Thanks for the wake up call Graeme

[Gerrard]

Yes literally! The old subconcious must have been working last night because I woke up at 4am suddenly seeing benefit in P&I loans.

I headed for the computer and did some quick calculations using the example posted previously before on this forum.

Using the IO approach that property shouold return about $1000 per annum, giving a total of $10,000 after 10 years. But I still owe the same amount on it, and we'll assume there has been no capital growth.

Using the P&I approach I would have to commit approx $5,000 of my own money over the 10 years time (assuming a 25 year mortgage term), but at the end of 10 years would have paid off $19,000. Giving me a total benefit of $14,000.

I assume this gets even better in the following years as the principle payments really start to ramp up, or by shortening the mortgage term.

So I now have to go back to the drawing board and rethink my stratgey. End goal is still comfortable retirement, but maybe I can make this goal happen earlier. After seeing my Dad lose his job at 60 and not be able to find another one there is some merit in that!

Perhaps a little short term pain is worth it. Maybe I have to make some smarter purchases so I don't have to commit any money at all on a regular basis.

Right. I'm off to buy your book, avoid work for the rest of the day, and rethink my whole strategy.

Graeme - thank's for your persistence with all my questions and comments. No doubt there will be more after I have read the book!

Gerrard

[CJ]

There is a lot of debate re Interest only vs principle and Interest.

If you have spare money, it is best to pay of the mortgage - therefore P&I.

If you are cashflow tight, it is best to have all spare cash - therefore IO.

Must depend on your current strategy but in the end, the idea is to have freehold properties (sweeping generalisation).

Middle ground would be fixed IO with a revolving credit. The total facility does not reduct, therefore the same as IO, but in between deals, or times of surplus cash, you are able to pay down the principle. This requires disiple not to draw down those principle payments for that trip to fiji.

Is this to simplistic? Do many use this option?

[orion]

Graeme - thank's for your persistence with all my questions and comments. No doubt there will be more after I have read the book!

You are very welcome Gerrard, looking forward to some more questions, all the best.

Regards
Graeme Fowler

[drelly]

I guess it depends very much on your personal situation.

I am still clearing the last bit of my home mortgage so using my own money to pay P&I simply doesn't make sense. So I'm on IO and using the extra cashflow to improve and maintain the properties.

Like Graeme, I also think that personal disposable income (and the relative security of it) plays a big part in what decisions you make. If you're living on the smell of an oily rag, then paying off principal is the way to go as anything that reduces your exposure is good. However, if you have a good diposable income and can afford the extra risk, then using the cashflow to expand into new investments is more of an option.

[orion]

If you have spare money, it is best to pay off the mortgage - therefore P&I.

Hi CJ, agree with you on this one

If you are cashflow tight, it is best to have all spare cash - therefore IO.

If you were tight for cash, I think you would be at even more risk going interest only. A slight increase in interest rates could have a big impact on you with several properties. A decrease in house prices could mean that the banks also get concerned, depending on your debt to equity ratio - ie if it is 80% or above.

Middle ground would be fixed IO with a revolving credit.

Yes, another option as long as you pay down the revoving credit account at a rate equal to, or faster than the same on P&I. Revoling credit is excellent if you have discipline as an investor, saver etc, otherwise not a good idea.

Regards
Graeme Fowler

[wada]

Hi,

Gerrard said:

The old subconcious must have been working last night because I woke up at 4am suddenly seeing benefit in P&I loans.

I had to chuckle with this one 'cos I've done the same thing a few times over the past 3 1/2 years or so... not necessary about this P&I topic but general figures, calculations etc

I'm in favour of P&I fixed for max of 3 yrs. However, I'm starting to like the revolving credit loan where the principal can be paid off at a quicker rate... we are quite 'anal rententive' when it comes to spending money now

Wada

[inzvestor]

... we are quite 'anal rententive' when it comes to spending money now

Not a bad thing at all Wada !!

If yoyu learn to live below your means from the outset (ie as soon as you leave school) you will find you have a few extra $$ to play with when you really need them (ie an unmissable opportunity - or even when you really need that holiday !!)

Most people get into financial difficulty inthe first place because they are not savvy with their money.

It's harder to make than keep money.

[orion]

It's harder to make than keep money.

Hi Inzvestor, for some people that is true, for others they have no trouble making it, but then spend it, or lose it just as fast. So, there trouble is actually holding onto it, or keeping it. I know a guy that has been a millionaire twice previously and again has nothing.
It all depends on your reality and internal dialogue about money.

A great question to ask people is - if you had to make an extra $100 a week, what would you need to do? What about if you had to make another $1,000 a week? And what about an extra $10,000 a week?
For an employee who has only ever traded time for money, the answer to the first question would be to work more hours ie to earn another $100 a week. They may think it is impossible to earn an extra $10,000 or even $1,000 a week, because they believe the harder you work, the more you earn, and that is by working for it, trading their time for cash. And because there are not enough hours in the week to be able to work and earn that much money, it therefore must be impossible, or illegal.
An entrepreneur on the other hand would have a different conversation about how to earn the extra money in each case - they may have to sell something extra on top of what they are currently doing, buy and sell something for a profit, or do a real estate quick cash deal for example (hopefully not for $100, or a $1,000). The entrepreneur would not have the same internal conversation about how to earn the extra money by trading time for money, as the employee would - because their realities about making money are vastly different.

Regards
Graeme Fowler

[Marcus]

Hi Inzvestor, for some people that is true, for others they have no trouble making it, but then spend it, or lose it just as fast. So, there trouble is actually holding onto it, or keeping it.

This is because most (scary but true) people have poor habits. The basics behind financial security are far from "rocket science". Yet most people reaching the age of retirement do so with little or no "nest egg".

We have evolved into a society that thrives on instant gratificaton. More often than not, we spend what we earn (some more)and bad debt is getting worse by the day. The new age consumer now has more options than ever when looking to gain finance. Who knows where it will all end?

Regards,
Marcus.

[The_Dog]

It all ends up in the bankruptcy courts. Simple as that.

Private bankruptcy (as opposed to business bankruptcy) is all the rage over here (UK), something like tripling in the last 3 years. One of the major papers ran a story on this girl declaring "bankrupancy is the best thing I ever did". Boy, did that generate some heat!! (Letters to the editor etc.). The laws are changing so that the 'black-listed' period following bankruptcy is much shorter. This allows people to go out, get cards, and start the bad habits all over.

Bad bad bad.

Woof