Paying off Investment Property? Or not? Oz questioner

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Roobingle

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I cant find advice on this but i will pay off my principle residence in a few months. I have other 2 investment properties of 40,000 and 60,000 approx. My goal is having a passive income allowing me to retire early. Therefore after my principle, I want to go hard and pay off the investment properties as yes i will be paying tax but logically, good money is also going out the door on interest. good times now with low interest but i dont expect that to last. Should i pay the investments off asap (after my principle)? i don't want to die owning heaps of property and not enjoying myself. i just want to be able to sustain myself into a 'retirement' where i work or study what i want instead of doing a good, secure (but boring) job i've been conditioned to. and i'm the kind of person who does like to be in debt so go hard at paying off rather than spending or spoiling myself (well much!).

Note: Both properties are returning a sizeable profit now (positive geared). Yes i know i'm going to be up for $$$ tax time. This year in Jan i took over the management of both investment properties while increasing the rent on one to market value when my property managers were strongly advising me not to. I instantly increased my monthly income by $500. I picked up a great tenant. My other property is not at market value and i wanted to increase the rent by $15 a week, but bearing in mind the economic condition i would have accepted $10. So i decided to ask for the tenants input. they had already been renting for 5 years. Because they should be paying a lot more, they offered $20 that they could comfortably be able to afford. I was very happy with that.

A main problem i saw with the property managers were that they did not send me (CC) every item of correspondence to do with my properties. They should have. For a whole lot of things they were saying they were doing, they didnt eg rent went for 9 months after a due increase which they kept saying they had written about but didnt. that particular guy got sacked for a whole lot he didn't do but in the mean time, i was missing out on real increases. The company was also advising on low amounts etc. Was not happy with them. It appeared they were taking a lot for basically only collecting rent. I'm much happier now and better off financially. The only aspect i was worried about was the transition on changing tenants. Using a paid internet site, I advertised and only lost 3 days rent. I was wrapped.
 
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Re: Paying off Investment Property? Or not?

You have borrowings of €100,000.

Forget the fact that they are secured on your investment property. The profit on the investment property is pretty much irrelevant, as long as it's in excess of the interest you are paying.

Sure interest rates are expected to increase, but you can review your decision then. The only relevant issue is the net interest rate you are paying now. Let's say you are paying 3% gross. You can claim tax relief on 75% (?) of this, so the tax relief is around 50% of 2%. So the net rate you are paying is 2%.

Is it better to pay off a loan at 2% or to invest it somewhere else where you can earn in excess of 2% net. I would imagine that a diversified portfolio of shares will earn you well in excess of 2% over the long term.

For example, if you are not contributing the maximum to your pension fund, then you should be as the tax free return should be well in excess of 2%.

Sure the shares could go down in value, but you can well handle the risk.

Some people get a huge emotional value from being debt free. While I can understand this in relation to one's home, it's not appropriate to one's investment properties.

In summary

You have three properties worth - I am guessing €1m.
You have a secure job.

You should not worry about borrowings of €100k when they are tax efficient.

Brendan
 
Re: Paying off Investment Property? Or not?

3 properties worth 1.5m. Yes a secure job but I want to retire in 3 years from it at the age of 47. Paying off the rentals would give me an income that i pay tax on but I won't NEED to work and can study or work at what i want to without the pressure of having to make mortgage repayments. I'm getting nearly double back per month from the rentals against their mortgages. I should pay off my principal residence in November and will need to make the decision then. I am leaning towards my decision unless there is another way that I won't have financial commitments in 3/4 years where i still can retire. What do you think Brendan? I have no dependents I need to account for.
 
Re: Paying off Investment Property? Or not?

I am in a similiar position to u.

I have 2 properties worth around $1.5m and savings in cash/shares of just under $200k.
Properties are 50% geared and are cash flow positive to the tune of $15k pa which coupled with return from my savings means I'm currently semi retired(work 3-4 months a year)

I never intend to pay of investment loans down completely maybe take off another 100-200k over next number of years as I'm comfortable in investing excess cash in share market/deposits where target is to earn 8%+ return per year.
Having said that,I have invested in share market over 15 years and take out various hedging strategies to minimise my risk.

If u are going to worry about mortgage on your investment properties then clear it down but as Brendan stated it is the least tax efficient thing u can do.
 
Re: Paying off Investment Property? Or not?

Thank you for your replies. Yes least tax efficient but total goal orientated. Depends what 'game' you want to play. I would like my money to work for me. To achieve what I want to. I don't want to devote my efforts in paying the least tax but then living a life that i'm not satisfied with. What I really need to ascertain is if the money I pay out on interest (lost/wasted money) is less than the tax I'd be up for in the same period. As i said, i don't want to die with 100 houses to my name - i just want to achieve my goal of not having to work. And... my dabble in stocks was 3 months before the 86 crash so i don't want to do that again!
 
Re: Paying off Investment Property? Or not?

You have the same goal as me and thats' 1 of the reasons why I'm not in mad rush to pay off gearing on my investment properties.

Tax efficiency to me is relevant as after tax income is what I live on and have set up property/high yielding shares to give me net yield of $30+k pa.

I have only worked 3-6 months in last 3 years,give up full time job in 2006 to concentrate on family/travel/sporting goals-went back to Ireland on 2 month holiday last year and will be 3 months this year.
 
Re: Paying off Investment Property? Or not?

I don't understand! How can i find out more about what you've said. Are you with shares that pay dividends? So if you were me, would you pay off your principal (actually I'll take it down to $5 to avoid interest but have the extra $$ available to me on redraw if ever needed) and then save the money (the rents and principal payments i would have previously paid) to get into shares?
 
Re: Paying off Investment Property? Or not?

Interesting posts but I think you are both posting from the US and the tax advice and regime here would be different than in US so that might make a difference. Neither of you mention your pension fund which is the most tax efficient way of saving for retirement but not accessible til retirement age. Based on Roobingle's posts, 100k borrowings on valuation of 1.5m is nothing. Every €1 paid off the principle is 75c not deductible gainst taxable income etc. You have done the maths. You can/should earn more in Index Funds/ETFs/Deposit accounts than you save net in interest payments. Good position to be in.
 
Re: Paying off Investment Property? Or not?

Yes-some of my share portfolio pay high dividends in order of 7-12%.
I also invest in other stocks where dividends would not be as high but capital appreciation should be higher.
1 example of this was Eircom Holdings(part owner of Eircom) who were trading at a substanial cash discount to their share price and have nearly doubled my money on that 1-of course this is exception to rule

I also take out put options on some shares to safeguard my capital when purchasing shares.

My share portfolio usually makes up 60%-70% of 200k-rest is kept in cash in high yielding deposits.

Overall,I target 8%+ return on this $200k

I have a $750k loan on my 2 investment properties which currently is yielding $15k positive net cash flow(also get an incremental tax benefit as u can claim depreciation as an expense on investment property in Australia).

On Pension fund,I have kept up my voluntary contributions from Ireland-pay 6.6% on my salary income in Australia which will entitle me to full Irish pension-this is a judgement call on my behalf as Irish pension is double to Australian equivalent.

Point I'm making is for me,don't see point in killing myself in paying off all of investment loan but will probably bring it down to round 500k over next 10-15 years .Don't want to be asset rich,cash poor

Again it comes down to my attitude towards risk and I'm quite happy to invest spare cash rather than pay down $200k on property.

Hope above makes sense
 
Re: Paying off Investment Property? Or not?

"What do you think Brendan? I have no dependents I need to account for."

Breaking the rules addressing a question merits a telling off. Do you get treble points for addressing a poster+moderator+head honcho !!
 
Re: Paying off Investment Property? Or not?

huh? have i broken rules?? well at least i'm not conventional! i'm in Australia.And uhm, i've just had normal monies and probably a bit extra going into my pension funds but that's just going to be a bonus. It's money i've never seen so i'm not relying on them. My Father made me buy property when I was young to prepare me for retirement.
Oh come on Cerberos - you could have added something more helpful!
 
Re: Paying off Investment Property? Or not?

Okay, so I pay off my residence in Nov. I'll then have the money I would have paid on my mortgage and 2 rentals coming in. Should I be looking into EFTs (whatever they are) and Index Funds (same!). I cant see deposit accounts paying more than the interest i'd be paying. But i am starting to see that the only real advantage in paying off the places would be to delete my financial obligation (which I could cover with my redraw buffer if things went pear shaped) and at the end of the day, we are only talking about the interest i'd be saving. Therefore, I should be looking into something that will give me a return of something more than my interest. Gotchya. Hhhmmm.... so save a bit, perhaps live a bit, buy that stereo i've had my eye on... hmmm..... nah. not yet. perhaps then I could retire earlier or even reduce my hours? (in my main job) i've actually got 5 jobs, 2 of which are volunteer roles. OH so much to think about.
 
Re: Paying off Investment Property? Or not?

Hey i'm getting it - even if i went with a term deposit, it would not be as much as the interest i'd be paying on the mortgages but it would be some of it, with the expectation that the tax benefits would make up for the shortfall. yeah?
 
Re: Paying off Investment Property? Or not?

Roob

I was not aware that you were based in Australia when I replied.

This is an Irish site and we might be making assumptions about tax, property law, etc which would invalidate our answers.

You should ask your questions on the Australian equivalent of Askaboutmoney.

Brendan
 
Re: Paying off Investment Property? Or not?

Westpac are offering 6% on deposits greater than $5k whilst your mortgage rate should only be around 5% if you are on variable rate-so in effect u are earning more on deposit then simply putting $100k into your mortgage offset account.

There are numerous Australian shares paying 10%+ dividends with franking credits although appreciate u may be recitent about investing in Australian sharemarket given your previous experiences.
 
Re: Paying off Investment Property? Or not?

Again, I must stress that this is an Irish site and , as such, there won't be any opportunity for someone to offer a correction or an alternative opinion.
 
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