A quick question on cash Bonds

[voodoo]

Hi

yes, I know we have been thru this before but I have one quick question.

If you take out a cash bond for 150k for 5 years and it delivers an income of 30k pa, what happens at the end of 5yrs?

should you be paying off the 150k from the 30k pa, or what happens.

I just can't get my head around how this works.

I have been reading Steve's site and articles and I will be attending his seminar in Brisbane next month.

thanks

 

[keithj]

If you take out a cash bond for 150k for 5 years and it delivers an income of 30k pa, what happens at the end of 5yrs?

should you be paying off the 150k from the 30k pa, or what happens.

No, you shouldn't be paying it off, you should intend NEVER to pay it off. You just borrow another 150K at the end of 5 yrs to support your other borrowings for another 5 yrs. With a bit of luck your equity will have gone up by more that 150K in each 5 yr period, so you end up ahead from an EQUITY point of view, even though you have more TOTAL DEBT.

Once you get your head around NEVER REPAYING DEBT because your equity has increased more, it easy.

 

[voodoo]

thanks Keithj,

So after the first 5yrs you owe 150k, then draw another 150k (from equity) for the next 5 yrs, so you now owe 300k at the 10yr mark. But equity has risen so you draw another 150k to take you thru to the 15th yr. (450k)

And you would have to keep investing each year to get the capital?
is this correct?

cheers

 

[House_Keeper]

thanks Keithj,

So after the first 5yrs you owe 150k, then draw another 150k (from equity) for the next 5 yrs, so you now owe 300k at the 10yr mark. But equity has risen so you draw another 150k to take you thru to the 15th yr. (450k)

And you would have to keep investing each year to get the capital?
is this correct?

cheers

voodoo,

It might be worth attending Steve Navra course. The next one in Sydney is in March. The details are on his web site.

Cheers,

 

[Andrew_A]

How far would you follow?

voodoo,

It might be worth attending Steve Navra course. The next one in Sydney is in March. The details are on his web site.

Cheers,

<snip>
I have been reading Steve's site and articles and I will be attending his seminar in Brisbane next month.

thanks

I met one person at the Brisbane course in 04 that was attending for a second time and said it was very useful as the first time the concepts hadn't sunk in. Steve does cover a lot of material so doing your homework before is quite useful.

 

[keithj]

So after the first 5yrs you owe 150k, then draw another 150k (from equity) for the next 5 yrs, so you now owe 300k at the 10yr mark. But equity has risen so you draw another 150k to take you thru to the 15th yr. (450k)

Exactly.

And you would have to keep investing each year to get the capital?
is this correct?

Ideally not - you don't want to be forced to invest for the rest of your life. If you have enough good growth oriented investments before buying the first CB then those investments will have gone up more than 150K every 5 yr period. So each time you borrow 150K to buy a CB with, the equity you use as security is the original equity you had on day one.

Of course there is nothing to stop you pyramiding and buying more IP & CBs along the way as equity becomes available. And remember the bank will only lend 80% of available equity, so your investment has got to rise by more than $188K before the bank will lend against it.

Additionally, some gurus recommend not borrowing more than approx 60% of the growth to provide a buffer. So your investment has got to increase by $250K before you should consider borrowing 60% of that ($150K).

It's probably a good idea to put together a simple spreadsheet with columns for

1. Year
2. Value of property
3. Total Loans
4. CB Purchase cost
5. CB Income
6. Interest on IP Loans
7. Other IP Expenses
8. Interest on CBs purchased
9. Personal Income after tax
10. CB Income
11. Income available for personal expenses
12. NETT EQUITY
13. LVR

This will show you your cashflow and nett equity over the years using a CB.

In my view, the advent of lo-doc loans has made CBs less relevent.

 

[voodoo]

thanks for the replies,
I am still confused on how it works.
Who do you buy the bond off?
and is this just an IO loan for 5yrs?
What happens at the end of 5yrs? do you start paying off the 150k.

I'm about 95% sure i will be attending Steves course next month in Brisbane, as I need to get my head around this issue.

keithj the spread sheet is a great idea,

cheers

 

[keithj]

Who do you buy the bond off?

Ask the guru.

and is this just an IO loan for 5yrs?
What happens at the end of 5yrs? do you start paying off the 150k.

It's an IO loan for 30 yrs or as long as possible. The CB lasts for 5 yrs. The loan used to buy lasts for 30 yrs. The same applies to the next CB.

Once you get your head around NEVER REPAYING DEBT because your equity has increased more, it easy.

Why do you want to repay debt ? It's not in the banks interest, it's not in your interest. It's just a preconception most of us were brought up with - that to have debt was BAD.

 

[Jacque]

Try this post

http://www.somersoft.com/forums/showthread.php?t=12389&highlight=cashbond+explanation

 

[voodoo]

thanks again for the replies and the link.

cheers