Roll over of debt?

[rambada1]

OK, I have a math and cash flow question - NO, please dont get scared and shut this down. Im having trouble connecting the dots in my head.

Now its to do with structured interest capitalisation (and I'm not after a discussion on that please) and investing with cash flow being the focus.

We have high value RE & high debt and am looking at cash flow & long term strategy.
We have some capital available, only a small amount and insufficient to buy another property.

Now the math stuff -

• if I were to capitalise our rental % payments utilising the available capital
• then at the end of eg 12 months, reset debt for further capitalisation of IP % + buy some high yield shares
• And so on
• Our IP is cash neutral

The goal is to role bad debt into good debt against PPOR + IPs and buy high yield shares.

Now if you've followed this abstract trail so far your doing well - my question is the missing link.
Wouldn't a structure of this nature only produce enough liberated capital for regenerating further % captialisation? ie how does this generate extra capital to buy the high yield shares + further capitalisation? Or does it?
In my head I see the capitalisation concept as a see-saw, one side goes up the other down, but in equal amounts. So in terms of cashflow/capital - where does the benefit come from? Whats the point?

And after all that, why even set up a structure like this - put small capital into high yield return, and use the returns to roll debt over?

I hope this protracted confused question makes sense

 

[Terry_w]

OK, I have a math and cash flow question - NO, please dont get scared and shut this down. Im having trouble connecting the dots in my head.

Now its to do with structured interest capitalisation (and I'm not after a discussion on that please) and investing with cash flow being the focus.

We have high value RE & high debt and am looking at cash flow & long term strategy.
We have some capital available, only a small amount and insufficient to buy another property.

Now the math stuff -

• if I were to capitalise our rental % payments utilising the available capital
• then at the end of eg 12 months, reset debt for further capitalisation of IP % + buy some high yield shares
• And so on
• Our IP is cash neutral

The goal is to role bad debt into good debt against PPOR + IPs and buy high yield shares.

Now if you've followed this abstract trail so far your doing well - my question is the missing link.
Wouldn't a structure of this nature only produce enough liberated capital for regenerating further % captialisation? ie how does this generate extra capital to buy the high yield shares + further capitalisation? Or does it?
In my head I see the capitalisation concept as a see-saw, one side goes up the other down, but in equal amounts. So in terms of cashflow/capital - where does the benefit come from? Whats the point?

And after all that, why even set up a structure like this - put small capital into high yield return, and use the returns to roll debt over?

I hope this protracted confused question makes sense

Can't get my head around it sorry. Can you please rephrase, perhaps with a simple example based on a $100,000 loan?

 

[rambada1]

Day 1

PPOR loan $100,000 - $10,00 rent deposited over 12 months
IP loan $100,000 - $10,000 % capitalized over 12 months

Day 365
PPOR loan $90,000
IP loan $110,000

So other than recycling debt towards the IP, does this strategy have any increase in cash or capital? To my head, setting aside taxation paradigm, this doesn?t enhance annual cash flow or available credit. If it did, then the extra cash flow and/or capital can be placed in high yield returns of an alternative source.
So the only benefit of such a structure is if taxation and/or capital growth is taken into account and the resultant cash flow enhancement is utilised?
I'm just wanting to clarify in my head that this strategy is only viable with tax and capital gain considerations and has no other math component I am missing ala paying fortnightly, etc.
Hope this clarifies my query.

 

[Rolf Latham]

standardish debt recycle strategy

I do recall a recent ATO ruling which didnt like it

ta
rolf

 

[jrc77]

If ignoring taxation consequences, would actually put you backwards as typically interest can only be capitalized on a LOC, and the interest rates on lines of credit are slightly higher than on a typical IO loan. So you are creating a higher debt on the higher interest rate loan and a smaller one on the lower interest rate loan ...

Regards,

Jason

 

[Terry_w]

Day 1

PPOR loan $100,000 - $10,00 rent deposited over 12 months
IP loan $100,000 - $10,000 % capitalized over 12 months

Day 365
PPOR loan $90,000
IP loan $110,000

So other than recycling debt towards the IP, does this strategy have any increase in cash or capital? To my head, setting aside taxation paradigm, this doesn?t enhance annual cash flow or available credit. If it did, then the extra cash flow and/or capital can be placed in high yield returns of an alternative source.
So the only benefit of such a structure is if taxation and/or capital growth is taken into account and the resultant cash flow enhancement is utilised?
I'm just wanting to clarify in my head that this strategy is only viable with tax and capital gain considerations and has no other math component I am missing ala paying fortnightly, etc.
Hope this clarifies my query.

Your cashflow would depend on interest rates.

You are receiving $10k in income but paying this into a loan. So net cashflow would be the same if the interest rate was 10% pa.

But you are not paying the IP loan so this is where the cashflow advantage would come from.

It would be hard to make this work from the taxation deductibility side of things.

 

[rambada1]

Thank you all

So from what I can ascertain, there is no mathematical support to such a concept. For this to be a strategy it requires CG and/or taxation benefits.

Cheers