RE: Debt Recycling

[cautious]

Hi I was wondering if anyone out there can help me understand this debt recycling strategy?
For the past 18 months I've purchased a investment property, under this debt recycling strategy, but I'm now a little concerned as the bank no longer wants to lend me anymore money to top up the line of credit, due to it's new stringent regulations. I now have an investment property, LOC, mortgage as debts and not sure how to continue moving forward.If the LOC doesn't get topped up, then I'm in real trouble since the investment won't cover the costs of the LOC if I sell it Can someone come up with a better idea?

Thanks,

[Seeker]

Originally Posted by cautious

Hi I was wondering if anyone out there can help me understand this debt recycling strategy?
For the past 18 months I've purchased a investment property, under this debt recycling strategy, but I'm now a little concerned as the bank no longer wants to lend me anymore money to top up the line of credit, due to it's new stringent regulations. I now have an investment property, LOC, mortgage as debts and not sure how to continue moving forward.If the LOC doesn't get topped up, then I'm in real trouble since the investment won't cover the costs of the LOC if I sell it Can someone come up with a better idea?

Thanks,

Not being cautious?

I'd probably sell if I were you.... but how much under are you?

The risks of using equity to buy "investment" of ANY KIND, are 50/50 that you will lose.

In this economy, sustain yourself with the basics unless you can afford to gamble with that portion of your money and do not care (too much) if the net results are negative.

No matter what anyone tells you, there's risk of loss. If it sounds too good to be true, it probably is and was.

[cautious]

Hi,

Thanks for your reply. Well at the moment I still have enough LOC to last 6 months,to reach it's limit but either way, at the moment I'm under $45,000 and in six months $70,000 in debt plus inv property, but I have faith that if I sold inv property it will cover itself but not the LOC.

I will have some redraw available in mortgage but not enough to cover LOC plus that will have defeated everything of the strategy to start with.. it's all really confusing. I will be worse of in debt than before I started! The main problem is not having a bank lend me more to top up LOC to continue with the strategy, It feels like it's going to be a make it or break it deal.

I'm feeling alittle frustrated and helpless at the moment.

[disneysteve]

I'm not entirely clear but it sounds like you bought this investment property with borrowed money and need a steady stream of more borrowed money to keep the deal afloat. Is that correct? You say you "have enough LOC to last 6 months." Last 6 months for what? What are you using the LOC money to pay for? Isn't the investment property generating income? If not, why do you have it.

Sorry - I'm just confused by exactly what your situation is.

[cjscully]

Originally Posted by cautious

Hi I was wondering if anyone out there can help me understand this debt recycling strategy?
For the past 18 months I've purchased a investment property, under this debt recycling strategy, but I'm now a little concerned as the bank no longer wants to lend me anymore money to top up the line of credit, due to it's new stringent regulations. I now have an investment property, LOC, mortgage as debts and not sure how to continue moving forward.If the LOC doesn't get topped up, then I'm in real trouble since the investment won't cover the costs of the LOC if I sell it Can someone come up with a better idea?

Thanks,

I can't imagine why anyone would want investment properties that don't give a positive cash flow. Sure you can leverage existing investment properties to buy other investment properties (assuming you have lenders willing to lend money) but that should not present a problem if the property you're purchasing generates enough income to cover the new debt and put money in your pocket. As soon as that strategy stops working (lenders no longer willing to lend to you) you just stop adding properties to your portfolio and sit back and reap the rewards of your positive cash flow.

Since your investment doesn't seem to be providing you with positive cash flow, I'd say get out of it as fast as you can.

[nick__45]

What kind of investment property is it? I can't tell what is the investment in this beside paying someone using someone else money and be on the hook for all risk.

[nick__45]

Originally Posted by disneysteve

I'm not entirely clear but it sounds like you bought this investment property with borrowed money and need a steady stream of more borrowed money to keep the deal afloat. Is that correct? You say you "have enough LOC to last 6 months." Last 6 months for what? What are you using the LOC money to pay for? Isn't the investment property generating income? If not, why do you have it.

Sorry - I'm just confused by exactly what your situation is.

You are killing me with your common sense dude. One of these days I am gonna bust a gut reading your reply.

[dczech09]

I did some research on this whole "debt recycling" thing as I have never heard of it until now. From what I gathered, you got yourself into a bad situation. Basically this is a glorified version of leveraged investing where you use debt to invest. I say that if you cannot find a way to settle the tides, then sell before you get into worse shape. This debt recycling strategy involves a lot of risks that are not only hard to see, but are totally out of your control. Essentially all you are doing is using equity to purchase investments; aka, you are using debt to purchase investments. Dumb, extremly dumb. I urge anyone who reads this post not to engage in this strategy unless you are looking for trouble. I don't care what your risk profile looks like; I have a high tolerance for risk and would NEVER consider this a good idea.

[Seeker]

Originally Posted by cautious

Hi,

Thanks for your reply. Well at the moment I still have enough LOC to last 6 months,to reach it's limit but either way, at the moment I'm under $45,000 and in six months $70,000 in debt plus inv property, but I have faith that if I sold inv property it will cover itself but not the LOC.

I will have some redraw available in mortgage but not enough to cover LOC plus that will have defeated everything of the strategy to start with.. it's all really confusing. I will be worse of in debt than before I started! The main problem is not having a bank lend me more to top up LOC to continue with the strategy, It feels like it's going to be a make it or break it deal.

I'm feeling alittle frustrated and helpless at the moment.

All of what you are trying to do is "save" taxes, and make money with equity; this is inclusive of the mortgage redraw account. You are not in the US are you?

If you don't have a cash reserve, it's not prudent nor advisable for for people to take the route you have taken. It's for the rich. You don't play with the equity in your home unless you can afford to lose it completely.

If you depend on constantly upping the LOC and the amounts borrowed to try to multiply investment dollars and lower tax dollars paid, when do you stop borrowing?

If economically, the world has a downturn, then you will lose. Because everyone loses in a downturn.

If there were no downturn then yes, you can make money.... but timing the "get-out" phase, needs to be done properly (and IMO it's difficult to stop the process when you are making money in it).

I'll say it again: Cut your losses and stop digging the hole deeper. If the bank won't work with you, you don't have a real choice. Sell.

[dczech09]

Any legitimate rich person who has strategically built wealth over time would not consider this strategy as being worth it; thats how they got to be rich in the first place.

Cautious, you have to understand that the banks have tightened up regulations and they will not extend your LOC because they see too much risk. If I were a loan officer and I knew of this activity you were engaging in, I would send you out the door without a second consideration. Bottom line is that you got yourself between a rock and hard place and are now looking at loosing some money; imagine that. As Dave Ramsey says, "you play with snakes, you get bitten!"

You're gonna have to sell and use the proceeds to pay off you LOC and mortgage. I take it you probably do not have the equity to cover this, so may be looking at working with a loan officer to arrange a plan to payback anything owed after proceeds. You made a poor investment; I'm not being judgemental or mean, I'm telling you straight up what the deal is.