Posivite cash flow?
- Thread starter YPG
- Start date
Hi TPG,
I was 23 when I bought my first IP. This was really before I was edumacated, and the concept of IO loans was foreign to me. It wasn't until I read some Jan Somers and some Peter Spann, that I finally "got" the concept, probably 5 years late! Agree, IO may not be for everyone, BUT don't make the decision based on "what feels right" as you may not fully appreciate how the numbers work with P&I vs. IO. Do some more research, ask more questions, and then make your decisions based on FACTS.
Using your example:
Let's say using P&I you could purchase 1 property every 2 years. So after 10 years, you've got 5. The first 1 has had 10 years growth, the 2nd 8, the 3rd 6 and so on, the last one maybe 2.
And using IO, you can purchase 1 property every year, due to increased servicability. Even if you still only bought 5 properties, all in the first 5 years, after 10 years, the 1st will have had 10 years growth, the 2nd 9, the 3rd 7, but the last one has had 5 years.
It is likely that the second situation will result in a higher net value that the first. Maybe it would be possible to sell 1 and use that to pay off some other debt. OR you could purchase 1 every year for the 10 years.
Hope this doesn't come across as condescending; just want you to challenge your own thinking as to WHY one would choose P&I or IO loans.
Thanks for this reply.
It is very interesting post to consider - very valid point regarding I should really look into IO rather than what I think 'feels right'. To be honest I probably don't understand enough about IO and I should look into it.
I guess I have always been reminded by my parents to not become too greedy, live within your means and don't generate enormous debt. And there is no better example then right now while they live comfortably in a very big waterfront house, drive nice cars and travel the world compared to the rest of the world that it currently struggling.
And that is why I felt paying off some of the principal was a good idea - however you have pointed out that this may not be the case and I may be basing personal feelings towards something I should investigate more.
I am only 20 years old myself and with the help of my parents I have just signed a contract of my first property that is P&I which was probably influenced by my parents as they have always preferred that method. But I agree with you that I should really investigate all options. I should probably have some meetings with some knowledgeable professionals and outline the best strategy and goals for me.
And this might be a stupid question that portrays my age and inexperience: but if we are really in a housing price bubble won't having 10 IO properties be more risky than having 5 PI properties? Or is this not a good way of looking at it?
Thanks for your reply and any further advice is welcomed.
Cheers,
YPG
If we are in a housing bubble, it makes no difference whether the loan is P&I or IO. In a falling market, both types of loans will make you lose money - but the IO loan will give you great serviceability to purchase properties that you think are falling in the downturn. In a rising market, the IO loan will allow you to access 100% free equity in your IPs for your own use rather than re-borrowing money that you've already paid back to the lender.
In a falling market, you're screwed even if you have no loans.
Yeah I was thinking of degree of screwed.
But looks like my question was a stupid one anyway haha, my bad.
It's not necessarily a BAD idea, but there might be better ideas!
P&I on your first one is not a bad idea, especially if you have difficulty budgeting - but given that you're only 20 and have bought your first property, I'm guessing that's not an issue!!
If you can manage the P&I, you'll be putting some of your own money into the property (like forced savings), which, as Aaron_C pointed out, you can potentially re-borrow later. (A better option may be to have an offset account against your loan; pay the loan IO, but put the equivalent of the principle repayment into the offset - heaps of posts on this...)
If you like this property investment lark, and want to get another one, then you can probably refinance and switch to IO at that stage - you may be surprised at how much cashflow that frees up, and hence how "affordable" the 2nd one is.
So it's horses for courses; I'd recommend you find a mortgage broker (there are plenty on the forum, some of which have generously contributed to this thread) who can help you strategise and develop an appropriate structure for your goals and circumstances.
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