Yesterday I woke with a nagging thought in my mind. All of these years I’ve been thinking about money and how to use it incorrectly. Were my thoughts right?
Up until now, I’ve always been pretty careful about money, I have no debt, we’ve fully offset our mortgage, got some savings to cover us for a rainy day. But I still am not really comfortable. I want to do things and those things need money. What I’ve always done up until now is to save up and pay for them. I’m starting to think that this is the wrong tactic.
If I save money from my salary, then I will have paid tax on them and gained a little interest from having the money in the bank. However, inflation will also be eroding the buying power of this cash and I suspect that for every £100 I wish to save, I will have to earn £200, or more if I am doing a long term save to buy something big.
What happens if I borrow the money? The money I borrow will be tax free, instantly available. The problem comes in paying it back. What I need to do is to earn money to pay back this loan. So what I really need to do is to find ways of increasing my cash flow to pay for the things I want.
Why don’t I get a mortgage and buy a rental property? The rent I would charge would then pay for this mortgage, any management charge (outsourcing is great remember), and the cost of the original loan for my Ferrari (or whatever – OK let’s start small and say “holiday”). Plus any tax that might be owing, but given that this is more business like, I suspect I can offset lots of things to minimise the tax take.
What’s the worst that can happen?
The property drops in value – I’m taking rental so the value is pretty meaningless until I need to sell. Even if I do want to get rid of the property, the bank can repossess – do they have a claim on the balance?
The property becomes vacant – hopefully not for long, but how could you cover the shortfall? Do the same thing again?
What’s the best that can happen?
I build up enough cash flow to pay for the things I really want – I build up enough property to pay for my retirement, I don’t need to worry about pensions – I have enough assets to pass onto my children to help them through the next century.
Once a portfolio has been built up (to a level I do not know) defaulting the loans stops being your problem and becomes one for the bank – they have invested heavily in you.
What do you think? Have I got the basic idea all wrong?