Taking a 20-year vs a 30-year bond when buying a property
People often ask why I take out a 30-year bond instead of a 20-year bond when buying property and my answer is always the same… Because there is no 40-year bond available.
They then usually inform me how much more interest I’ll have to pay if I take a 30-year bond, but they are forgetting that I am not paying the interest – my tenants are!
If you are going to live in your property forever, it could make sense to pay it off. But if you are buying property as an investment, you want the bond to be as long as possible.
Everything in property investment is about CASH FLOW. The less of your OWN money you use – whether for deposits or shortfalls – the more property you can own. That is also why you should always try to get 100% financing. Also keep in mind that if you take a 30-year bond, you’ll have 10 extra years to refinance the property.
Think about it… If you have R2 000 to invest per month, and your shortfall is R2 000, you can only own one property. If your shortfall is R1 000, you can own two properties. If your shortfall is R500, you can own four properties.
See where I’m going? If you have NO SHORTFALL, you can own an infinite number of properties! And I don’t know about you, but I’d rather have more properties being paid off slower than fewer properties being paid off faster.
But remember, your RESERVE FUND, aka your emergency fund, becomes super important as your property portfolio grows. You’ll need more cash if circumstances change and you can get this by refinancing and leaving it in your access bond. I usually suggest 5-10% of your properties’ market value.
So, don’t go for broke… go for 30, and you’ll never be broke!