One of the big incentives for smaller investors to dip their toes into property investment is to effectively have other people pay off their home loan. But what if that wasn’t the best financial decision?
Contrary to popular thinking, it’s not the best decision. Instead, there is one very good reason you should be paying off your investment loan first: you can secure more income more quickly.
Why should I pay off my investment loan first?
By paying off your investment loan sooner, you’re giving yourself access to a much larger income much sooner. As it stands, the income from your investment property is probably already covering the loan on that property and hopefully bringing you some extra. But the sooner that loan is paid off, the sooner you’ve unlocked a much bigger income source for yourself.
Still trying to wrap your head around it? It might be easier to see what’s happening with some numbers.
Picture this: you’ve got $4 million worth of debt at an interest rate of five per cent, split equally between your own home and your investment properties, which collectively bring in $160,000 gross income.
You don’t have to come up with the money to pay interest on the investment loans because that’s already being paid by rent, so as soon as you’ve paid those loans off, you’ve got an extra $160,000 gross income.
Compare that to if you had paid off your home first. You won’t have to pay $100,000 a year towards the interest component of that loan, meaning you’ve now effectively gained $100,000 in after-tax income. But that’s $60,000 less than what you could be bringing in by paying off your investment loans first.
This will, of course, mean you’ll lose some of the tax write-offs associated with your investment property sooner, but if earning more income is more important to you, it’s a great way to get there.
As always, you should always speak to an expert to work out what the best course of action for you is, but this is just one example of how being smart with your investment can pay big dividends in the long run.
Looking at getting into property investment or expanding your portfolio?
Talk to Costas Constructions. We have more than 20 years of experience planning, designing and building award-winning developments in Melbourne. Get in touch today.