Michelle is an investor who is currently paying off both her own home and one investment property.
Her question is related to priorities. She’s wondering if she should: (a) sell her own home so her family can downsize slightly and reduce their mortgage, which would free up some cash to go and get another investment property; or
(b) keep things going as they are, and eventually buy another investment property when they have more savings?
I’m so glad Michelle sent this burning question this week, because I get a lot of queries about investment properties vs. principal place of residence.
If you’re even a little educated about property and wealth creation, you’ll understand that your own home is essentially a “bad debt”, because it’s a debt that can’t be deducted at tax time.
On the flip side, property investment loans are a good debt, because they help to reduce the amount of tax you pay.
Therefore, it makes sense to minimise your bad debt – whether that means selling it to eliminate the debt altogether, or reducing it by paying it off faster.
Michelle wants to know the best path forward but before I can answer that question, I need to ask her something first.
My question to Michelle is…
- What are you trying to achieve?
- Are you wanting to actively build a property portfolio?
- Are you wanting to downsize because you’re struggling with mortgage repayments?
- Are you in a negative financial position and you’re finding your finances all too hard to handle?
To create a clear path going forward, you need to revisit your strategy and understand what position you’re in now and what you’re trying to achieve.
To give you an example of one strategy you could use in order to move forward with your finances, is to move out of your home and list it on the rental market.
I have many of my students who have adopted this strategy. By transforming their own home into an investment, they turn all of that bad debt into good debt thereby accessing tens of thousands of dollars worth of tax deductions each year.
They go and rent another nice home somewhere desirable, but more affordable, so that their outgoings are lower overall. They find that their borrowing power goes up as a result, meaning they’re able to buy more investments. In 2-3 years’ time they plan to move back in.
Now, this doesn’t work for everyone – you can be very emotionally attached to your own home, and the thought of renting it out to someone may not sit well with you.
Sometimes, you may need to take that step back of selling your own home in order to eventually take a step forward. If you need to get rid of your big mortgage to help you sleep better at night, then maybe selling is the right move.
Broadly speaking, it often pays to focus on paying off your ‘non-deductible’ debts (such as your own home) as a priority. But if you do this at the expense of growing your portfolio, then you may miss out on profitable opportunities that grow your long-term wealth.
That’s why the right move really depends on what you’re trying to achieve. If you find you’re stuck and you’re not sure of what to do next, don’t feel like you have to make the decision on your own. We have a team of experienced coaches on hand to guide you in the right direction, so if you have any questions you can contact our team here.
We love getting your Burning Questions each week, so please click here and submit your question if you’re unsure about what to do. It can be about anything to do with property investing: where to buy, what to buy, how to buy, or even strategies to maximise your current investments.