Colin in Wellington had several rental properties and when we met him he had nearly $3m of borrowing with the ANZ. He was making principle and interest payments and was very happy with his portfolio and his overall position. However when we started to review Colin’s situation, it appeared that he was neglecting to do any other than urgent repairs and maintenance to his properties. He would have liked to have money to replace carpet and to redecorate and to generally maintain his properties to a higher standard than he was doing. His problem was that the principle payments were strangling his cash flow.

I pointed out to Colin that making principle payments was not the only way to establish equity in the properties. If he redirected the principle payments into repairs and maintenance, this would increase the value of the property and increase his rental income whilst also providing him with better tenant retention. He also realised that money spent on the property is normally tax deductible whereas principle payments are not.

With this mind, Colin converted most of his borrowing to interest only loans. The cash flow improvement that resulted was over $40,000 pa. This means that Colin has nearly $800 every week to spend on maintaining and improving his portfolio.

Case study 2

John had a lot of property in Wellington and wanted to buy more. Unfortunately for John, he didn’t know how much he could buy. When he saw a property that he was interested in, he made an offer subject to finance and crossed his fingers until he heard back from the bank. Even though the bank never said no, John had no confidence in his borrowing ability and when we met him was very reluctant to look at buying more property, even though he really wanted to.

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