Debt vs investment property: A financial dilemma

In this episode of the Jaco2 podcast, we unpack a common financial dilemma: should you repay debt or hold onto an investment property for long-term gain?

The discussion is based on a reader question and explores the decision of whether to sell an investment property to settle a home loan, or to retain it for rental income and capital growth. As with most financial decisions, there is no one-size-fits-all answer – the best choice depends on your personal financial situation, risk tolerance, and preferences.

In the short term, the cash flow impact of selling versus keeping the property may be fairly neutral. However, over the long term (10–20 years), retaining the investment property is often more beneficial.

Once the bond is repaid, the property can generate ongoing rental income, while also increasing in value over time, helping to build long-term wealth.

A key step in this decision is properly evaluating the investment property. A property is generally considered a good investment if its total return – net rental income plus capital growth – exceeds at least the interest rate on the debt or better, the return from alternative investments.

Read: Retirement annuity top-up or debt paydown? Decision framework that works

For example, a R1 million property generating R60 000 in annual net rental income (6%), combined with 5% capital growth, delivers an 11% total return.

This should be compared to your bond rate or alternatives such as money market investments earning around 6%-7% or a unit trust earning between 10%-14%. Ideally, this type of analysis should be done before purchasing the property.

That said, financial decisions are not only about numbers. Qualitative factors also matter. For some, the peace of mind that comes with being debt-free outweighs potential higher returns. Others are comfortable managing property and prefer the growth potential it offers.

You also need to consider the risks involved in property investment. These include vacancy periods where no rental income is received, as well as the challenges of property management – especially for those with limited experience or those approaching retirement.

One way to reduce risk is through diversification, for example by owning more than one property instead of relying on a single rental unit.

Lastly, it is important to consider structuring your finances correctly for tax efficiency. Ideally, debt on an investment property should be linked to that property, not your primary residence.

This allows you to deduct interest expenses against rental income – an important tax benefit that is lost if the loan is tied to your home. Professional financial advice is highly recommended, particularly when making these decisions close to retirement, where reducing or eliminating debt often becomes a priority.

Read:
Retirement funds vs property: Which is the better investment?
Property vs a diversified investment portfolio: Let’s talk tax and returns

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Watch a previous video of ours on buying a property (with English subtitles) here.