Future Proof Your Debt

Future Proof Your Debt
21-Aug-2018 Mark Honeybone

Future Proof Your Debt 

Two weeks ago I did my usual NZ Property Video Podcast where I interviewed Ashley Church from the Property Institute of New Zealand.

One of the topics we spoke about was his view on where he sees the current market and what will follow in the upcoming years. Like many others including myself, he sees that the property market is currently stabilising and will be for around next 4 years. He believes that overall it will most likely stay relatively consistent and without significant rises or declines.

So if this is the case, what can we do as investors?

During the past year, I have written columns about ways of taking advantage of such property market by mainly adding value to properties (for example, adding rooms, minor dwellings, subdividing, renovating, etc.).

What I’d like to discuss this month is a strategy that many people weren’t taught or told about when I first got into property investing about 14 years ago. 

Back then in the investor groups, I was involved in, it was all about leveraging debt as high as you can. You could leverage close to or over 100% of a property’s value. We all thought it was great, as there was no money involved in the deal.

Unfortunately, when things changed for the worse and house prices declined, and interest rates went up, many of my friends were in dire straits as well as me who had two trades that hurt me for many years afterwards.

Over the past 3 years or so the Reserve Bank has made changes to avoid such situations within reason to investors. Even though over the last 18 months it has really annoyed many investors, in my opinion, it saved many inexperienced investors when the market flattened and even went down in some areas.

So what am I suggesting?

If you can, pay as much debt off your property as you can. Obviously I suggest looking at your own house first, at least while you can until the Government makes changes.

However I now think paying debt off on property brings so many benefits for investors. As I mentioned before when I started investing, paying principal off was a swear word.

  • Reducing debt off the principle quicker
  • Reducing debt by saving on interest you would normally have to pay
  • Having less debt and being ready to buy another property when the perfect opportunity comes along, that you need to react fast for
  • Receiving more cash flow from rent payments (which you should also increase as the time goes on, which creates even more cash flow)
  • A possibility of paying the debt off much quicker resulting in a better cash flow

These are some reasons which can amplify your investing in a safe way and help you move forward reducing debt.

Another reason about why it’s a good idea to pay the principal is if the market goes down by 10% (or more), you have less risk, as you paid money off the principle.

Of course this doesn’t apply to everyone, and some simply don’t have spare cash to do this. Some investors create 30% to 40% equity without doing this.

However, if Ashley Church and many other experts are correct about the market in the upcoming years, if you buy a property where you can’t add any value (which may still be a good investment) and you do have spare cash, using the above strategy can have you reducing debt and creating better equity, cash flow while having less risk.