Stagger property investment

moneymakeover

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553
Imaginary scenario. Below I'm trying to describe situation where a landlord might be 10 to 15 years from retirement and looking to pay off debt.
It would be good if one property had zero debt and then the rent from property 1 could be used to pay down property two.
Then few years later the combined rent from 1 and 2 could be used towards property 3.

Is this a common strategy? Haven't seen it described before. But it makes sense particularly if trying to get to zero debt. Or property investors happy to keep some debt?

Personally speaking so long as there is anything remaining on the mortgage the rent tends to equal the mortgage therefore difficult to make ends meet. When debt goes to zero what was previously the capital repayment becomes like a big pay rise.

The other big issue is tax. Once mortgage interest no longer due the profit must become significant and therefore the tax?

Property 1
Value 250k
Mortgage 0
Rental income 1200/month


Property 2
Value 250k
Mortgage 60k 5 years remaining
Monthly repayment 1000 capital + 200 interest
Rental income 1200/month

Property 3
Value 250k
Mortgage 120k 10 years remaining
Monthly repayment 1000 capital + 200 interest
Rental income 1200/month
 
Last edited:

Brendan Burgess

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39,594
It only has the appearance of strategic thinking. But it's not really a strategy. A strategy involves some choice , some decision.

You should assess each property investment on its merits. Does the return on the net investment (property value - mortgage) justify keeping it?

That is something each landlord should do for every property , every few years.

For example, if it turns out that Property 2 is not a good investment, then you should sell it.

Having sold it, the strategic question is : Should I use the proceeds to repay the mortgage on Property 3? If it's a cheap tracker, probably not. If it's not a tracker, probably yes. A rate of 4.5% is still a net rate of 3% after tax.

Another strategic question you should be asking is : Is it wise to have most of your assets in retirement in one asset class? The answer is probably not. You probably own a fourth property, your own home. It would make sense to diversify into the stock market.

So even if all your properties are still justified on an investment basis, then you probably should still sell one of them. Either repay the mortgages with the proceeds or invest in equities.

Are property investors happy to keep some debt?

The other big issue is tax. Once mortgage interest no longer due the profit must become significant and therefore the tax?
People can make very distorted decisions due to tax.

If you have a cheap tracker, it's probably better not to pay it off. If not, it's probably right to.

I had this discussion with a commercial landlord recently. He has a cheap tracker with 5 years to go. He wanted to switch to another lender and extend the mortgage to 10 years. "The more interest I pay, the less tax I pay."

He probably would have described that as "strategic". Stupid, but strategic.

Brendan
 

moneymakeover

Frequent Poster
Messages
553
I guess my question

If several properties

And won 100k
Is best option to pay off the full amount of a property, thereby no repayments on that mortgage

Versus paying 30% off one with large mortgage?
 

Brendan Burgess

Founder
Messages
39,594
Hi mm

OK, I had missed that.

Here are the considerations in rough order of priority.

1) Pay off the one with the highest mortgage rate. That will save you the most money.
2) Unless paying down the other one would result in a lower LTV and lower mortgage rate
3) If the interest rates are the same on both and they are both trackers, pay off the one with the shortest time remaining on the mortgage.
3A) But if they are both cheap trackers, you might be better off not paying down the mortgage and investing in equities instead.
4) Unless you might want to sell a particular one in the medium term - in that case, pay down that one.

Brendan
 

moneymakeover

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553
Nowhere does that mention the idea that by paying off a mortgage it results in no more payments to the bank.
And that must be useful in terms of cashflow?

With the resulting cash you then focus on paying off the next mortgage.
 

RedOnion

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4,052
Nowhere does that mention the idea that by paying off a mortgage it results in no more payments to the bank.
And that must be useful in terms of cashflow?

With the resulting cash you then focus on paying off the next mortgage.
It doesn't mention it because it's completely irrelevant.
 

moneymakeover

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553
If I'm paying 3 mortgages@ €1000 per month

And i redeem one

So I'm then paying €2000 per month

That would make a difference?

It's true the overall debt is same regardless which loan is reduced
 

moneymakeover

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553
That's the thing.

If i reduce balance on mortgage by say half the bank will still expect the same monthly repayment (and the term will reduce).

To get reduced payments i would need to renegotiate the contract
(IMHO)
 

Brendan Burgess

Founder
Messages
39,594
No. The bank will ask you if you want to reduce the term or the payment.

You should keep the term the same and reduce the payment.

Brendan
 
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