Leverage

[Frezzinghot]

I have a hypothetical question about recycling equity.

here is a scenario. Let say you have $10m worth of property say in Auckland.

the average growth of those properties were 5% pa conservatively. The debt on those properties were all positive, could you effectively pull $500k from those properties per year as an income? I have heard some investors doing this using a large RC, extreme but are there any reasons why this strategy could not be used?

[PC]

Interest on the debt is no longer deductible for residential.
Commercial property ok.

[learner]

Hello PC

My understanding is that for any interest deductibility on borrowing, there must be a link between the borrowing and the income that the borrowing produces. If a person is borrowing, based on the equity in a commercial property (or on any asset), and uses the loan as income, then it would not be deductible as an expense. Of course a person can borrow against any property, residential or commercial, and use that money as living expense, but it simply adds more to the borrowing, and also the interest bill.

[Perry]

There is another way; one I've heard of. The nub of it is: "working capital."

A person (rightfully, properly) takes out some of their equity from their / a business.

That leaves the business short of working capital.

The business borrows to reduce the working capital shortfall.

The interest on that is deductible, so long as (nowadays) the business is not solely residential rentals.

Something like that, anyway.