Tenant paid rent in advance

[Rixter]

Then my point stands, because you could have withdrawn $50K in cash, if you had that much available, and had $50K working for you all year, rather than using it to pay interest and getting back $20K cash to have $20K cash working for you...

You still can keep your $50k cash and/or have it working for you, plus an additional $20k increase in cash flow from tax deductions brought about by pre-paying the following year $50k interest bill using borrowed funds.

You still have your $50k plus another $20k.

Capital & debt are 2 sides of the same coin.

 

[Perp]

You still can keep your $50k cash and/or have it working for you, plus an additional $20k increase in cash flow from tax deductions brought about by pre-paying the following year $50k interest bill using borrowed funds.

You still have your $50k plus another $20k.

Capital & debt are 2 sides of the same coin.

So are you saying that the Bank would let you increase your debt from $1M to $1.05M to prepay interest, but that you couldn't have chosen to not prepay interest, and instead withdraw $50K cash?

 

[Rixter]

So are you saying that the Bank would let you increase your debt from $1M to $1.05M to prepay interest, but that you couldn't have chosen to not prepay interest, and instead withdraw $50K cash?

Perp, you're confusing cash flow & capital.

Using your $50k in savings to pre-pay expenses reduces your cash flow.

Using OPM does not because you still have your $50k.

I know its a complete turn around in paradigms. It took me a little while to get my head around it too.

The poor/middle class are brought up to think cash flow for income, whilst the rich/wealthy have been brought up to think capital for income.

 

[Perp]

Perp, you're confusing cash flow & capital.

Using your $50k in savings to pre-pay expenses reduces your cash flow.

Using OPM does not because you still have your $50k.

I don't think I am. I think I'm having difficulty getting a straight answer.

If you have a $1.05M LOC on which your balance is $1M, then you have $50K cash sitting in your LOC. That's not OPM; it's your money, that you're presently using to offset your interest. But if you can take out $50K cash from that LOC, that's no different to $50K of your cash sitting in an offset account. It's available cash.

The only way that you wouldn't be reducing your available cash by $50K would be if the limit of your LOC was $1M, but the Bank would let you go to $1.05M on the basis of prepaying interest, but would NOT allow you to withdraw the $50K in cash.

 

[Rixter]

The only way that you wouldn't be reducing your available cash by $50K would be if the limit of your LOC was $1M, but the Bank would let you go to $1.05M on the basis of prepaying interest, but would NOT allow you to withdraw the $50K in cash.

I agree. If you have $50k in cash prior, whether its sitting in a savings account or in a LOC it is still the same $50k cash no matter where you have parked it.

However that's not the context we're looking at it in, thus your confusion. Why use your money when you can use capital instead of exhausting your same $50k in cash flow?

I guess we'll just have to agree to disagree until you can get your head around it.

 

[THR]

You could of paid some of next years expenses in advance and offset the extra rental income.. did you do that?

No, it was paid on 30 June. I didn't expect it.

 

[Rixter]

No, it was paid on 30 June. I didn't expect it.

Any expenses paid on 30th June can be claimed in that same FY.

 

[WattleIdo]

Perp - You got it wrong.

The bank lends you the prepaid interest. Its then repaid by monthly instalments. No draw on cashflow. Its borrowed. It can tie up limits as the years interest acts as a negative redraw. It builds over the year and then you repeat next year.

The only cashflow is the tax refund is bought forward a year.

I'm afraid I'm with Perp in wanting to understand but just not quite getting it yet.
Do you mean that we can use equity to prepay interest? i.e. the 50K?

Now to sound really dumb ... where does the 20K come from? Why do we get some back from the bank/govt?

Sounds like a great idea ... I just don't get it.

 

[WattleIdo]

Thanks for your reply Perp - I get the thing about the 20K now.

For this to work you need:
an offset account
to be paying IO
to be in a medium to high tax bracket

Would it work under any other conditions? I'll do it if I can!

 

[Rixter]

Assuming 40% marginal tax rate (rounding), if you claim an extra $50K in interest expense, you'd get a $20K cash refund on the $50K interest prepaid.

I still don't understand how you can pay the $50K if it wasn't already available cash - i.e. unless you had a limit of $1.05M or higher - but I'm done with asking about that due to the obnoxiously patronising tone that was adopted.

Using your $50k cash to pay the expense, you have just exhausted $50k of your own cash. In doing so you've just reduced your cash flow by $50k.

By using a LOC/loan to pay the same expense, you still have your $50k cash after you've paid the expense.

 

[WattleIdo]

Using your $50k cash to pay the expense, you have just exhausted $50k of your own cash. In doing so you've just reduced your cash flow by $50k.

By using a LOC to pay the same expense, you still have your $50k cash after you've paid the expense.

Ok thanks Rixter - so it's a method to maintain that flexibility in available cash and at the same time get a tax refund on the interest payments in advance.....have I got it?

 

[Rixter]

Ok thanks Rixter - so it's a method to maintain that flexibility in available cash and at the same time get a tax refund on the interest payments in advance.....have I got it?

That's correct WattleIdo.

 

[WattleIdo]

... then you can plan where to put that 20K and at the same time you're all paid up for the year sitting high and dry.

Would like to be that organised. LOC looks better and better.

(Thanks for your reply).