DEBT RECYCLING INVESTMENT STRATEGY
Debt Recycling Investment Strategy. It’s a fancy term. It sounds good but what is debt recycling and how does it work?
In this video I’m going to explain debt recycling in terms of buying property investment but it will really work for any type of investment.
Understanding debt recycling strategy is relatively simple and it’s going to make it easy for you to understand how people get wealthy using it.
Almost as importantly, I’m going to explain why people don’t make it work.
The basics of DEBT RECYCLING
So you already need to have a home loan, you already need to have some debt to recycle right.
Let say if you started off with a $500k home loan and over a period of time you pay that debt down.
Let’s use an example of $100k.
That loan would be paid down to $400k. Debt recycling is actually just borrowing that $100k back and putting it toward an investment property.
So far you’ve got the same amount of debt as what you started with however I want to break down the structure to give you a bit more understanding.
How you would do this is take out a second home loan for $100k?
Many people want to put all their loans together into one payment but in this case I believe it’s best to separate them.
This is because if you borrow money for investment purposes the interest on that borrowed money is tax deductible. The money you’ve borrowed for personal use, your existing home loan, is not tax deductable.
Separating the two is an easy way to keep track of things.
This should give you a very basic grasp of debt recycling but let’s go a bit further.
Using the same scenario. If you’ve purchased a decent investment property it’s going to be putting money in your pocket at some point.
This means that you will be able to pay down your home loan faster which means you can debt recycle faster which means you can acquire more investment properties.
Obviously you have to qualify for the new investment property loans but you can understand the concept. Over a longer period of time you could effectively bring your original home loan debt down to $0 and have 100% of the debt against your home as investment debt and 100% tax deductable.
This strategy is a great strategy but not many people work this well. Let’s go into why. I’m going to leave the biggest mistake till last but this is one I estimate 90% of investors get wrong.
1. Too much debt to begin with compared to income
This is a hard one. There’s no hiding house prices are high, especially if you live somewhere like here in Melbourne.
The fact is that the higher your debt is to begin with means it’s harder to pay it back full stop. The average person totally ignores the fact that the higher the debt is now means the harder it’s going to be later on.
People want everything, they want the nice home now, the nice cars now and to be wealthy. That wont work for most Australian’s.
The higher your debt is to begin with just means you’ve got less cash to recycle because your paying more interest to the bank.
2. We spend too much. Thrift has been frowned upon.
I’ve been in finance for 16 years now. I’ve seen thousands of peoples finances. We have attitudes and behaviours that you get after almost 30 years of no recession.
Unfortunately, that’s not normal. A small part of why the inflation problem is so big is that people just keep on spending.
I’ve said this a hundred times before. This decade people are going to figure out how poor they actually are.
Poor attitudes towards spending means you find it harder to pay down that debt. This is a shot in the foot for recycling your debt.
3. Australians have been fed this lie that you can sit on your couch, do nothing and get rich.
You can sit there and watch MAFS or whatever show it is that is literally making dumber. The fact is, you’re gambling if you think that’s going to make you wealthy.
What really upsets me is when property spruikers sell this lie because they sound so convincing when they explain what debt recycling is and how to use it.
If you want a debt recycling strategy to work, just earn more money. It’s very simple, it doesn’t have to be massive amounts because you have time working for you.
4. They buy dud properties
I’m going to explain a mistake I made, because most investors actually make this mistake,
I had a property that before the interest rates started going up it was putting cash in my pocket.
Good work me. It gave me extra cash flow and all the benefits as I was explaining previously.
Fast forward about 15 months and 3 and half percent in interest rate rises and that property is now costing me about $8000 per year.
That is now terribly bad because it’s basically taking all the money out of my pocket and not allowing me to reduce the debt on my own home. It’s a multiplier effect that keeps people poor.
Before I go on with the story, I want to explain that most property investors are in this exact position.
You see I’m currently selling that property. So I did some numbers.
If I sell that property I’m getting back my $8000 per year. I’d lose the tax deduction which is probable going to be around $3,000 per year. So it only puts me in a better position by $5,000 per year.
But by selling that property it means I will basically be able to reduce my owner occupied debt by about $200k per year which means an interest saving of $12,000 per year.
So all up I’m putting $15k back into the loan on my own property every year. I’ve got an extra $15k of cash flow.
To be honest that wont be the position forever because I’m going to recycle that debt into a better performing investment.
Buying for capital gain and totally ignoring important details like the cash flow of an investment is the biggest mistake that gets made because it’s taking money out of your pocket.
Your investment is making you poorer!.
You can have a great strategy, like debt recycling, but if you buy bad investments your strategy wont save you.
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