Cam McLellan is a property investment specialist, the co-CEO of OpenCorp and the bestselling author of My four-year-old the property investor.
How to use your investment properties to pay off your own home
"A key to building wealth is to hold the greatest value of assets, using the least amount of your own money. This is where interest-only loans come into play, as they can free up your cash flow. You are able to use that money to hold additional properties and this provides compound growth on your asset base. You are then able to grow wealth faster.
I'll use an end goal example of someone wanting to pay their own home off in 10 years and not 30 years, which is the time it would take if they were to pay off a principal-and-interest loan using their job earnings only.
To pay off your own home in a third of the time, you are required to also buy two well-chosen investment properties. Let's say each investment property costs $600,000 and has 100% debt; banks won't lend at 100%, but for simplicity, we'll use these figures (in real life, your debt would be lower and so these are "worst-case" scenarios).
Remember, improved cash flow from interest-only loans, tax breaks and rental income will help you pay for most of your loan repayments. We'll assume the remaining mortgage on your home is also $600,000.
- Investment property debt x 2 = $1.2m ($600,000 each)
- Family home debt = $600,000
- Total property debt = $1.8m
Well-chosen property has the potential to double in value around every 10 years. Given this, to be debt-free you need to hold the investment properties through one full growth cycle of 10 years, then sell them.
This means your two investment properties will double in value from $1.2m to $2.4m during the cycle. If you sell them at this point for $2.4m, you incur capital gains tax (CGT) on half the profit (as you held the properties for more than a year). This will cost you around $300k at the top tax bracket.
The remaining amount is $2.1m. You can now fully repay the $1.8m debt on the investment properties and your home, leaving you with $300,000 extra and a fully paid-off home. I'm sure you'll think of something to do with the extra money!"