Invest & Enjoy a Mortgage-Payment-Free Life while Paying it off
Path to the freedom of mortgage-free life by following simple personal finance & investment steps.
Many of us in our thirties, forties, and even fifties often wonder if there is a better way to enjoy life while being in the usual day jobs and paying bills and mortgages.
Well, I often did and still do!
This quest has led me to various kinds of literature like Rich Dad Poor Dad, Dave Rasmey, 3+1 plan and FIRE Movement blogs (Financial Independence Retire Early). While everyone has their own ideas and opinions, it is key that we adapt to our own circumstances. So I tried to combine some of these intriguing ideas and experimented to see what works for me. I hope it provides some inspiration for you as well.
A positive and steady cash flow from some passive income is the key to have a mortgage payment-free life journey while paying off your mortgage(s).
What this even mean
- Passive income means that the payment is coming from sources where your time investment is minimal (so not your day job).
- Steady cash flow means that cash/income is coming in for 10 or 11 months each year.
- A Positive cash flow means the money in your account after any liabilities paid off.
- Mortgage payment free means that all your mortgage is paid entirely by your passive income.
How it works
The income generated by the investments after usual expenses (finance or other) should be more than the monthly mortgage payment.
This model may not work for countries with a high-interest rate, high property price, and low rental return. Like any other investment, a proper calculation of yield (return before tax in this context) is essential. The two basic models to calculate the yield are:
A yield of 6% is necessary for a starter; however, you want to achieve a 9+% yield for a mortgage payment-free life. As a small investor with a mortgage, the cost-based model with a 10+% return will be a good position.
How to achieve it
There are many ways passive income can be generated; however, a great way to build cash flow and wealth at the same time is through properties. The book called ‘3+1 plan.’ provides a great step-by-step guide for building a rental property portfolio. This plan means that 3 rental properties and one residential property are sufficient to sustain a simple family life.
I will delve into the details of building the portfolio in future articles. For now, please note that it took a good few years, stable income, great savings-rates (note FIRE here) and appraising property values.
The goal here is to achieve interim mortgage payment freedom.
A plan with two rental properties is probably sufficient to enjoy today’s financial independence (so it is a 2+1 method). The important point is not to over-leverage your investment-properties. To achieve this goal, you may require to have about 40% ownership of each of them.
Well, to get to the 40% may take few years of deliberate mortgage over-payment (a concept everyone should be aware of), but the result will be awesome.
Here is an indicative summary:
If you observe the calculations above, the two rentals' net income covers the three mortgages' cost, which essentially means no mortgage from your day job.
The low-interest expense for the rental mortgages is mainly due to the historically low-interest rates at this moment. So it is important to build equity with the disposable income generated by this model and additional savings from other day job income.
There will be additional expenses if you choose to employ property management companies and also income tax implications. The indicative yield calculations are (as the assumption is that there are mortgages to pay, so cost-based yield model used) :
This is how mortgage payment freedom can be achieved.
Any such investments require a good level of safeguards, and here are some ideas:
- An emergency fund for the family: 3–6 months of expense before getting to property investments.
- An emergency fund for rental properties: at least 3 months' worth of rent.
- Insurance: Landlord insurance along with the rent guarantee where possible.
- Maintenance & Care: Having a landlord cover, emergency, and repair contract with a renowned provider.
- Leverage: Keep the equity on each property above 40% as minimal to get a better mortgage deal.
- Avoid crazy ideas: Some people (in social media) advocate buying properties with zero or 10% down. These snake-oil salesmen seem to have some magic sauce. Avoid!
What about the regulations
There are some essential regulations that landlords needed to adhere to, and these are different for different countries. For example, in the UK, Gas safety certification is a must-have, and also electric certification on the way. For shared rentals, various regulations are applicable.
Be aware of the Taxman
Due to the housing crisis, the government may put some taxes on such investments. So please check your countries tax laws. For example, in the UK, surcharge stamp duty (like a registration fee in other countries) for additional properties. As a general rule of thumb, the rental properties' income is subjected to regular income tax, and depending on your tax slab, it could be substantial.
Owning rental property also comes with its fair share of responsibilities and some pitfalls, so it may not be for everyone. It is important to continuously pay off the debt and creating a debt reduction snowball. Whatever approach you follow to build your portfolio, the focus must always be on paying off debt as soon as possible.
This model can make the life journey with a mortgage a bit enjoyable with additional disposable income.