Peter Spann against capitalising interest???

D

dheath

Hi everyone,

I have just finished Peter Spann's book, "$10 million in property" and in the finance chapter there was a peice on capitalising interest shortfall for rental properties, he states that this techique is only good as a short term tactic.

I know a lot of people here like to use this method to build a large investment base quickly.

Can anyone comment on this, maybe Peter himself?

Looking forward to your posts as I have just started this technique for the first time and was hoping to keep using it indefinately, but maybe not!!

Cheers,
Duane.
 
Hi Duane,

Can't speak for the pro's/cons of capping interest on I.P.'s, but I would say - don't listen to all the 'noise' around you. That is, don't get freaked out by something you read in a book. Most info. iin books is written in a very general manner and never for specific circumstances, by necessity.

If you are implementing this strategy, ask yourself why you have done so and what it is that you are trying to achieve. If it is a good strategy for you, then continue with it.

Peter is very successful and has done very well for himself, but he is by no means an expert on your personal situation.

Mark
 
I have just finished Peter Spann's book, "$10 million in property" and in the finance chapter there was a peice on capitalising interest shortfall for rental properties, he states that this techique is only good as a short term tactic.
Click to expand...

I would have to agree with him. I know quite a lot of people who use a living off equity approach quite successfully, but I worry for them that is there is ever a prolonged downturn in the economy they could be forced to sell properties or wiped out.
 
I don't capitalise interest as I see it exacerbating some of the risks that I am exposed to, and would require additional risk mitigation. I think that compounding interest working for you is a great thing, but compounding interest working against is not.

That said, each person needs to look at their personal circumstance and plan going forward, and work out whether capitalising interest is what they want or need to do.
 
Hi all

From what i have read of different ideas on capitalising

1. Eg. IP Property value $400,000 @ 80% LVR (NO LMI) $320000 available
less debt say $250000 so 70000 LOC to cover mortgage payments and
other expenses. If you have PPOR debt rent would go towards this Non
tax deductible debt.

2. Rent goes into IP LOC 80% but the shorftall is capitalised eg Rent 15000
pa expenses including mortgage $18000 so the shortfall of $3000 is
capitalised.

3. Use the 95% LVR on Properties to increase asset base.

4. Ensure you have equity to pay for the debt shortfall or whatever not out
of your own pocket.

5. Don't do this it is dangerous and property doesn't always go up invalue.

Cheers
BC
 
Why not do your own sums on your own situation and work out what you think about it?
To say "capitalising interest is bad" is a bit like the people who say "leverage is risky" - it depends entirely on the circumstances, your knowledge, and your comfort level.
Regarding Peter Spann saying something - listen to advice and make up your own mind. Dont be anyone's disciple because at the end of the day you are the one taking the risk.
 
To say "capitalising interest is bad" is a bit like the people who say "leverage is risky" - it depends entirely on the circumstances, your knowledge, and your comfort level.
Click to expand...

I'd have to disagree with you on this, an ever increasing debt that you are unable to service (If you could service it you would have no need for the strategy) is always going to be dangerous. As mentioned earlier I know a number of people who use this strategy effectively, but that doesn't chanfge the fact that they are endangering themselves should their be a protracted downturn in the economy.

Regards
Alistair
 
APerry said:
I'd have to disagree with you on this, an ever increasing debt that you are unable to service (If you could service it you would have no need for the strategy) is always going to be dangerous. As mentioned earlier I know a number of people who use this strategy effectively, but that doesn't chanfge the fact that they are endangering themselves should their be a protracted downturn in the economy.

Regards
Alistair
Click to expand...

Yeah, but whether you can service it or not is a very individual thing. For example, interest capitalisation would be safer if you, say, did it so that your LVR is always at 60%. Ever increasing debt by itself doesn't tell you enough to assess risk.

Is a 400k loan on a $400k property more risky than $2m loan on $5m property? If in the second case I capitalise interest but always keep the LVR around 50%, as an example, I think that's safer than the first person.
Alex
 
I'd agree with both Alistair & Spann to some degree.

Capitalising interest can be a good short term strategy, provided there's enough safety nets, such as diversification of IP between states/cities, diversification between asset classes (shares/LPTs/IPs). Growth asset classes have cycles, so this diversification evens out some of the volatility, so there should always be something somewhere growing & hence providing equity to keep overall LVRs within allowable bounds. As Alistair mentioned there is a risk of all the asset classes being in a downturn for a protracted period (eg Japan RE for 25 yrs) - that's when this stategy would fail.

On the other hand capitalising interest is normally done using assets with a high growth potential. IPs can have high growth, but usually rents increase at much lower rates, and so will probably take several decades before they cover the interest costs of the initial loan. So the income is an increasingly smaller proportion of the price of an IP.

However, shares do grow in proportion to their earnings on average (thats what the P/E ratio is all about). Using this knowledge and a sensible strategy, its sometimes possible to create a capitalising interest scenario that will become cashflow positive within a reasonably short period. There is obviously the same risk of an economic downturn, but that risk only needs to be mitigated in the short term, and not for ever. And in the short term that risk is reduced as the cf becomes increasingly less -ve.
 
Yardney

I know that Michael Yardney encourages capatilisation which I think is an excellent strategy depending on the time that you begin (i.e. not a wise idea to start at the top of a boom) the LVR that you have (as Alex Lee discussed) and whether or not you have a relatively high growth asset.

It is an excellent method for purchasing far more (high growth) property than you would otherwise be able to service from your own pocket and provided you begin either with a signifcant equity buffer or in a strongly upswinging market can be very powerful for accumulating wealth.

Granted there is the argument that it is compounding against you, however, that has to be balanced with the fact that you have likey just bought 2,3, 4 etc more properties which are also growing in your favour as well.

If you have a sufficient buffer and decent LVR, even if the market drops, in a worst case scenario you could sell and settle the debt. Afterall, banks will lend you 80% LVR with no mortage insurance in the expectation that at 80% if you default, they can still sell your property and recoup their money. I wouldn't suggest that banks are in the business of taking on unreasonable risk.
 
Just a quick technical (or maybe stupid) question - if you did decide to capitalise on your loans - I guess you'd have to be using LOC loans??

Mon
 
another technical question: if you nominate on your loan application that you wish to capitalise the interest, does this mean your servicability can be lower? Sound counterintuative, cos you'd end up with greater debt (short term), but would seem to make sense because you wouldn't need to find the funds to pay the growing debt (yet)?
 
This is probably a very basic question & answered somewhere in the thread but i will ask it anyway. I have actually never heard of capitlizing interest, so could someone briefly explain what it is & how it works. Thanks.

Rgds,
Gina.
 
Mon said:
Just a quick technical (or maybe stupid) question - if you did decide to capitalise on your loans - I guess you'd have to be using LOC loans??
Click to expand...

No. You can use any type of loan. Even a personal loan or credit card, if you wanted to (highly recommended against!). I use regular basic loans (generally cheaper than LOCs) and draw the amounts down into an offset transaction based account.

luce.rocks said:
another technical question: if you nominate on your loan application that you wish to capitalise the interest,
Click to expand...

I've never had to do this. However, you are correct in that if you're debt is increasing each time you refinance you will need more serviceability. By the time I run out of this I should be in a position to do asset or equity based lending (80% lends, no mortgage insurer involvement, high equity, little or no focus on serviceability).
 
You must log in or register to reply here.

Similar threads

Jamie M
Interest only with an offset against PPOR
2
Replies
34
Views
21K
Jamie M
Jamie M
I
20 year strategy (another one)
Replies
8
Views
3K
impermanence
I
mattjones
Final Brisbane Property Group Meeting For 2014 Is On Tuesday 9 December
Replies
0
Views
2K
mattjones
mattjones
B
Dream to be Comfortable not Rich. Start Now!
2
Replies
33
Views
7K
ChrisA1
C
J
Determined to succeed
Replies
8
Views
2K
flightcrank
F
Back
Top