Assuming You Have Good Cash Flow Is Paying Down Debt A Good Strategy?
Assuming you’re in a good cash flow position, is it a good idea to pay off debt through principal and interest loans or should you stick with interest only loans?
Ryan: Provided you can maintain a reasonable cash flow surplus, is the benefit of reducing your debt position through principal and interest repayments during slow capital growth a good strategy, versus interest only?
So I guess, assuming that you have a reasonable cash flow surplus, so you can afford to go principal in interest, is paying down debt a good strategy versus going interest only?
Ben: Obviously Ryan and I aren’t accountants or financial planners or mortgage brokers, so this isn’t advice, it’s just what I have personally heard and do for myself.
My accountant has told me to never pay principal in interest off a single property, except your own home. Even with my own home, he says to park all of the excess surplus money that I have in the offset account, against it. He thinks it’s better to repay the debt on the property with future money that’s worth more in the future, ’cause let’s say ten years from now your dollar’s gonna be worth $1.30, but your debt’s gonna remain the same.
That said, I pay principal in interest off every single one of my properties, and I don’t listen to him ’cause I don’t like debt.
I don’t like leverage, and I don’t like risk and so I like to see the balance of all my properties going down. I probably didn’t do that for the first five years but in the last three years, I’ve actively been working on either paying chunks of debt off in the form of money in offset accounts or through just whipping away at the principal as well.
Ryan: Yeah and I think look at your long-term goal again. Take the time to work out, okay where do you wanna be in x – number of years and does it make sense to pay down this debt or do you want that money to go ahead and reinvest? Or do you want that money for something else?
And I think both be and Ben are pretty … I don’t know if risk averse would be the word, but we’re not chasing risk so much but the idea of paying down debt and eventually just owning everything outright is definitely my goal, and I’m pretty sure that’s your goal as well, isn’t it Ben?
Ben: 100% the same.
You just brought up a really good point, and it comes back to the question that somebody asked before about time frames and position in the cycle.
So if you’re in accumulation phase, and you’ve got surplus income coming in, and you haven’t bought enough properties to achieve your financial independence goal, then your dollar is not best served paying debt; it’s best served buying an additional property. As soon as you’ve got the number of properties that you need based on your strategy and goal to achieve your financial independence 15 years from today, your focus should go from enough is enough, stop buying.
You don’t have to over leverage yourself if you’ve got enough property to achieve your goal and into consolidation phase, which is debt reduction and adding value to properties to increase the rental returns as quickly as you can so that you can work on that debt reduction phase.
To be honest with you, accumulation for the average person shouldn’t last for more than about three to five years out of a 15 year period. The majority of the time is actually in consolidation and debt reduction. That’s the problem that most investors make from my perspective.
They don’t buy enough properties in a short enough period of time and leave them for long enough to do what they need to do to achieve financial independence. Most of the hard work’s done at the start and then it’s just boring waiting time after that.
Ryan: Well and also, people get really greedy, right? How much money do you need? How much money to you want to live a life and be happy to eventually accept that you’ve achieved that? And work out how to enjoy your life because often people, they achieve their goal and then they just get greedy, and they want more, and they push the goal further into the future, and they could be spending the time enjoying their life, paying down debt ’cause they’ve got enough properties any way. But instead, they just get hungry, greedy … They overextend themselves.
I’ve seen people who’ve built up property portfolios with 30 plus properties and then things went backwards, and they had to sell a whole bunch of them and nearly start again and so it’s really up to you how much risk you wanna take and whether you’re happy with the amount of money that you’ve got, and you can start enjoying it.
I’m really big on that because once you achieve financial freedom, that’s just the start. Then you’ve gotta work out what you’re gonna do with the rest of your life and that’s the really hard part. Getting the money is the easy part.
Ben: Yeah and it’s funny, we’ve had really good talks about this before. I think if you weren’t in my life, and I hadn’t learnt the things that I’ve learnt from you over the last three years … Has it been three years? Two and a half, three years?
Ryan: Nah dude, it’s been like four or five or something now.
Ben: Has it?
Ben: Oh I was still working for someone else when we started to catch up.
Ben: Wow, but I mean like, I was pretty greedy and there’s parts of my personality … I don’t know if it’s necessarily greed, it’s most just I’m a high performer, and I like chasing goals, but it’s kind of like, if I hadn’t have has these conversations with you I definitely would be working a lot harder.
I’d be continuing to bring more people into the business and buying more property but you’ve taught me that, you know like, that’s a part of your life and it’s okay to find another part of your life, and to define yourself outside of the way you work, and how much money you have, and the people that you hang out with. It was really uncomfortable to go through that but now I’m kind of coming through the other side and working in a different way and enjoying things in a different way and realizing enough’s enough and selling some stuff down. It’s been liberating actually.
Ryan: Yeah, it’s pretty good.
Well I hoped you enjoyed the answer to this question with Ben Everingham from Pumped on Property. We’re really having a blast doing these Q & A sessions with you guys so keep the questions coming.
If you’re at the point now where you’re ready to purchase an investment property, but you think you might need some help then Ben is offering free strategy sessions to On Property listeners. Simply go to onproperty.com.au/session, and you can book a time with Ben and you can go through where you’re at, where you wanna be and what your next steps are to get there.
So again, that’s on onproperty.com.au/session. Thanks so much for watching and until next time, stay positive.