Settling Your Loan
People often ask why I take out a 30-year bond when buying property , and my answer is always the same … Because there is no 40-year bond available I am then usually informed how much more interest I ’ ll have to pay if I take a 30-year bond , but they forget that I am not paying the interest – my tenants are !
So , my personal benchmark and mantra for property investment is to buy as many properties as I can and pay them off as slowly as I possibly can as long as the return of the property ( the capital appreciation and the net rental yield ) is higher than the interest on the loan .
We must always consider opportunity cost , which is the loss of other alternatives when one alternative is chosen . For example , there is an opportunity cost to taking a 20-year bond rather than a 30- year bond , and that is the loss of other property investments you could have made with the additional funds you are paying into the bond .
You may argue that the monthly payment difference between a 20-year bond and a 30-year bond could be less than R1,000 . It doesn ’ t sound like a lot , but that same amount could be sufficient to cover the shortfall of another investment property that can give you a much greater return than the savings on paying off your bond quicker .
If you ’ ve read some of my other articles , you would know that everything in property investment is about cash flow . The less of your money you use – whether for deposits or shortfalls – the more properties you can own . That is also why you should always try to get 100 % financing from the banks .
Keep in mind that if you take a 30- year bond , you ’ ll have 10 extra years to refinance the property . So , when you are following a refinancing strategy to build your property portfolio , you want your bonds to be as long as possible . Let ’ s consider another example :
If you have R2,000 to invest per month , and your shortfall is R2,000 , you can only own one property . If , however , your shortfall is R500 , you can own four properties . And if you have NO SHORTFALL , you can own an infinite number of properties !
I don ’ t know about you , but I ’ d rather have more properties that I ’ m paying off slower than fewer properties being paid off faster ! After all , more is more in property investment !
Note : When you take this approach , it is imperative to have a strong reserve fund in accessible cash as changes in interest rates will affect you significantly more because you have more debt that is being paid off slower . For me , a strong reserve fund means at least 10 % of the value of my properties .
I would also not follow this strategy for my primary residence . The reason I ’ d rather have my primary residence in a separate trust and paid off is that this property ’ s purpose is not primarily for investment . For an investment property , however , I am more than happy never to pay off my bonds !
SOURCE Prosperity Enterprises
SA Real Estate Investor Magazine APRIL 2021 21