FinancingProperty Investment Tips

Why a 30-Year Bond is Better than a 20-Year Bond

30-year-bond-better-than-20-year-bond

 

THE 30s ARE THE NEW 20s

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Anonymous

We have many paradigms or sets of ideas that are not accurate. When a paradigm is inaccurate, a paradigm shift is required. In other words, we need to change our approach or sometimes even our underlying assumption about the topic at hand.

An inaccurate paradigm that many people have is about debt. Most of us are taught that debt is bad and that we should work any debt we have off as quickly as possible.  But, all debt is not bad, and this paradigm is not necessarily applicable to good debt. I define good debt as the debt against an asset that appreciates in value or the debt on an asset that generates or will generate a higher return than the debt’s interest rate.

In one of our previous articles, The Only Time 30 Is Better Than 20, I refer to how people often ask why I take out a 30-year bond when buying property, and my answer is always the same… Because there is no 40-year bond available ;-).

So, my personal benchmark and mantra for property investment is to buy as many properties as I can and pay them off as slowly as I possibly can as long as the return of the property (the capital appreciation and the net rental yield) is higher than the interest on the loan.  A bond with a longer duration also enables you to pay less in tax as per our previous article, “Be Thankful I Don’t Take It All, Cause I’m the Taxman…”.

Keep in mind that if you take a 30-year bond, you’ll have 10 extra years to refinance the property. So, when you are following a refinancing strategy to build your property portfolio, you want your bonds to be as long as possible.  When you have additional funds available, you can always make use of your access/flexi bond to pay less interest as per our previous article, Start Using Your Access Bond Today.

I don’t know about you, but I’d rather have more properties that I’m paying off slower than fewer properties being paid off faster! After all, more is more in property investment!

Note: When you take this approach, it is imperative to have a strong reserve fund in accessible cash as changes in interest rates will affect you significantly more because you have more debt that is being paid off slower. Refer to one of our previous articles, To Fix or Not to Fix your Interest Rate, That is the Question where we discuss the effect that interest rates have on your mortgage bonds.

Read the entire article in the April Edition of Real Estate Investor Magazine.

 

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