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Debt Recycling with IP's

Discussion in 'Property Finance' started by albanga, 2nd Jun, 2016.

  1. albanga

    albanga Well-Known Member

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    Hey Experts,

    Just trying to get my head around how you debt recycle using IP's. I understand the principle but unsure how it would look in practice.

    If you purchase an IP that is negative cashflow then your income would be required to cover the shortfall so you wouldn't be able to pay down the non deductible debt?

    Or does it only work if the IP's are positive OR can you borrow to pay the interest as well?

    OR am I missing something simple because I'm thinking about this at 10.30 at night :p
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes a negative cash flow property could mean recycling in the wrong direction.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    However, you can still debt recycle by borrowing to pay for as much of the IP expenses as you can. This will put more money in your pocket and more to pay down the PPOR debt quicker - if still negative it will be delaying the repayment but the debt recycling lessens the effect.

    Even where a property is largely negative you can also recycle by selling it and using the proceeds to pay down the PPOR debt and reborrowing to buy another property.
     
  4. Beelzebub

    Beelzebub Well-Known Member

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    If I have a 10k non deductible personal loan can I borrow another 10k, use that 10k to pay IP expenses and then put the money I otherwise would have used to pay council rates for example on the non-deductible loan? The old 10k loan would be gone and the new one would be deductible?

    Is this a thing?
     
  5. tobe

    tobe Well-Known Member

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    If the old loan was paid by your income or the rent (as opposed to just paying one loan with the other), then yes, this is exactly what debt recycling is.

    its basically delaying and increasing deductible debt and redirecting income to another purpose Usually towards repaying non deductible debt, but it could be for anything.
     
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  6. albanga

    albanga Well-Known Member

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    Ok I think I see.
    So if I owned an IP that had say rental income of 20k and interest repayments of 20k I am Neutral.
    BUT traditionally after say 20% expenses I would be 4K negative.

    Instead of paying this 4K expenses from normal non deductible income I borrow it and pay for them making it non deductible.

    So In essence I have now created 4K of deductible debt that would have otherwise not been?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, but you would also have some depreciation to take into account too.
     
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  8. albanga

    albanga Well-Known Member

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    And what is the effect of that when recycling?

    Also I am guessing (I think i have read you post this as well back on SS) that you cannot borrow to pay interest in the goal of reducing the debt on your PPOR?
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  10. albanga

    albanga Well-Known Member

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    As always thanks @Terry_w!
    Looks like i have some reading to do tonight.
     
  11. chylld

    chylld Well-Known Member

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    This works sweet for properties that have gone up in value, as you may be able to do an equity release and use the new loan/LOC to pay for IP expenses.

    Thus, $x that would have been used to pay these expenses now comes from a deductible loan, resulting in your deductible debt going up by $x and non-deductible down by $x, i.e. debt recycling.

    This ties in with the other recent threads about pre-paying IP management fees. It can be one of the biggest IP expenses and separating it from the rental income allows you to pay it from an IP loan, and receiving the full rental income amount in your offset, reducing non-deductible debt more.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It could also be done on a property that has gone down in value. You just have to borrow somehow - on other property, related party loans etc.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  14. chylld

    chylld Well-Known Member

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    Yes any borrowing can be used. It's just sweeter when that borrowing comes from new equity, rather than say splitting an existing loan and having to pay it down with cash first in order to reset its purpose.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    but technically it wouldn't be recycling unless you are paying down one to increase another - but I know what you mean.
     
  16. chylld

    chylld Well-Known Member

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    True... using an equity release is more like increasing deductible debt without having to pay down non-deductible debt in the first place :) I got carried away with my thought process and departed from the topic almost entirely :p
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It can still have the same effect if you build up the offset account.
     
  18. albanga

    albanga Well-Known Member

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    So sorry just thought more about this and not sure I fully get it.

    Using my example above are you saying that by creating say a LOC and using it to pay for expenses that loan is deductible because the purpose was for investment?
    I would have thought it is only deductible if used to purchase an asset not for operating costs?

    Also what happens in the event you own say 2 IP's, do you need to create seperate LOC's for each so they are not mixed (even though both investments).

    It just seems too easy and why isn't Everyone who has IP's doing this?

    Also @Terry_w do you have an ideal loan structure for debt recycling?
    For example say I have a 500k PPOR loan with 100k useable equity and 1 IP (seperate loan).

    I imagine it would look something like:
    500k PPOR (non deductible)
    100k split for IP deposit (deductible)
    PPOR offset account (non deductible) - All income and rent goes into this. All personal expenses and the interest for the IP loan come out of this.

    100k LOC - I use this LOC to pay for all expenses on that IP and slowly I draw it down becoming more deductible debt. Once it reaches fully drawn I increase it as my PPOR split is now reduced by 100k.
     
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  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thats it basically.
     
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  20. albanga

    albanga Well-Known Member

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    Thanks @Terry_w you really are the PC King :)
     
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