The 2 broad methods of Debt Recycling

Discussion in 'Investment Strategy' started by Terry_w, 14th Jan, 2019.

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  1. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    The 2 broad methods of Debt Recycling

    Debt recycling is the conversion of ‘bad debt’ into ‘good debt’. See What is ‘Debt Recycling’? – The Structuring Blog


    Broadly speaking there 2 ways to ‘debt recycle’.

    1. Use the income from investments to pay down non-deductible debt, then borrow to invest further

    Or

    2. Selling investment assets and using the funds released to pay down the non-deductible debt and reborrowing


    The first approach is pretty common, but the second one is often missed. It can work well where the person owns shares because the transaction costs can be very low, compared with property - but it can still work with property.

    The best approach might be a combination of 1 and 2.


    Example

    Bart has owned a few investment properties for a few years. They are positive geared by $100 per week so that is about $5,200 per year in extra funds he can use to pay off his non-deductible home loan.

    But the properties have about $500,000 in equity in them.

    Bart only owes $400,000 on the main residence so what he could do is to sell the properties, pay the tax and used what is left to pay off the main residence debt, and to reborrow to buy more properties.

    This way he uses a combination of the 2 debt recycling methods.

    Of course, there is a lot else for Bart to consider such as, most importantly, his ability to qualify for finance to buy more properties.
     
    lixas4, New Town, craigc and 8 others like this.