not really that simple but in essence it is like that).

Just pay the bond amount and pay it of over 20 years. Rather invest the extra money you get in something else. I read a nice article about this situation, I will try and find it for you. But the only property you want to pay of over a short period is your primary property and the ones you don't rent out.

Any profit on the rentals can be offset by interest paid on the bond.