Reply: 2.1
From: Debra L
Rasputin,
If you purchase a property for $150,000, that returns a growth rate of 10% per annum, then in 10 years it will be worth just over $389,000.
If you originally borrowed 105% of the purchasing costs on an interest only loan then in ten years you will still owe $157,500 so your actual equity in this property will be $231,500.
This would allow you to refinance to around 80% of the value (without wasting money on mortgage insurance) and draw out $150,000 (which is tax free) and use this money to live off. Extending the loan by this value would still leaves $81,500.00 equity in this property.
If you had purchased an average of one property per year during those 10 years, then it would be possible to refinance your other properties in alternate years to live off.
Once you refinance your properties and draw out money to live off...the interest on that additional amount borrowed will not be tax deductible.
I personally think that a more preferable course to take, is to keep buying properties, until the income stream from the rentals will produce enough income to live off.
Once you reach this point, as long as you hold the investments, the power of compounding will make sure that this level is sustained, and will increase for you at a faster rate than inflation.
The main factor that give weight to the power of property investing is the wonderful way that compounding assists in building your wealth.
A property purchased for $200,000 at 10% growth will be worth $518,748 in 10 years, $1,343,500 in 20 years and $3,489,880 in 30.
If you take into account that the median price of property over the past 40 years has maintained a steady buffer of around 4% above inflation then the increase in value of $3,289,880 in 30 years would be equivalent in effective spending power as an increase of $448,679 or around $15,000 per annum.
Hence once you build up a portfolio of 10 properties, you could be receiving a capital gain of an average of $150K per year (assuming you hold them for 30 years) and this is on top of the rental returns, which should be well and truly positive by year 10.
My aim is to own all my properties outright by the time I retire.
In my opinion it is fine to pay out interest to the banks while building up my investment portfolio (as gearing allows me to build it up at an accelerated rate), but once I have achieved the result I am after, why would I want to throw money away.
Even though it is tax deductible, every dollar paid to the bank (and discounted by the tax department at 30-48 cents in the dollar) is still being wasted at 42-70 cents per dollar, depending which tax bracket you are in.
Build your portfolio as quickly as possible, then work on eliminating the debt.
Work on steadily purchasing properties, which are preferably as close to positively geared as possible.
Do plenty of diligent research to enable you to locate properties that have the best potential for capital growth and go from there.
Debra
