Pay off your investment property or invest in equities?
Andre has two rental properties with total mortgages worth R360 000. After paying the bond and levies he has a net income of R2 500 a month.
“Should I use my net income of around R2 500 to settle the bonds by increasing my repayments or invest the money each month in equities?” asks Andre.
Maya replies: There is no right or wrong answer as there are various factors to consider.
You did not mention if you have other equity investments.
If not, it may be a good idea to diversify your investment portfolio.
Consider a two-pronged approach of increasing your bond repayments by R1 000 and investing R1 500 into equities.
Currently you have about 13 years left to pay off your mortgages. If you increase your combined payment by R1 000 a month you will pay the mortgages off in just under ten years. As your rentals increase you can use this to increase your mortgage payments.
If you invest R1 500 a month into equities and the markets deliver a long-term average of 12% a year, you would have R350 000 saved in equities in 10 years time and a property portfolio providing you with a passive income.
Banking on equity returns
Another option is to invest the full R2 500 into equities in the hope that it will outperform the interest you are paying on your home. In five years’ time you would have R200 000 which you could use to settle the mortgages.
My hesitation with this strategy is firstly you need to have a 12% return from the market and although likely it is not guaranteed. Secondly interest rates are likely to go up and that may put pressure on your ability to fund your mortgage repayments if you are committed to investing in equities.
If we had a crystal ball the answer would be fairly straight forward but a diversified approach makes the most sense.
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