@ Luis – this is still a ‘truism’ … it’s the same today, whether you buy a $100k asset for cash or a $1mill. asset for $900k down.

It’s just that, assuming the same 7% compound growth rate on both, with one you will be $100k richer, and the other $1 mill. (less costs) richer, in just 10 years

This has been my approach now for several years.

Each time though, there is a period of internal strife because culturally i have been raised to believe, “you are what you own not what you owe” and getting more debt goes against that certain core upbringing.

Fortunately, I quickly move on…and pull the trigger.

@ MoneyBeagle – if you never sell, there is no risk of downturns

@ traineeinvestor – there is nothing intrinsically wrong with interest-only mortgages; it’s the level of starting equity that you hold that determines your risk, under your equation. Even then, it’s moot if you don’t sell (as long as your property is cashflow positive).

Having lived through a couple of downturns, I have to agree with Money Beagle here. Your approach makes perfect sense when it comes to maximising the upside but carries a degree of risk.

Those interest only mortgages are typically for short terms (3-5 years depending on where you live) and need to be rolled over on maturity. A combination of lower valuations, higher interest rates and/or few vacancies can be a fatal combination – as happend in many places in Hong Kong 1997-2003, Australia under Keating, the US in the early 1970s and the GFC, several countries in Asia in 1997 etc etc.

My own approach is to go for long term (20 years is the best I can do here) P+I. I may not be getting the best bang for my buck on the leveraging and have to put down a bigger deposit to get positive cash flow, but I sleep better at night knowing that each month that goes by makes my position a little more secure.

Cheers
traineeinvestor

In China you have to put down 30% for your first mortgage, 60% for the second one, and then there’s no further. From then on , you buy property 100% cash. If you offer property as security on any other form of loan, it has to be 100% free of any other debt burden – so you cannot even use a paid property to secure payments for deposits on two other properties (unless you fraudulently misdeclare the purpose of your loan).

And then rental income is generally less than 1% of the capital invested. (RMB 1mil of property will give you RMB 2 500 per month rent residentially, or RMB 5 000 odd if it’s a business property).

The capital growth, however is phenomenal. Our apartment’s value doubled in a year, if comparing it to the price that a similar one just above us sold for recently.