Debt Recasting

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When people have debt as part of their Investment Portfolio, if you keep trying to add a new property, you can start to think “Wait when am I going to get into passive income territory?”

And the truth is there’s a bit of a myth flying around with passive income and how it actually works, you know recasting did is so important because when you are on interest-only debt, it’s not sustainable. It doesn’t last forever. And for that reason you’re not going to be in a position to hold that passive income forever either because there might be a credit policy that changes things and you no longer can sound interest only and you need to make these moves happen. But what happens if you’re on Principal
and Interest. Let’s just say you’ve been paying your loan down
for some time as that loans been coming down. Maybe your asset values rising say a $300K property or $400k property becomes maybe $500K value
and because you’ve been on p&i that’s come down. Now with that p&i debt coming down the truth is no matter how fast you pay it down you’re never going to be in a scenario where your re-payment changes because you’re on a 30-year contract until it’s gone it’s the same.

There are two ways though, one is going to your bank to see if you can change the debt on the existing mortgage to make it suit what extra you paid or you can ask the bank to do a debt recast. That’s basically internally refinancing your loan to a whole new 30 year period or you may refinance or to another bank and get another 30 year loan to pay that out.

Now if you’ve got a 30-year loan with a reduced amount of debt on there,
but the rents have been rising over time and so is the value – that is when your passive income starts to get created. Your passive income now starts showing because you’re paying your 30-year debt down quickly.
Maybe it’s now 15 years in but instead of having it still based off the original 30-year term your now basing it off a new 30 year term for that current debt balance, which is half. At that point you start to create passive income because sustainable passive income is something that needs to be considered. Interest-only, quitting a job the figures that are throwing around all that stuff can happen and they can LeapFrog you to where you want to go but the end goal needs to be sustainable passive income
and that sustainable passive income can only happen in two ways. Either
there’s no debt or either there’s a debt that’s manageable with that level of income. Unless you’re going to change it around or unless rent’s have rise or risen substantially things aren’t going to move the dial as fast as you’d like it to be.

So at some point whether it’s an interest-only strategy and you keep recasting that assuming the banks can do it or at some point you keep going principal and interest and then once you get to a certain level, then you recast it to make a new 30 year term. At that point over a longer period of time you start to have your gap in passive income created. Now what it does mean is that interest actually racks up for longer because you might have a 30 year loan and now you’re recasting for another 30 year loan. However debt isn’t a bad thing for property investors. It’s the cash flow gap that creates retirement not having no debt by itself because that’s very few scenarios where you can get to that unless you look to do a mass sale down.

The main thing people want is to make that gap in income versus expensive
and sometimes they don’t mind if the interest is, you know, 30 years here and in 30 years again, and it means maybe for $500k property instead of paying $700k in interest. You might pay eight or nine hundred that’s not the end of the world. Because the key thing is you wanted an income that’s created by the tenant to pay for the expenses and give you some so even if you were paying more interest over the life of the loan by recasting your debt, it’s actually you that wasn’t even paying its the tenant the tenant was paying at the whole time and you’ve been collecting the gap in between.
So this is a very common strategy that investors use at a later cycle of their
life because many people start to add properties at the maybe the 30s and 40s and 50s even sometimes but when you’re going to retirement nothing’s changing if you’ve paid your debt off by half and you just looked Is in the way through you need to make that debt level change or the rents have to rise substantially for cash flows to change and that’s where that recasting comes in.

So if you’re thinking about you know, you paid your loan down for so long.
Maybe you want to start creating a passive income stream or you want to start mapping out how passive income really starts to be sustainable and generate that over the longer term don’t miss out or forget about either debt recasting or removing debt or the long-term approach, which is really having a long-term amount of rent rising and debt not rising at the same pace with it.

That’s it from us here at InvestorKit, the Experts in Wealth Creation helping you take action.