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Do people seriously buy properties with this yield and less?Bigger tips that may require lifestyle adjustments:
1. Divest of poor yielding assets (3%).
Do people seriously buy properties with this yield and less?
That is insane - unless you are on multiple six figures...and still insane.
Covered very well above.
However, in this case it sounds like you have little/no income but a mountain of cash so, in the absence of Rixter, I will say that if your situation is at it sounds and you've modelled it with your broker/financial planner and your options are exhausted, deposit bonds could be an option. Do a search.
RF, I think you're referring to cashbonds..... a deposit bond is a small fee you pay to an insurance company to use their money (instead of yours) for your deposit on a property loan.
Anyway...this is how I have used a Cashbond to keep purchasing IPs. I used it in conjunction with my CGA Property Investment Strategy -
When you have a few IPs under your belt Serviceability eventually becomes an issue. The banks/lenders will not lend you money due to you not meeting their standard lending criteria. As you know banks/lenders work out serviceability under 2 modules - LVR & DSR.
Where the majority of investors start to reach their borrowing capacities is in relation to their DSR or Debt Service Ratio. In other words not enough cash flow income to service their IP debt. Now this isn't a problem if you can increase your income. But how can you do that??
Obviously there are many ways as the mind can conjure up. But the main ways most investors know of is to increase their PAYG income and/or increase their IP rental income. As these methods are fairly well reliant and restricted to market conditions a lot of investors don't know where to go to from there. A lot forget about the store of Equity they have with their low LVR's created over time by past capital growth.
That's where a Cashbond comes into play - which is method I implemented to get me around the lack of serviceability issues and allowed me to keep borrowing to build my Portfolio.
A cashbond basically works by converting existing equity into cash flow for the purposes for increasing your income in the eyes of the banks/lenders.
The way it works is as follows - you purchase a Cashbond/Annuity or guaranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5-10 years. You purchase the Cashbond using funds with drawn from an investment LOC.
For example if you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing because you have an extra $20,000 income in the eyes of the banks. Pretty neat hay
You can also use that cashbond income to service your portfolio holding costs as well.....this giving you sleep at night factor knowing you can service the debt comfortably.
This was how I have been able to keep purchasing. Now I know this method is not for everyone.
Its a strategy, for someone further down the investment road, at their disposal that can be used as part of their bigger picture strategy.
A tool for the more experienced investors with substantial size portfolio / equity holdings available to utilise after less impacting options may have been exhausted.
It all depends on your current financial situation, goals, time frames & your personal investor risk profile.
Hope this has provided you & everyone else with some food for thought.
Is it higher than an offset account interest rates?
4. Using your example of the "20k per year over 5 years " does that come in one lump sum or is it paid weekly?
I'm curious about this too.
Also could you draw that 100k from your LOC, stick it in another bank account and claim the interest earned on that as income?
Yes, but what about the expense?
will pay back the capital
You pay what ever your LOC interest rate is less CB interest paid back to you.This is awesome rixter i love learning new things! I've read this around 5 times trying to get a better understanding: )
Just have a couple of questions
1.How much money / interest do you have to pay to use this strategy
I set up a $100k CB which returned ~$22k per year over a 5 year term."A cashbond basically works by converting existing equity into cash flow for the purposes for increasing your income in the eyes of the banks/lenders."
2.How aggressive where you when you were using this strategy with your lvr?
Cant answer for all banks but mine was. WBC3. Have all the banks been happy to use this form of income ?
Payment options are annually, bi-annual, quarterly, monthly. I chose monthly to maximise CF.4. Using your example of the "20k per year over 5 years " does that come in one lump sum or is it paid weekly?
They vary depending upon prevailing financial climate at the time, purchase amounts & term length..2-4%Thanks Rixter. Totally forgot about your cashbond strategy. Something to look into.
How much interest do these annuity funds pay you back?
No.Is it higher than an offset account interest rates?
Possibly anyone with a substantial size asset base and net worth who has exhausted all other less impacting options to increase DSR.You also mentioned it is not for everyone. Care to enlighten who or what scenarios this strategy wouldnt work.
Yes mine did.Do they really count all of the annuity as income or only a percentage?
Ah I see, this is the part I missed. I thought they simply paid interest, and then would return you some of the capital at the very end, which is why I was confused.