Hi my names Ben Everingham and I’m the Director here at Pumped on Property. In today’s video I’m gonna talk about whether you should pay off the mortgage on your own home, or buy an investment property first.
G’day my name’s Ben Everingham and I’m the Director here at Pumped on Property. In today’s video I’m gonna talk about a really commonly asked question from investors. Which is whether you should pay off your mortgage on your own home or buy an investment property first.
So I think to answer this question we’ve got to remember that there’s no one size fits all, right or wrong for any person. That this video is definitely not investment advice. I’m not a financial planner, I’m not an accountant, I’m not a solicitor. This is not directly related to your situation, these are just my thoughts on a very, very commonly asked question that I’ve personally asked my self many times in the past.
The first thing I wanted to say is really a question you’ve got to ask yourself before you even enter into this conversation as to whether you should pay off your home first or buy another property is, are you financially free right now. Because if you’re already financially free, you know, this question is kind of irrelevant. If you’re financially free and you’ve still got debt against your own home then that’s a decision that you need to make for your own family, or for your own personal situation.
If you’re not financially free then the second question you’ve got to ask yourself is, based on the property that you currently own, the businesses that you hold, the job that you have, the shares that you have, the super that you have, are you going to be financial free. That’s a question that most of us don’t actually ask ourselves very often. We kind of go, well at some point in the future I’ll be in a better position than today, but when will that be? What do you need to be, or have, or own to be in that position?
Like for me, it’s extremely simple. If you want $100,000 a year in passive income through property investment you need to own one point five million dollars worth of property with a seven and a half percent rent return. Or two million dollars worth of property outright with a five percent rental return. It is that black or white, get over how many properties you own so that you can sort of tell your mates or whatever people buy lots of properties for that they own, and just get on with the business of getting to the amount of money that you need to own outright to achieve your goal.
If two million dollars owned outright sounds like a hell of a lot of money right now, it’s probably because you’re still thinking like an early stage investor. Which is – “how the hell do I pay of two million dollars using my current annual salary?” But the way that you pay off two million dollars worth of property is super simple. You purchase two million dollars worth of high quality property in the right market at the right time. You ride the cycle till that property’s worth four, four and a half million dollars. Then you sell half of it, you say good bye to 500K to the Australian government. Thanks government! And you pay off the rest of the debt, that two million dollars worth of properties you decide to hold.
It is really, really simple to achieve financial independence, but for some reason we complicate this whole property investment space and I suppose if you’re a business that’s trying to stretch the gap so that people come running in and trying to grab you and hold onto you because you can’t do anything without me. Then I get it, but here we’re all about just sharing information and putting you in a position to make much better decisions yourself.
So, coming back to the purpose of today’s videos, you know, if you own enough property and you’re already financially independent then turn this video off. Because you should be doing something far better than listening to my charred voice right now. But if you don’t own enough property, I suppose the question is sort of simple. If you want to be financially independent and you really want to do it, not just talk about it like most people do then you probably gotta get out there and actually do something. ‘Cause the money’s not gonna fall on your lap, so that means purchasing another investment property possibly, before you pay off your own home.
As long as you’re in an extremely low risk position and not taking on any unnecessary risk and the timing of the cycles correct and you’re not buying at the top just before a slump. Or you’re not buying at the top just before a flat lining. You’ve got good data to support the reason that you’re making the investment and you can easily finance it based on your current salary and income. But, you know, this is probably a business case to say that paying off your debt, at let’s call it $20,000 per annum for the next 30 years is gonna be a bloody hard slog. Versus buying a $400,000 property that increases in value by five percent per annum, which makes you 25 grand per year without you having to do anything. And maybe in 15 years time from now when that’s gone up by, let’s call it, with compounding interest, $400,000. You know you’re in a position with that big lump sum to just wipe off that debt on your own home straight away.
So as a home owner myself with children, I’m really in a position where I do want to own my own home outright. I’m also an extremely low risk individual, and an extremely low risk style investor. So the concept of owning my own home is very powerful for me, and really meaningful. Like the way I was brought up, like a lot of other people is you own your home outright and you’ve got that security for life. No one can touch you. I suppose, after that at least financially you’re in a solid position regardless of the waves. Worst case scenario you always have a roof over your head. I sound like my mum right now, when I’m saying this.
But, we all want to own our own homes, and like, I’m proud to be a home owner in Australia and I’m proud to aspire to owning my home outright one day. So, I just know I didn’t want to do it over 30 years. I didn’t want to slave away at my job or in my businesses and be committed to doing that. Which meant I had to figure out a way to achieve it, which for me was buying investment properties and using those chunks of money to repay big bits of debt. As opposed to drip feeding little bits at a time, which for me is sort of like a bit demoralising and a bit demotivating.
So, I think what you’ve got to be thinking about right now is, would that 20, 40, 50 grand a year that you’re paying off your own home at the moment be better served in another investment property. If you don’t currently have enough investment properties or businesses or shares to be financially independent in the future then you’ve got to continue that action of purchasing investment properties. Again, big asterisks there, based on timing it’s not about just getting into the market and hoping that things are always going to be good ’cause there’s great times to buy and great times to sell.
So, if you can afford to buy another investment property you will probably be in a much better off position if you hold that property for 15 or 20 years from today than you would be without buying it. That’s really, really important.
I’m gonna share some of the things that my accountant told me because I’ve had this conversations with them a lot of times. I really like the idea of owning my own home outright and I keep defaulting back to that, ’cause that’s kind of like my economic, or financial blue print given to me by parents when I was younger, you know, own your own home type thing. But, he says that it’s great to own your own home if you’re gonna stay there for the next 50 years, but let’s face it the average Aussie moves every seven to 10 years. Which means if we’re gonna move, owning the home outright especially if it’s gonna become an investment property might not be the smartest thing to do. Because you’re gonna pay way more tax on it and those tax deductions are no longer gonna be there. So he says, “Ben, if you want to own your own home outright and not have that money in the market, I get it. But put all of that savings into the offset account so it’s like you paid down your own home outright. But then when you move out of the property, obviously the debt on the property goes right back up and the income being produced by that property that you have pay tax on is significantly less so you can move into a position where you’re getting the benefit now of having the offset account and if you’re a good saver like I am and like all investors should become, you won’t touch that money knowing that it’s in there. Then let’s say that we get into some hard times in the future and there’s an opportunity to buy something below market value, then rather than going and knocking on the banks door at the time when they don’t want to lend you any money you can just use that cash and get back into the market place. But you’ve got the benefit of that whole period of time of not paying interest on your loan.”
So that was kind of the advice that he gave me, which makes logical sense to me. Then after you’ve paid off your own home you can start chucking money into the offset accounts against your investment properties, etc. Still achieve that financially independence, but just in a way that allows you to make the most of the current tax laws in Australia relating to investment property.
So my personal plan I thought would be something that I’d just finish this video on. Again, I don’t really share too much of my personal stuff just because, like, who really cares what I’m doing or what someone else is doing. But in this instance I thought it was interesting so I’ve still got a big debt on my own home. I just put some savings into that and when I sell a property I put like a chunk of cash against that and I kind of just have that sitting there doing its thing. At the moment I’m still very active as an investor in the market place. Again, my strategy’s 15 years, it’s not get rich quick. But it definitely involves timing the cycle at the right times and strategically exiting at the right times as well.
So I hope that’s given you some insight. Again, I like to pay principal and interest off my own home even though he says I shouldn’t be doing that, I also pay principle and interest off all my investment properties. Because you know I do like seeing at the end of the year the actually bank loan going down by 10 or 15 or 20 grand per year. I still park the money in the offset accounts and I am ultimately walking the same path that everyone else is that’s hopefully listening to this is. Which is at or towards financial independence now and in the future.
I hope that you got something out of this video and I hope I didn’t complicate this process more for you. I think putting the money into buying more properties at the right time will obviously give you a much better income and wealth position in the future. But, you’ve got to weigh out the pros and cons of the risk and see how you feel at that time based on the knowledge that you have.
So, thank you so much. If you’re interested in talking more about your situation and thinking about buying an investment property but not really sure where to start, I’d like to offer you a one on one strategy session with me or my brother Simon. Where we look at where you are right now and where you’re looking to go in the future and help you get a bit of a plan in place and educate you on the market based on our experiences of buying over 100 million dollars worth of property for ourselves and our clients. So that you can get a bit of a plan in place and either go out there and do it yourself or work with someone like me who can help make that process a little bit simpler and a bit more systematic and data intended for you.
So, thank you so much for your time. Until next time stay hungry.