Why you should always buy a property on loan
Buying property is in no doubt one of the best investment strategies around. Some of the reasons:
- They are relatively stable in prices and usually go up in value.
- If you invest right, they are always net cash flow positive.
- You can depreciate their value over a period of 27.5 yrs to save on short term capital gains and then only pay a long term capital gain when u sell them.
But one thing that some investors do that really bothers me is buy property in cash. This, in my opinions is one the worst strategies. Reason is quite simple. When you use cash, you lose on opportunity cost.
Opportunity cost is what you could have made on that money if you hadn't used it up to pay for the home. For ex. If you buy a home for 125k and pay all cash, surely you wont be paying any interest but you won't have access to this capital any more. Instead if you paid 25k down payment and instead loaned remaining 100k at around 4.5%, and invested your 100k in index fund that pay 7 to 10% lond term, you would be making a profit of atleast 2.5% on the same money while maintaining your liquidity.
Loans have some other benefits that I will discuss in one of the future posts but this is something that's very important to grasp if you want to invest your money smart.
Hope someone finds this information useful.
