Investment property, yeah or nah?
It was one of those phone calls that you remember:
“Good Morning, Luke Speaking,” (Why do people still answer their mobile phones this way? You know who you are calling! Anyway, back to it…
“Hi Luke, its Ryan here, have you got a minute?”
“Sure what’s going on?” I answered.
“I need to catch up with you about increasing my repayments, I really want to pay my loan off faster,”
“Sounds good, how much do you want to increase them too?”
“I want to bump it up to $360,000!”
At this stage I started to wonder if there was too much wax in my ears, $360,000, surely he meant $3600?
“Nope, $360,000! Remember that house I bought in Mt Wellington 4 years ago? Its just sold for $1.2 Million!”
Ryan had used the equity in his own home in Mt Eden to buy an investment property that is now potentially sub-devisable. It cost him $800,000 4 years ago, which he borrowed, using his home in Mt Eden to secure.
The sale allowed Ryan to repay the $800,000 as well as the remaining $360,000 on the home that he lives in.
Ryan didn’t foresee the massive upswing in property prices, he bought the property with the intention of keeping it forever as a potential retirement income stream. The reality turned out to be that holding it wasn’t the best use of his capital - so he decided to sell it.
When thinking about buying an investment property you should always look at it for what it is: an investment.
Property investment is a long game, you buy properties to rent them out to your tenants. This is very different to a property trader; a property trader buys property in the hope that on-selling it will create a profit. This is a very short term strategy, and has very different tax obligations.
You can create wealth through property investment, but it’s not as easy as most people will make out. Ryan’s story shows that with a long term attitude and a bit of luck you can make short term gains.
The key is taking a long term view. Even though Ryan paid off his personal mortgage, he has not re-financed and bought two more properties in Auckland. The difference is now all of his debt is housed under a Look-Through-Company and is tax deductible.
His next goal is to get his loan-to-value ratio to a point where he doesn’t need to use his own property as security and truly make it mortgage-free.