ACQUIRING
The 30s are the new 20s
Why taking a 30-year bond is better as a property investor
We have many paradigms or sets of ideas that are not accurate. When a paradigm is inaccurate, a paradigm shift is required. In other words, we need to change our approach or sometimes our underlying assumption about the topic at hand.
" It ain’ t what you don’ t know that gets you into trouble. It’ s what you know for sure that just ain’ t so.”- Anonymous
For example, if you Google the above quote, you will find that it is widely attributed to Mark Twain. But this is inaccurate. So, if you dig a little deeper, you will find that no one can be quoted for saying or penning down the exact quote, and therefore, the author remains anonymous.
A Good & Bad Debt
Another inaccurate paradigm we have is about debt. Most of us are taught that debt is bad and that you should work any debt you have off as quickly as possible. This is a noble idea, especially when it comes to bad debt, consumer debt or using debt to live above your means. In these cases, the debt paradigm is actually very good.
However, the underlying assumption or premise that all debt is bad is incorrect. All debt is not bad, and this paradigm is not necessarily applicable to good debt. A good debt is the debt against an asset that appreciates in value or the debt on an asset that generates or will generate a higher return than the debt’ s interest rate.
The property’ s annual return can be defined as the property’ s capital growth during that year AND the net rental yield for that year( rental income minus expenses such as rental commission, levies, rates and taxes, maintenance) as a percentage of the purchase price. When I have debt on a property where the property’ s return is more than the loan’ s interest rate, my goal is to pay off that loan as slowly as I possibly can.
20 APRIL 2021 SA Real Estate Investor Magazine