**Reply:** 3

**From:** Terry Avery

Look at it this way. The more of your own dollars that you contribute to the

IP the lower your return. For example buy a property for $200,000 with no

deposit (using equity in own home?) and has a cap gain of $50,000

P&I payments of $10,000 over say five years

Return is 50,000/10,000 x 100 = 500% over the five years or 37.97% p.a.

compounding interest. Yippee, what a return on my money. Had the principal

repayments been higher, say $15,000 then the return would be

50,000/15,000 x 100 = 333% , or 27.23% p.a. compounding, so you can see the

more principal you put in the

lower the return on your money.

IO payments of principal is nil, OK calculator can't work it out with zero

so let's say we use a dollar as a deposit

Return is 50,000/1 x 100 = 5,000,000% (actually if you put nothing in then

the return is an infinite %) or 770.55% p.a. compounding

Now which return on your money would you rather have, gee tough one there!

Going IO you can use the principal payments to buy another IP so the way I

see it is you have to look at the return on the money you are putting into

the deal. Every principal payment has to be looked at in terms of what

return will the money give me. The more I put in the less leverage I have

and the lower the return.

Of course some people's sleep factor is affected if they don't pay down the

principal but if you look at it another way, when you buy a property you are

buying an option to sell the property at a higher price at some point in the

future. It is not necessary for you to own the property outright in order to

exercise the option to sell but when you sell then the profit you received

gives a higher return the less of your own money you put in. It has taken

ten years for my wife to grasp this but now that the penny has dropped she

is able to explain it better than I can.