Paying Back Loans vs Sharemarket for 2nd Property

[Purple Property]

I've got rental property in Auckland. I've got 3-4 years until I'm likely to afford the next place.

I've got two options, simply pay off the mortgages with my savings from wages or keep the loans high and invest into a sharemarket index fund.

Benefits of the index fund is interest rates are low (I've fixed a little under 5% for my loans) and long term average sharemarket returns are 10-11%

Benefits of paying off loan is it reduces my LVR, my net cash loss (property is negative geared) and it is guaranteed return. The sharemarket might also drop when I go to buy my next place which is another added risk.

I'm leaning towards simply paying down the mortgages, but have the lingering feeling my money could be working harder for me.

What do more experienced investors do?

[Nick G]

Personally i don't like a one-property portfolio being negatively geared so I would pay back loans until the property was at least neutral on a 6% interest rate. It also lowers your risk in the case of an economic shock (when shares would take a hit too) and gets you to the position where you can buy again.

For the "experienced investor" question - if you are disciplined you can convert some of your debt into a revolving credit facility and deposit money into an offset account. This gives the same net effect as paying it back but you have the flexibility of being able to use that money should an opportunity arise without having to go hat-in-hand to the bank.

[Damap]

Pay it down purple, it's guaranteed to increase your equity and your net return with no risk.

[artemis]

I would lean towards the sharemarket option. Much more liquid so can change your mind at any point in the future, if plans change. Might as well get the tax advantages of mortgage interest and (probably) imputation credits.And a bit of diversification.

[Kbkiwi]

If your looking at a 3-4 year time frame I would definitely not be putting it into a share market index fund, which has a high degree of short term volatility. If you want a better return than a bank savings account, you could look at a diversified bond portfolio that matures within 4 years. Just remember you have to take into account the fact you will need to be comparing after tax gains rather than gross yields, and also transaction costs. Paying down your mortgage might still be your best return.

do your own due diligence of course.

[PC]

Your time frame is too short for passive investing in the share market.
No guarantee of return. No ability to recover from a crash in 3-4 years.

Mortgage repayment has guaranteed return > 5% - with no tax or ticket clippers to pay.

[orion]

I've got rental property in Auckland. I've got 3-4 years until I'm likely to afford the next place.

I've got two options, simply pay off the mortgages with my savings from wages or keep the loans high and invest into a sharemarket index fund.

Benefits of the index fund is interest rates are low (I've fixed a little under 5% for my loans) and long term average sharemarket returns are 10-11%

Benefits of paying off loan is it reduces my LVR, my net cash loss (property is negative geared) and it is guaranteed return. The sharemarket might also drop when I go to buy my next place which is another added risk.

I'm leaning towards simply paying down the mortgages, but have the lingering feeling my money could be working harder for me.

What do more experienced investors do?

Pay down the loans, no question about it.
Shares are very volatile and especially now.
Decrease your LVR is a much safer bet than relying on shares which could do anything.

[PTILoveYou]

Pay down loan.

Sharemarket is very risky now, a collapse could happen anytime.

[ScottSI]

Just to understand - Do you have savings eg. 50k or are you just going to increase your repayments pa using income from your wages as two different situations.

If savings - why have savings earning 3% and have loans of say 5%. Depending on structures and if you are using offset accounts etc so many other variables you should loan the money to your IP entity and charge market rate interest. You will need to ask some good advice from your accountant here also as will need to look at tax efficiency (your tax rates etc). If the IP runs negative but your loan causes that so what, you are building up funds in your shareholder current account or whatever (why you need to discuss with and accountant) for payment in the future.

If paying down debt faster. This will have a similar affect but slower.

Paying down debt will decrease your LVR with banks money and put you in a better position moving forward. It will build in a safety buffer should any surprises happen.

I would personally pay down debt first but look to create a line of credit for further investment - See below:

If you want to increase your income streams then borrow against the equity of IP off the bank and reinvest NOT buy CARS, HOLIDAYS ETC!!!.

This will increase your LVR but increase your income for serviceability etc. You will now also have other assets but the bank may not recognise these in your SOP.

So borrow 500K at 5% fixed for 5 years and invest that 500k in shares or syndicates at a higher return. This will depend on your skill etc though. Get a 7.5 % + return and this means you make 2.5% on the banks money. You will be taxed on the income generated $ 12,500pa (before tax) but you can use this to help pay down the rental faster or just spend it (I like debt repayment personally).

On a side note as this relates to a bigger picture of investment and income generation for you in the future. It also depend on your plan as most people are just after a few $$ but some are after a lot more $$$$$$$$.

Over the years many people asked me when will I sell down to clear my debt and make my portfolio debt free etc.

What I have learnt from a few investors who I consider to be truly wealthy (earn over 1 million pa for not getting out of bed) is that you don't sell off your capital assets. Tenants pay down the debt and the properties increase in book value generally as well. They generate cash-flow off the asset to live off.

They then borrow against this equity in their assets as they have plenty and serviceability is good to reinvest in other areas.

They borrow millions at 5% ish rates and invest in other areas paying 8.5% up. Many access low level risk investments that are paying 11% + though they are getting MUCH harder to come by at the moment. Unfortunately many of the better investments are only open to wholesale investors under the FMA (google it if you don't know what this means).

They still own the property assets (which generally increase in book value) which generate income + the banks money generates income as they have the ability to borrow money cheaply as they own assets. They then earn more money so pay down debt faster or re invest making more money etc - round and round the merry go round goes.

Big Note: The information provided above is a very light over view and you need to seek good advice before going down this track and you must be able to minimise your risks by making good investment choices!

[elguapo]

Sharemarket is very risky now, a collapse could happen anytime.

Awesome, can you tell me what day it will happen, I'd like to be ready to buy.....

[Purple Property]

Pay down the loans, no question about it.
Shares are very volatile and especially now.
Decrease your LVR is a much safer bet than relying on shares which could do anything.

Is there ever then a time and place for the sharemarket whilst building a property portfolio?

[elguapo]

I'm leaning towards simply paying down the mortgages, but have the lingering feeling my money could be working harder for me.

What do more experienced investors do?

There are a lot of factors;

What is your risk tolerance? Paying down the mortgage is a lower risk/lower return approach.
How significant is the mortgage in your situation, i.e. huge or small compared to income.
How at risk is your income?
Age
etc.

Nothing wrong with doing both, paying down the mortgage steady and having an amount paying into a sharemarket tracker monthly. You ride out any volatility in the sharemarket and also chew down the mortgage, which banks always like to see.

[orion]

Is there ever then a time and place for the sharemarket whilst building a property portfolio?

Not personally, but some might like to gamble a bit with some spare cash.
If you set property investing up properly, someone else pays for it, that's what an investment is.
With shares, you are paying for them and gambling on them going up in value.

[elguapo]

If you set property investing up properly, someone else pays for it, that's what an investment is.

Investment is the expenditure of time/money/energy in expectation of a future benefit.

What you have described is leverage.

With shares, you are paying for them and gambling on them going up in value.

You can also establish a share portfolio with 'someone else paying for it'.

[Wayne]

With shares, you are paying for them and gambling on them going up in value.

Nothing wrong with a nice dividend - it doesn't have to all about the price going up.
Just as investing in houses is about the rent rather than capital gain - I thought?