Nov
26
Buy Property and Pay Off the Mortgages
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Recently I received a message from someone I know via Facebook, a fellow property investor, sourcer and financier. He gave us his opinion via a well written piece, some of which I agreed with, some I didn’t. Below is my response to him which you will enjoy reading and probably learn something useful.
Everyone talks about contrarian investing… “buy property now while the market is in a downturn” yada yada yada. Nobody says “pay off the mortgages”. It’s always seemed to me that people just buy and buy and create more debt, never paying back that debt for “tax reasons”. Uhm… check out Lord Sugar’s debt on his multi-million property portfolio. I don’t see any banks chasing HIM for repayment of their loans!
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Hi Mark,
Nicely written piece, well done, but you have to admit there’s a certain self satisfaction in knowing that once all the mortgages are paid off that you have oodles of cash flowing in to your bank account and the banks are no longer at the beck and call of the banks, at the mercy of the economic conditions prevailing at any point in time etc.
If the property falls empty, so what. As long as you’ve got money to cover the property taxes and utility running costs, and this can be as low as £2,000 for the YEAR, then you’re not going to end up bankrupt servicing an empty property with a huge mortgage on it.
What investors on the outside don’t is that investors on the inside are in fact doing is leveraging up in the downturn, buying loads of property that cashflow now in order to “park” the property, then they intend to SELL half their portfolio, pay the taxes and use the profits to PAY OFF their remaining mortgages.
Why does nobody say this anymore? The likes of Andy Shaw would shout “buy property and wait” and “never sell property”, but look at him now. His business model, as with so many business models I see, are fundametally flawed. They only work in upwards markets and rely on increasing values in order to remortgage, increase the debt on the property and then use the cash to live, but on the premise that this cash is debt and therefore not taxable. WRONG! If the money raised from the refinance is not used for the purpose of investing in more property or for repairing and renewing existing stock, then the interest element on that portion of debt is NOT tax deductible!
My goal is to have all my properties totally debt free within the next 10 years, if not sooner. That way the banks and everybody else can do what they like, my income will be bomb-proof from the vagaries of the economy because with all that lovely cash sitting in my bank account, I will be able to weather most storms!
My advice?
Leverage up, buy as many properties as you can handle yourself or handle the agents to handle, and then pay off the mortgages on them as soon as possible. Then live a less stress life knowing it will take a major calamity or personal screw up for you to lose the lot.