I've owned a property for two years and would like to build my portfolio by buying more property. I have extra money on a monthly basis that I freed up from getting rid of most of my debt.
Should I pay off my current property as soon as possible and use it as an asset to borrow money from the bank to purchase future properties? Or should I use the extra money to pay off my car loan? Or should I rather invest the extra money?
Firstly, congratulations on reducing your debt and being in a position where you are able to invest. You are now financially stable, and with this mind set you will no doubt soon build an enviable portfolio.
So, you have some extra cash every month and you want to know what the best thing to do with it is?
Settling expensive short term debt
We know that short term debt tends to be very expensive. If you owe R20 000 on a credit card and pay interest of 20 percent on it, it makes sense to cash in your money market funds where you are only earning six percent interest and pay off your card. This way you score 14 percent (and it?s tax free!).
Should you pay off your bond quicker?
A bond is a long term debt and as such much cheaper. You could be paying prime for it (and these days prime can be negotiated for vehicle finance too), which is currently 10 percent. Yes, a person could still score four percent if they pay the extra cash into their bond instead of investing it in their money market account (as per the example above).
But what about investment returns other than cash?
Should I invest in property?
If you wanted to use the existing property as security (once the bond has been reduced to a certain level) to purchase another property, just be aware that the current cost would again be 10 percent (maybe more by then) and a rental income is unlikely to cover that in full.
According to the ABSA House Price Index, house prices have started to recover from their recent declines. Now certainly looks like a good time to think about investing in residential property. In the short term we may be looking at an upward trend in house prices (unlike listed property which is forecast to grow by inflation plus six percent for the next five years). The JSE ALSI is also predicted to be around inflation plus 6.5 percent for the next five years.
However, if you are looking at long term investing, for example towards your retirement, you need to focus on long term trends.