Colin in Wellington has several rental properties and when I met him he had nearly $3mil of borrowing with the ANZ. He was making principle and interest payments and was very happy with his portfolio and his overall position. However when we started to review Colin’s situation, it appeared that he was neglecting to do any other than urgent repairs and maintenance to his properties. He would have liked to have money to replace carpet and to re-decorate and to generally maintain his properties to a higher standard than he was doing. His problem? The principle payments were strangling his cash flow.
I pointed out to Colin that making principle payments was not the only way to establish equity in the properties. If he redirected the principle payments into repairs and maintenance, this would increase the value of the property and increase his rental income whilst also providing him with better tenant retention. He also realised that money spent on the property is normally tax deductible whereas principle payments are not.
With this mind, Colin converted most of his borrowing to Interest Only loans. The cash flow improvement that resulted was over $40,000 pa. This means that Colin has nearly $800 every week to spend on maintaining and improving his portfolio.