The above question presumes you already own at least one property so you’re probably in a reasonable position already!

However this could also mean a number of things such as, you have been lucky or diligent enough to pay off all your existing debt, your current investment is now cash flow neutral or positive and you want to take advantage of the current tax investment laws, you are building assets for the future or just because you can!

Generally in past generations, the aim of most Australians was to pay off the debt on your home as quickly as possible to be debt free and ensure your home was your castle. However these Australians may not have given consideration to what alternatives there might be in order to further themselves financially. Your home is an asset and it can be leveraged to invest in other assets which can then provide income to improve your financial choices moving forward.
should you purchase an investment property?
I read a quote recently that knowing when to make your second investment, (your own home being your first!) is 75% maths and 25% emotion, not an outlandish statement! Each person is very different and at the end of the day, only you will know when you’re comfortable to make another big purchase, it will come down to your cash flow, current asset and employment position and your appetite for risk! The decision to invest in another property when you already have a home loan is a pretty big decision because you are taking on more debt and the most important thing is cash flow and can you manage?

Lets discuss the maths part of when it may be time to look at an investment purchase:

Financial expert Noel Whittaker says the effects of “compounding interest” show why it’s a good idea to begin the process of buying another investment property when your original loan term is coming to a close. The basic principal of compounding interest is that as a loan term increases, small increases in your monthly payments have a big affect on the amount of interest paid and also the term of the loan.

As an example, if you begin with a $400,000 loan at a 5% interest rate over a 30 year loan term, your monthly Principal & Interest repayments will be $2,147 per month and you would pay a total of $373,884 in interest. Now if you pay an extra $493 a month, you can reduce your loan term by 10 years down to 20 years and you will pay $233,906 in interest, a saving of $139,978. Lets say you want to reduce your loan term down to 10 years, you would need to pay an extra $1603 again, taking your total monthly repayments to $4,243 per month. You would then “only” pay a total of $109,280 in interest during the period.

However the point here is, once you reach a certain point in the loan which is around the 10 year mark, compounding interest doesn’t matter as much anymore and you’re better off using your money to invest where greater returns are possible. If your managing your mortgage payments well, you’ll save little interest in increasing your repayments and your missing out on what could have been 5 to 10 years growth in another investment property.

So the above takes into account when your money is best working for you and a theory on where it may best perform however, as always, it is your individual situation. One of the basic principles of investing is you should maximise your deductible debt and minimise your non deductible debt.

Therefore you may be of the opinion that you want to extinguish all your owner occupied debt first but doing this again means you may be missing out on substantial capital growth on future investment purchases. Keep in mind the following points and decide where they relate to you:

What is your goal as an investor?

Is it owing a property outright and having passive income or is it building a property portfolio where debts are covered by income? There is no right or wrong answer, just your individual choice.

Comfort level?

Can you maintain your investment portfolio through the market and the highs and lows of the property cycle? Are you too highly geared and what happens if you lose a tenant, will you be ok? 

Stage of Investment?

When beginning property investment, the priority should be to buy the next property and continue the growth of your portfolio. Tying up funds to aggressively pay down your home loan may restrict you from saving for another purchase or servicing a new debt, therefore slowing your ability to grow your portfolio. However if you have a mature portfolio, you may be looking to reduce your debt levels and rely more on the passive income.

If you’ve decided to take the plunge and purchase you’re next property, please get in touch with us, we’d love to help you to reach an informed and intelligent decision: Buyer’s Advocate home page.