Property Accountants in Hamilton, chartered accountants Interesting read I received in my emails this morning 🎉
Why you should be paying Principal on your Rentals!
Long term, do you want Passive Income from your rentals?
What is the easiest way to achieve this?
Obviously that is easy - it's to have no mortgage. One of the easiest strategies to achieve passive income from your rentals is to make Principal and Interest repayments, and long term pay off the mortgage. Sacrificing a little bit now, saving a little harder, and budgeting a little more, can have huge benefits later on and can really help to set you up for your retirement.
How is paying Principal possible?
It’s human nature to spend all that you have available. So if you earn $800 in your hand each week, the $800 per week will generally disappear. Often people don’t know where their income goes, but because it's there, they buy little extras they don’t really need. But if the net pay was only $750, you would probably still survive. You might have a few less drinks, lunches and luxuries, but this would force you to manage your money better and adapt to having slightly less. So, working on this principle, if you were to set up an AP for the $50 per week to go towards your rental to pay down some principal, then you probably wouldn't even notice the difference of a little bit less in your spending account each week.
Over 10 plus years, the small principal repayments will add up to a lot. You start saving interest on the loan your have repaid, so slowly the interest gets less and less. Then you have more cash free, so can repay more in principal. So its all about getting into this winning cycle.
Your available cash Increases
If you just allow the pay rise, finished loan repayments, or tax cut money to sit in your spending account, it’s going to disappear. On paper you are earning more and have more cash, but you will naturally adjust for this and it will disappear on unnecessary extras. So instead:
If you get a pay rise: Work out the extra pay and increase the AP to your rentals or home loan to pay off the mortgage quicker.
If you finish paying off an HP or car loan: Set up an AP for the same amount to your rentals or home loan to pay off the mortgage quicker.
On 1/4/18, if tax rates change: Work out your extra net pay, set up an AP to your rentals or home loan to pay off the mortgage quicker.
But, but, but………… the “tax benefits”
I hear this comment all the time. Yes, it is a slight benefit to pay off your personal home loan quicker. But most of the time the money just gets wasted and doesn’t go to either the home loan or the rental. Also the tax benefits are often tiny. I looked at this in more detail in my 21/3/17 blog, and on a $500,000 rental loan the difference in tax was only $292 per year approximately over five years!
Hopefully this helps you to pay off your rentals and obtain passive income long term!
Coming into Coombe Smith offices to see us? There is now 2 hours FREE parking available on both sides of the road outside our building. Thank you to Hamilton City Council.
Kind regards
Ross Barnett
Principal
Coombe Smith Chartered Accountants
Hamilton Branch
Normal Office Hours: Monday - Friday, 8am - 4pm
Phone: (07) 839 2801
Fax: (07) 839 2802
Level 1, 851 Victoria St,
PO Box 9317, Hamilton 3240
www.cswaikato.co.nz
This may be a 'Tax Advice Document' subject to non-disclosure rights under the Tax Administration Act 1994. You should not disclose the contents to any party without first obtaining professional advice. Disclosure may void the non-disclosure right. This electronic mail message together with any attachments is confidential. If you are not the intended recipient please email us immediately and destroy the email. You may not copy, disclose or use the contents in any way. The contents and attachments, may contain views or opinions that are those of the sender and not necessarily the views or opinions of Coombe Smith Hamilton LP. Coombe Smith Hamilton LP accepts no responsibility for changes made to this e-mail or to any attachments after transmission from Coombe Smith Hamilton LP. Thank you.
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Property Accountants in Waikato We specialize in rental property accounting and help you to reduce tax legally
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