Ben Everingham, Pumped on Property
To pay off your mortgage in 7 years requires action. It is indeed a very aggressive approach. You may choose to turn this into 10 years, or even 15 years. Nonetheless the strategy is the same and it does take action and responsibility.
Why it is important?
Owing your own home debt free gives you a financial security and stability. This allows you to make completely different decisions in life such as take a lesser paying job, travel, start a business without the fear of having a huge amount of debt. It gives you different choices and opportunities in life and allows you the freedom to make some decisions without the burden of major debt.
Both my grandparents ended up on the pension. One owned her own home outright and the other didn’t. I have seen the care they have been able to receive later in life and that one decision has resulted in completely different lifestyle’s for them.
How much money will you save over 30 years?
Many people don’t realise the compounded effect of paying off their mortgage sooner. Let’s look at an example.
Say you owe $400,000 on your home loan. It is a 30 year, Principle and Interest loan with an average of 5% interest rate. Over the next 30 years the property will cost you an extra $370,000 in interest. If you cut this period in half to 15 years, or 10 years or even 7 years the savings you can make can result in hundreds of thousands of dollars that could be spent on travelling, purchasing an investment property to further your financial position or putting your kids through private schools.
Real estate is a vehicle to achieve a better future for ourselves. It is one of the top performing long term asset classes in America, Europe and Australia. Those people that invest property end up doing better than those that try to save their way to financial freedom.
Three different options on how to achieve this
All these options involve taking risk or reducing your lifestyle and are based on a mortgage of $500,000. Some people will have a mortgage which is double this and some will have less but the idea and strategies you can use to pay off your mortgage remain the same.
- The Hard Work Option
This option requires the most amount of effort and will require reducing your lifestyle. It involves paying off your mortgage and reducing your debt from your own income.
For most Australians this is not a viable option, as it requires a large amount of earnings and an extra $70,000 – $80,000 of free cash flow each year but for those of you with this earning capacity and additional income it is an option to pay off your $500,000 mortgage in only 7 years. As always it will take hard work and commitment.
- Hard Work and Investing
In this scenario there two parts. Part One requires you to do a bit of the hard work and continue to pay down your mortgage.
Part two involves purchasing an investment property that will do the rest of the hard work for you. Let me explain how this can happen.
Say you are looking to buy a $600,000 investment property in the market place. If you can pick up a property 10% below market value you have already started your return from day one.
Assuming you have picked up a property in good condition, which is ready to tenant the next step would be to manufacture some value. This could include converting an extra bedroom, adding a bathroom or renovating to add 20% value over 7 years.
The final step is about timing the market and capital growth. The aim is to achieve 40% capital gain over 7 years from your investment property. As we know 75% of population growth and job growth in Australia is in Sydney, Melbourne and South East QLD. As a result, this final stage will only really work in these major capital city markets as these are the only markets who have consistently achieved such results in capital growth.
So, we are now looking at 70% growth on your original investment in 7 years. 10% buying below market value, 20% from manufactured growth and 40% from capital growth.
A 70% gain over 7 years results in your property now being worth $1,020,000. This is a gain of $420,000. Now you need to take into account your entry, exit and ongoing costs of owning real estate. There is also the cost of your renovation. If we look at costs of $150,000 you are then looking at a pre-tax gain of around $250,000 – $270,000.
If we go back to your original home loan of $500,000 and take the $270,000 gain from the investment property you are left with a loan of $230,000 to pay off from your earnings. This amounts to $46,000 per year or $884 per week. This will still take a lot of hard work, commitment and reducing your lifestyle expenditure. Many Australians won’t have this as extra income but there are things you can do to change this. For example; start a side business, increase your skills or increase your income during this 7 years. I do believe it is possible but it is certainly a challenge.
- Purchasing Two Investment Properties
In this option you will rely on real estate to do all the hard work for you. It is basically a rinse and repeat of the investment property purchase in option 2. This can equate to a total gain of around $500,000 over 7 years, allowing you to pay off your mortgage and live debt free.
All of the example above require some levels of hard work, taking on some level of risk and all involve a large level of commitment and action.
Ben Everingham runs a highly experienced buyers agents based in Queensland, which is registered with the REIQ. Over the last 8 years Ben has bought over $8 million dollars worth of investment property and now lives on the Sunshine Coast with his family. Ben and the team at Pumped On Property have supported their clients to buy over $130,000,000 worth of investment property over the last three years.