By Victor Kumar
Ever since investors started talking about property openly, accountants have been advising their clients how to buy property, but they have been providing them with the wrong advice.
You see, their advice and modelling has always been around tax minimisation and not about wealth creation.
In fact, wealth creation seemed to be a by-product rather than the end-game.
However, what if we flipped it on its head and went against the grain?
What I am talking about is paying your tax-deductible debt off first.
That’s right, pay off your investment properties before you pay off the mortgage on your own home.
Controversial? Yes! Logical? Absolutely!
Here’s the rationale:
Let’s say you had $2 million worth-of debt – $1 million on your home and $1 million on your investment properties, which was bringing in $80,000 in gross rental income with interest rates of five per cent as an example.
If you paid off your home first, sure, you don’t have to come up with $50,000 a year to pay the interest component on that loan.
That is, you don’t have to have a, job which is arguably giving you more than $50,000 a year in after-tax income.
However, if you paid off your investment properties first instead, the scenario changes.
Of course, you don’t have to come up with the money towards the interest on the investment loan, which was being paid via rent anyway.
So, if there is no debt, that $80,000 of gross rent is now coming directly to you.
If you take 20 per cent away for your portfolio’s running costs, you have $64,000 coming your way!
You still have home debt, which needs some $50,000 to service it, but you actually don’t have to work for it!
That means you could cut back on work hours such as one of you can stop working, or you may choose to continue working for the next decade to fully pay off your loans and actually retire early.
Have we created a tax problem by doing this?
Absolutely, because we are earning more income, so we are paying more tax, but it’s like having another job to help pay off your loans.
The reason we baulk at this concept is that we have been indoctrinated with tax minimisation and not with wealth creation.
The thing is, to get a different result, we need to do things differently than we’ve been taught in the past.
That is simple property investment strategy evolution.