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The Aggressive Debt Reduction Strategy That Can Pay Off Your Home in Under 7 Years · The Follio Property Podcast

• 0:00
  You mentioned, you kind of loosely alluded to a potential scenario where someone could be aggressively paying it off and it might have a bit of pressure on their finances. There might be tight budgeting there. What sort of mindset is someone going to have to have if they do want to pay off that principal place? When I say pay off the principal place, I mean within that six-year period or seven or under 10. So quite aggressive in terms of the...
• 0:24
  25, 30 year. Under 10 is the target. We've been able to exceed that and often do, that five to seven year mark. We've had mine recently, we did it in three, but that was a really aggressive strategy. How'd you do that?
• 0:39
  Again, they took on a lot of debt to get there. And that's the kind of productive nature of this, right? You have to take on more debt to relieve debt. So a particular client of ours had a home in Geelong. They had close to a million bucks worth of debt on their prime and place of residence. We then purchased three assets for them. Their debt to income on that was at about two and a half. So the beauty of that, the debt to income was so low on their prime and place of residence, it gave them so much surplus capacity to buy investment properties.
• 1:08
  And so people listening like, okay, you're telling me that it's a debt reduction strategy. You'd have to take on all this debt to get there. Yeah, that's the nature of it because they were on track to pay that mortgage off in 25 years. Kids are at an age, you know, over the last five years where I think they've got three children, two, five and say seven, but there's no private school fees yet. All the large expenses that are coming are coming in, you know, three to five years time. So they don't want to be paying off all that debt when they're putting three boys through money.
• 1:36
  through private school, right? So the strategy was we want to be as aggressive as we can. We're making really good money. We're both back at work and we both don't want to work forever. So how quickly can we do it? So the strategy was a five year strategy to get that down to zero as quickly as we could. We certainly didn't anticipate, we're gonna get the full million in five years, but that was the play.
• 1:56
  Purchased one in regional Western Australia, so Rockingham, that one there for 350, recently sold it for 700. So after fees, there's 300,000 off the table that you've taken off the primary place of residence. Bought another one in Perth, in Maylands, purchased that for 650, that is now on the market and looking to get close to one one.
• 2:19
  So that will do a fair bit of the heavy lifting. And the other asset they bought and sold and traded within their own market of Geelong. So we assisted on the purchase side, but it was a renovation and flip. So they were able to do that in 18 months and extract another $350,000 from that. So once mainland settles and sold, they'll actually be more than debt-free. But understand, in reality, it's not as simple as, you know, I made a million dollars, therefore I pocketed that. You've got to take away your capital gains. You've got to take away your sales costs.
• 2:49
  So they'll still probably owe $100,000 on that mortgage, but a large portion has been knocked off in a three-year period. So pretty significant. Obviously fortunate with some market conditions there. Their Rockingham property pretty well doubled in three years. Mainlands has done the same with some works and value add, as we spoke about on a previous episode. All three strategies endorse the value add, so we weren't just relying solely on the market. And they did one in their own neighbourhood and Australia.
• 3:15
  Josh the client is quite skilled so he's able to do a lot of those works in Geelong himself so there's a perfect example and and the beautiful thing is having a meeting with them recently was you know at 12 18 months ago they nearly tapped out of the strategy because the debt their debt to income got up to about six and a half times which you know is significant when we didn't potentially foresee the interest rate rises so it was all well and good three years ago to take on these properties when interest rates were at four percent
• 3:45
  they get to six and a half, that cash burn on a daily basis become real. So our yearly meetings went to six monthly meetings, which went to quarterly meetings, which pretty much catching up monthly just for them to hold on and not sell. So there is ways, and this is what, it's looking at various scenarios. So we sat down with their account and their mortgage broker
• 4:06
  They all had prime sites in good markets and it was prematurely too early to sell. So we restructured some loan to be able to pull out some equity to put that in an offset account, which essentially cash flowed these assets. So does that make sense? Yeah, definitely. And I think listening to this scenario, when you're looking, you gave good examples there of some properties that you bought.
• 4:30
  selling them off or they're on the market, flip some as well. In terms of investment debt, should the strategy be to get it to a point where you sell or should at any point in a rising market you refinance that? I appreciate obviously you're not a mortgage broker, but should there be part of a strategy in a rising market where you refinance, take some of that equity out and put it onto the principal place? Or with this type of strategy, are we looking at
• 4:56
  letting the market do the heavy lifting, hold on, and then look to just sell, then release the capital from that onto the principal base. Yep. Everything's circumstantial. So the play there was you've really got to give the asset time to grow. And if we had to sold it mid-strategy a year and a half ago,
• 5:11
  their debt on their primary place of residence now in Geelong would be five to 600,000. By waiting another 12 months, it's now gonna be 100,000. So that is life-changing for them. And that takes some risk appetite. It takes them listening and sticking with the advice that we gave. So everything's circumstantial. So when we look at the fundamentals of the markets they were in, and this is where we always revert back to the data.
• 5:40
  I'm not talking on personal bias is what my belief is on the Geelong market or the Adelaide market or the Perth market, Rockingham for instance. It's on the data. And there was clearly a runway in all those markets and we believe that they were still very early in the cycle. So the heavy lifting in terms of that capital growth, more was still to come than it already happened. So the advice was clear, we've just got to find a way to hold on to these assets. Yeah.
• 6:05
  for at least another six months. And we're not going out there saying we're gonna hold these for another three years. It's like, let's reassess in six months, but we're not selling them now, because in six months, and that next six months, the portfolio increased collectively, you know, another 40 or 50%. Okay, that's fantastic. How are we positioned? How's your cash flow?
• 6:22
  Are you sleeping? That's your stress levels. Are you managing this? And once we refinanced, we put $100,000 out, put that in a spending account in their offset, but they could still access it. Just took all the pressure away. Because it was literally, they're going paycheck to paycheck, and they're going, well...
• 6:37
  Our boys are growing up. They eat more than they've ever eaten. We want to take them to holidays and we want to do things and we can't because we're so burdened by these mortgages. But they didn't realize it. They felt like they were probably letting themselves down by having to remortgage and take equity out of a property. They felt that was a failure. And I said, no, that's not the failure. The failure will be when you're forced to sell.
• 7:00
  when you don't have to. And they just probably didn't realize that that leverage was there to pull. When I say leverage, I don't mean the sense of debt, but you gotta look at levers. What can I pull? What can I sell at times? What equity can I draw upon? What value add can I make? So what's our options? And in this scenario, it was a simple refi. Pull $100,000 out of the portfolio, which that $100,000 end up making them another four or 500. So return on cash, and they didn't spend that $100,000. They spent like 30 or 40 of it. But having that safety net that there was money and they could live a normal life.