Changing long term strategies...

[MikeTheScotsman]

Hi everybody.

First up: Great site! I’ve been observing for a wee while and have learnt so much already.
Secondly: Attended my first WPIA meeting on Monday and had the pleasure of hearing Marc and Graeme Fowler share their knowledge – thankyou both.

I thought that I had most things worked out in terms of my plan for property investing, but now I’m not so sure....

I bought my first property a year ago through an LAQC I had set up, and the plan was to buy one or two a year till I ‘retire’.
I have a revolving credit facility and am paying interest only. I have an extra $100k sitting on top which is effectively reducing my $235k mortgage to $100k.

The extra money was going to make up the deposits on any further properties I buy in the next few years... I had a chat to my accountant about this as I will be going overseas soon for a couple of years with the intention of returning to NZ and starting my own business. I figured that maybe I should be paying off as much principal as possible so that when I come back, the cashflow from rent will be of more use to me while I start the business up.

My accountant told me that as long as I’m an employee I should leave things as they are and get the tax benefits. So now I’m not sure...
Basically I’m thinking that somehow I should be using the extra money more efficiently but not sure how? Pay off a lump sum of principal, or stick with the original plan and use it for deposits?

Any opinions much appreciated.

[orion]

Hi Mike,

There is no right way, or wrong way of doing it. Firstly, I would suggest you sit down and write out what you actually do want from property as an investment long term, then work backwards to today to form your plan. If it were me, I would want to pay the principal off as quick as possible, if you have the $100,000 in that LOC account, you will be paying less interest - which of course compounds over time. If that same $100,000 was in a savings account, you would likely get virtually nothing (interest) after tax and inflation.
Just remember what I said the other night about acting on advice from people that are not experienced investors themselves.

Regards
Graeme Fowler

[MikeTheScotsman]

Thanks Graeme.

It's strange but the thing I'm finding hardest is working out what I actually want long term.

I guess the quicker I find out the better. Where's my pen...

Michael

[orion]

I wouldn't say it's strange Mike, as a lot of other people are exactly the same, they don't really know what they want.
Remember from the other evening, 25% of whether you are going to be successful or not comes down to 'knowing exactly what you want'. And if you don't know exactly what you want, other people will do their best to sell you what they think you should have.

Regards
Graeme Fowler

[Glenn]

Yes I agree with Graeme re paying off principle.
Funny thing is many accountants (and others) suggest paying interest only. I actually get a buzz out of throwing $20000 or so at a mortgage.
Stupid really, done it so many times but it never seems to loose its appeal to me.

You are never 100% free of the market risks until you can remove that interest component.
How ever there is always more than one way to consider the issues.
I sold one old house last year that I had held for 10 years.
The capital gain (free of tax) was equal to 10 years of gross rent.
So all that effort I had taken to pay off the various mortgages looked a bit insignificant compared with what I was able to do with the windfall.

The dilemma is that one never really knows when all those wonderful capital gains will come one's way.

So my way (being only one of many different approaches) is because there is no way of knowing when capital gains / selling will occur is to make hay while the sun shines.
By this I mean I pay off as much principle as possible even if it means I turn around in another year and borrow again to buy another property.

I have noted that the banks will give you a slightly better interest rate if your debt to equity ratio is good.

Flexible mortgages are great things. You can have the advantage of ready cash at anytime without having to have a nest egg of cash that earns a low rate of interest.
I have ended up with two different banks providing this in order to provide a large enough fund to make it useful enough to do my small deals.

ho hum that is my boring way of doing it.

[RentMaster]

I too would use the cash to pay off principle.

But it does depend on what you are going to do with that extra cash. If it is just going to sit in the bank for a long time, while you are paying interest on your mortgage, then that seems like a waste. But if you do intend to use it to purchase additional properties soon, then maybe hold onto it for that purpose.

[janesco]

perish the thought but I came up with an original idea as well....

the increase on my overdraught and the credit cards that had taken a hit were repaid....

somehow that seemed to be a cunning plan to me.

Obviously (to me anyway) I couldn't get a bette return on my money than this.

[MikeTheScotsman]

Thanks everybody,

I don't see myself buying anything in the next year or two while I am away so I'll pay off a big chunk, and keep a wee bit spare for emergencies.

I'll need to look into how this affects the LAQC. Can't think of any major issues with this though...

Maybe I'll get a buzz out of it too.

[lissie]

Thanks everybody,

I don't see myself buying anything in the next year or two while I am away so I'll pay off a big chunk, and keep a wee bit spare for emergencies.

I'll need to look into how this affects the LAQC. Can't think of any major issues with this though...

Maybe I'll get a buzz out of it too.

We are in a similar situation - the LAQC owns the property - we dont have any debt in our name. You can pay off $100k against the LAQC - you can borrow back up to the $100k any time. As my accountant explained it - it doesnt matter if the LAQC borrows from the bank or you ! Just make sure you dont borrow back > $100k - because you then all the interest may not be deductable. So basically we put our savings into the LAQC flexi loan and earn 8% tax free - not bad for oncall savings !