There is always some bright spark who has a great idea of how you can make easy money. And there always seems to be someone who swallows it up hook line and sinker.
The one I came across this week was an ad for Investment Property. No big surprise as this sector is largely unregulated allowing all sorts of scams to run.
This investment idea is to help you pay down your home loan by buying an investment property and borrowing more.
Here is the theory:
1. Use the equity in your house to borrow 100% for the investment property.
2. Get an interest only loan on the investment property.
3. Use all the rent money to pay down the loan on the house you live in.
4. Use the big tax refund you get from negative gearing to pay down the loan as well.
Starting to make more sense now? No!
It is a stupid idea and has been around for 20 years or more. I can remember this one being around when I worked in the bank.
Before you invest in any money made easy investing ideas do the math. If you cannot do the math pay someone like me to do it for you.
• The average Australian mortgage is $367,000,
• with 20 years to pay off,
• and a fortnightly payment of $1,120.
• Variable interest rate is around 6%.
• Buy a rental property for $350,000 with rent of $400 per week
• Expenses for rental property. Interest $21,000pa. Rates and insurance $5,000pa. Other $2,000. Depreciation $6,250 pa
• Your average tax rate is 30%
The interest over the term of your loan will be $226,000. If you increase the repayment to $1,900 per fortnight being existing payment plus rent, you will save $128,500 in interest and take almost 11 years of the home loan.
But, you still need to cover the interest and expenses less the tax refund amount of $24,000pa. ($2,000 per month)
The issue here is risk, by borrowing more to buy an investment property you are risking it all on the capital growth of that property.
You have little wiggle room and in 20 years if it has not worked you’re done.
If instead you took the extra $2,000 per month and paid it off your home loan you would save yourself $140,000 in interest. You pay off you loan in full in 8 years and 3 months.
Now instead of paying the bank your usual fortnightly payment you use that money to invest.
You get a better result with less risk.