Capitalising interest...good or bad?????

[dheath]

Hi all,

After just finishing ED and Tony's book "Wealth for Life" I must say it paints a good picture towards the technique of capitalising all interest and holding costs in favour of building a larger portfolio quicker, as to quote "the size of the assets is what really matters".

I have read a few posts here from some members where they actually believe it crazy and dangerous to do this.

I wanted to start a discussion on the true facts of whether this is a good technique or not, factually if possible without opinions creeping in.

At the moment I am only capitalising 1 block of land and 1 house near the beach as I have known about this technique for a while but have found it hard to break away from the idea of me getting all the profits, I don't want to give any back to the bank as extra interest, although a larger portfolio sounds nice too! (pending constant growth of course)....

I have also tried to only capitalise interest on properties I hold in sth east QLD, hoping the growth also keeps me that much ahead of the extra ever increasing interest.

Anyone have a story of there own? or a strong belief either way?

Please fire away!!!

D.

 

[alexlee]

There is no good or bad. Capitalising interest is one technique, and one that requires a lot of discipline. Interest only is tame by comparison.

Like interest only, capitalising interest improves your cashflow (because you're borrowing it). That also increases the risk. Is it too risky? That depends on a lot of factors: the person (IO requires more discipline than P&I, interest capitalisation even more so) and LVR (if you have a 50% LVR that's less risky than if you have 95% LVR).

In the hands of someone with discpline and a clear understanding of what it is, interest capitalisation is a very powerful tool. In the hands of someone who doesn't know what it really does, it's dangerous.

Whether it's good or bad depends on who is using it. Generally, I would suggest newbies shouldn't use it, because they may have the discipline to control it.

Yes, in the long run getting a larger portfolio early on means more wealth down the line. This assumes that you survive until then, and misuse of interest capitalisation (taking on too much debt, using the 'extra' funds to buy consumer goods, ending up with such a high LVR that you can no longer refinance) will shorten your investment lifespan.
Alex

 

[dheath]

Sorry, didn't see the thread just below on a similar topic!

D.