If you are a homeowner, there will come a time when you need to decide whether to pay off your current loan or invest in another property.
If you are a few years into your home loan, odds are your circumstances would have changed a lot since you first acquired your home.
It’s likely you’re earning more money and therefore have some extra funds in the bank.
Good debt vs bad debt
By this stage in life you should be savvy enough to be making sound financial choices.
But if you have accumulated bad debt, you need to sort this out before answering the question “should I pay off my home before I buy an investment property?”.
Bad debt refers to debts that diminish your cash-flow and are detrimental to your wealth creation goals.
Good debt on the other hand, is debt that helps you purchase wealth-building assets, where the costs incurred are tax-deductible.
These assets grow in value and generate income that financially benefits you and stops you from incurring the debt e.g. an investment property.
Good debt should mean your overall financial position is better as you can leverage the asset purchased.
It’s important that you don’t get good debt and bad debt confused – particularly if you’re looking at paying off your home loan or investing.
I recently had a client in my office that was of the opinion that all debt was bad.
After doing some cash-flow modeling, I was able to demonstrate that with the correct property investment strategy my client could retain more of his hard-earned income - which he could use to fast-track the reduction of his bad debt.
Without the good debt (debt from purchasing the investment property), his weekly cash-flow was significantly worse off.
Understanding the difference between good and bad debt is key to making your decision.
Use additional funds and assets wisely
By working towards other investments while paying off your home loan, you will start to see a number of short and long-term benefits.
For example, you may find that you are now in a better position to divert more cash-flow to your bad debt, pay down your loans and also make extra contributions to your super fund.
By doing so you will slash the overall interest and cut your loan time down.
You’ll also be boosting your retirement nest egg, ensuring you have a secure financial future.
Leverage your home
Now it comes to decision time.
If you’ve been smart and taken the above tips on board, your next move is to leverage the equity in your home to expand your assets.
Equity is the amount of money in your assets that you actually own after deducting any debt against the value of those assets.
This equity allows you to leverage into investment strategies that you may not have been able to do without the access to these funds.
As demonstrated above, investing is an example of good debt as you’re using funds to purchase a wealth-building asset.
Using the equity in your assets gives you the ability to invest and leverage into a wealth creation strategy that would not be possible if such funds didn’t exist.
Remember, just owning a property that you rent out does not guarantee the investment will make a positive contribution towards your wealth creation plan.
You need to fully understand the type of property and investment strategy that will deliver the financial efficiencies to enable you to comfortably own multiple properties.
To discover more about the strategy that will best serve your own individual needs please call 1800 600 890 or email email@example.com to book a strategy session.