Should you pay off your home and eliminate your mortgage or buy an investment property instead?
If you own your own home and you want to grow your wealth, you may be asking, “Should I pay off my home or buy an investment property?” It’s a very worthy question to ask, and in today’s episode I plan to help you answer that question for yourself.
When doing research for this article, I found a few web-sites and I found a few videos and basically the general consensus is something that truthfully I disagree with. They were saying that in all situations you should not spend money to buy an investment property but you should take extra money and try and pay off your home loan faster.
I am not a financial advisor, so I can’t give you financial advice but what I can do is go through a series of questions that you can ask yourself so that you can make a better assessment for your situation and make this decision for yourself.
I want you do an activity.
I want you to think about the future – I’m not talking one year or two years or five years, but much further into the future.
Let’s set a time of probably about 20 years, because that’s probably how long it’s going to take you to pay off your home loan. In 20 years time let’s look at both scenarios. “What are the benefits of just paying off your home loan?”, and then, “What are the benefits of buying an investment property?”
If You Were To Pay Off Your Home Loan
Let’s look at just you owning your own home and paying off that first. Well you are going to have no interest and no mortgage to pay, which is going to be great! This is going to mean that your expenses will decrease because you paid off your mortgage.
You’ve got security because the bank no longer owns your home, you do. If interest rates go up you don’t care. It doesn’t matter to you because you own your own home.
But oh no, you’ve got no income.
Your house is not going to generate you an income because you’re living in it. Without income coming in it is very hard to achieve financial freedom. You would actually have to rent it to get income through the door.
It may go up in value but I question as to whether that increase in value is actually accessible to you.
Sure you could sell your home to access this growth, but then you have to buy somewhere else to live. You would probably would want to pay the same amount of money because the whole market would have gone up. So I vote that when you just pay off your home loan, in the future, yes you got some benefits there but there’s also some negatives. You don’t have that rental income coming in and you can’t really access your growth.
If You Were To Buy An Investment Property
Now let’s look at the benefits of if you were to buy an investment property. Firstly you’ve got the negative of taking longer to pay off your own property. Okay, that’s not ideal. But eventually you probably should be able to payoff your home loan anyway, right? It might take 30 years instead of 20 years but eventually it is probably going to be paid off.
And the benefit with owning a property is that over time, even if you purchase a negatively geared property, the chances are that the rent in that property going to go up over time. At some point in time the rent is going to exceed the mortgage and expenses on that property flipping it into a positively geared property.
That means your investment property is eventually going to generate you passive income which over time can be used to pay down your home loan or can be used to fund your lifestyle.
You are probably going to pay off your home loan anyway, you have got passive income to help you fund your lifestyle, and you’ve got capital gains that you can actually tap into.
With an investment property because you already have your own home that you live in. If you needed money you could sell it and access that growth in order to fund your lifestyle and maybe you have an equity loan against it. Basically you are less reliant on superannuation as you can get extra income and capital gains which you can access..
If you were to just purchase your own home then when you retire you are going to be fully reliant on your superannuation or on a government pension. Whereas if you own your own investment property you may still need to draw from your superannuation of course but having that passive income makes you less reliant on it.
One property probably isn’t going to deliver you complete financial freedom.
I love the way Nathan Birch put it in this video
You need to work out how many investment properties do you need to own in order to be financially free. I am going to add a new calculator to On Property Plus where you can type in your goal income and you can type in what sort of properties you are looking at and it will then tell you how many roughly do need to be financially free.
And I’m going to give you some advice. My advice is stop thinking about “either or” and start thinking about “both and”. Rather than saying “should I do this or this OR that?” Ask yourself “how can I do this AND that?”
How can I pay off my home loan faster AND purchase an investment property at the same time. Believe it or not but asking that slightly different question puts your mind into overdrive and will help you to come up with solutions so you can have BOTH AND!
One simple solution to the above question would be to purchase a positive cash flow property. Therefore you get an investment property that pays for itself and spins off extra cash which you can use to pay off your home loan faster.
That’s just one solution and that solution obviously is not for everyone but that gives you an idea of how you can pay off your home loan faster AND buy an investment property.
Maybe you could look at building a granny flat on your home so that you could get income from renting out that granny flat. Sure you are going to lose some yard space but if it means that you pay off your home loan 5 or 10 years faster would that be worth it?
Start thinking outside the box and start thinking how you can do both. Then maybe when it comes time to retire you’ve actually got things working for you rather than just a house that you don’t have a mortgage on anymore.
Now I need to say that obviously there’s going to be some risk out there. Investing is never risk free but do your research and you can minimise your risk significantly.
So hope that I have helped you assessing your own situation. Should you pay off your home loan or buy an investment property and I would like to flip that question and say