Case Study - Invest to Reduce your Mortgage
If you missed the last case study, we saw how Sarah invested sight-unseen in Auckland during a hot market, while living in the Philippines. Check it out here.
Today's story is different and I took a double-take when Wayne sent it through because it is so clever. Two young investor clients used a smart approach to property to shave an estimated 8 years off their own home mortgage. I love this because one of the most precious resources we have is time and we invest now to enjoy more time later. How many people say they'd like to pay off their house faster - Kirk and Arena worked out the numbers, found a team to make it a reality and took action. Inspiring stuff.
Warning/Disclaimer: please note that a) the mortgage repayment benefits are the clients own estimates, (we do not offer financial or mortgage advice) and b) we are not accountants and there are different rules for how investment debt and home debt is taxed so your results will depend on your circumstances. Please seek independent advice from your mortgage broker and accountant when considering a new investment strategy.
From Wayne Dickson...
My clients, Kirk and Arena are married, aged in their 20s, live in Auckland and have no children. They are a professional couple. Their primary reason to start investing was to acquire positive cashflow properties that could be used to pay off their home mortgage faster.
Our clients felt it better to learn about and focus on an area and build up local market expertise, they also had the desire to buy a property that could be improved, both to create equity in the property and provide better housing for families.
The property that I found for them was a three bedroom house on an 850m2 site, which will be able to be subdivided in the future. It needed a makeover and was tenanted at $185 per week.
Located in a quiet cul-de-sac near the popular lake area of Tokoroa, it is a good area to own rental properties and tenants tend to stay long term. I spoke with the tenants while the property was for sale and confirmed they did not want to move and were happy to pay a higher rent if renovations took place. Properties like this are in demand and we have seen again and again that tenants are willing to pay a fair market rent in return for a well presented property.
The vendor was also onside when I negotiated and agreed to sell to another investor with some equity in the deal as the property needed work. This made it easier for our clients to purchase and quickly improve on the property.
The property stacked up well and was ideal for our buyers: no structural issues and in a good location, yet available at a discount with value-add potential.
I also invest in Tokoroa and own on the same street, while my partner Fiona runs a local property management agency and is picky about where she manages. It's a combination that has worked well for iFindProperty clients in Tokoroa and the buyers trusted us to guide them through the process.
In this case I had advised on what renovations were required and what could be left "as is". Fiona was able to back that up with a rental appraisal so the client knew exactly what they would spend and what the result would be before they went ahead with the purchase. We spoke with the tenants and confirmed they were keen to stay on so with everybody's buy-in and the numbers looking good, the clients pulled the trigger on the deal.
Immediately post-purchase Kirk and Arena brought in a team and spent five days in an intensive renovation. They cleaned and painted the exterior, fully painted the interior, replaced light fittings, oven and the curtains. The flooring was already in good condition so that wasn't touched. The total cost was around $6,000.
The tenants left the address for the five days. Upon returning, they were very happy with the transformation and the neighbours also commented on how much nicer the house was. The tenants now pay $210 per week. Check out the before/after comparison below.
Before - this house clearly needs some work!
After - much better. Well done team.
Buying well and then renovating the property created extra equity that the bank made available and the client applied those funds to their personal mortgage as a lump-sum payment. Interest rates had dropped since the client last fixed their home mortgage, so it was swapping higher-interest fixed debt on their home for a lower rate. The client found that alone reduced their personal debt immediately by 2 years. The property now generates excess cash, which when applied to the home mortgage will shorten it by another 6 years.
That is a great result for our clients who have made a big step towards being mortgage free at a young age with a smart investment, lopping eight years off their mortgage. They have also improved the quality of life for their tenants and the overall look of the neighbourhood. Everybody wins.
Having the buyers agent and property manager (myself and Fiona) working as a team was the deal sealer for the clients. We both invest in Tokoroa and have extensive knowledge of the town, the local property market and good areas to invest.
Learn more more about investing in Tokoroa HERE.
To get in touch with Wayne and join his Tokoroa buyers hotlist click HERE.
I hope you enjoyed the article, we've got several more good ones in the pipeline. If you have an investing story to share we'd love to hear it so please get in touch.
Nick Gentle, April 2016