Don’t Pay Down the Debt on Your Investment Property
Dilleen Property Group 2021
A lot of people invest in property because they want to create wealth and build a better future for themselves and their families. The way people tend to go about this is by purchasing investment properties but stopping at just 1 or 2 properties. This is because they believe that in 10-20 years those properties might be able to give them an income of 100k. However, if you actually look at what 1-2 properties paid off can give you, it's generally not enough. It won't give you that 100k income in 10-20 years!
This idea about not paying off your debt may shock a lot of people and it's one of the biggest mistakes that I've made when I was first building my own property investment portfolio. When I was eighteen, I bought my first investment property. After 1-3 years of owning that first property, I had the old-school mentality. This mentality is to buy a property and pay it off so that you can be debt-free. However, this is something you should NOT do. A lot of people who believe in this learn it from their parents, just like I did.
Why not?
What I've learned today is a little bit different. If I could go back in time I would tell myself to not pay off my property debt as quickly as possible and do not put extra money in that first investment property, especially in the first five years.
If you’re under thirty-five or forty, you still have time! Especially if you’re in your 20s, you should pay the bare minimum and continue saving instead of putting your money into a loan. Instead, you should keep that money and buy more properties with it. Expand and grow a large portfolio of 5, 6, or 8+ properties, because together those properties are going to have multiple streams of income.
As an example, if you are buying a property for $500,000 that rents for $500 per week, and you pay that whole property off and you stop there, in 15 years that property is not going to give you $100,000 income even if it goes up with inflation and starts renting for $800 - $1000 a week. 20 years from now that will only be $1000 per week gross income minus council rates, water rates, and expenses. With no loan, you might only net $750 - $800 per week from one property paid off.
If you grow your portfolio to 5 properties, instead of trying to pay off the debt on your first one, you could generate a much larger stream of income. As an example, you might have five properties rented for $400 per week each. That means that you would have $2,000 per week in rental income coming in. Yes you've got expenses, and yes you would have loans on them, but in the long term over the next 10 - 20 years, the loans will go down, the rents will increase, and you will get tax deductions along the way as well as compound growth over time.
If you hold a 3 million-dollar property portfolio and they only grow by 5% per year, it would take 20 years to double those properties in value. In the first year, you're going to make $150,000 dollars of growth, in the second year you're going to get $157,500 in growth... If you think about it, in three years of owning these properties you would have made almost $400,000 in growth.
This is why continuing to accumulate properties safely is so important to build an income! As I always say; buy properties below market value and in metro areas where there’s growth and a high rental yield.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
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