Deposit Bond

[WebBoard]

From: Mike .


Deposit Bonds ( A True Story)
From: Murray
Date: 18 Feb 2001
Time: 15:06:21

For those wondering about deposit bonds, I'll tell you about what my neighbour did.

He saw a development in St Kilda Melbourne which was for 45 two story Townhouses about 12 months ago. Wanting to start a portfolio he spoke to the developers agent who said they were priced @$340,000 each, but would consider a discount of $20000 each if he purchased three. He approached a finance-broker who suggested deposit bonds.

These were to cost $3166 each for 3 years, a cost off $9498.00. But through some astute bookwork they lowered the cost by putting the 3 units under one title. The cost was now only $7518 for $960000 worth of property.

But wait there is more.

They are due for completion in October 2001. He had them revalued last week and now are expected to be worth $409000 each. He is now negotiating for a loan of 80% of the total value, which will be $327200 on each unit. So he pays the original loan off $320000 per unit and pockets a cool $21000, minus his expenses. They are expected to fetch about $530 per week each in rent.

Not bad money for really doing nothing.

What he did was prepare a business plan for DU Underwriters and they were more than impressed.

I'm going to try the same plan for a development in South Melbourne.

Has anyone had a similar experince or heard off it being done this way.

Regards Murray

 

[WebBoard]

Phil

Reply: 1
From: Mike .


Re: Deposit Bonds ( A True Story)
From: phil
Date: 18 Feb 2001
Time: 17:47:28

wow.. now that IS a happy ending

but just one question (if someone can please explain to me) - how did the original loan get paid off? i'm sure i'm missing some fundamental technique of investing here.

 

[WebBoard]

Kristine

Reply: 1.1
From: Mike .


Re: Deposit Bonds ( A True Story)
From: Kristine
Date: 18 Feb 2001
Time: 19:54:21

If the purchaser consolidated all three units under one title, what happens when he wants to sell only one? He will have to apply for a subdivision, permission for which he may not get, and which will cost $ to have individual titles issued.

Perhaps, like Phil, I'm missing something from the original story. But how can he make a 'profit' when the original loans are still outstanding?

Please explain - Kristine

 

[WebBoard]

Tony

Reply: 1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)
From: Tony
Date: 18 Feb 2001
Time: 23:09:01

Hi Murray,

Sounds like your neighbour completed a Henry Kaye seminar. That story sounds exactly like the deals he promotes. I bet purchaser will try lease out unit like commercial property (i.e. 5x5x5x5) & will have rental guarantee & minimum buyback guarantee also.

For Phil, the developement hasn't yet been completed & therefore no loan was required at time of purchase. Neighbour was buying off the plan & it sounds like purchaser had a long settlement.

Murray, I am in a position to buy & if you think you could negotiate a better deal by purchasing more, then let me know. Together we can cut a better deal & I could also check out the deal.

For Kristine, The units/townhouses are on seperate titles, just one deposit bond was used because it was cheaper for the purchaser to structure it that way. I think you will find that purchaser will attempt to have seperate loans for each townhouse.

Regards Tony Have questions email me at [email protected]

 

[WebBoard]

Murray

Reply: 1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Murray
Date: 19 Feb 2001
Time: 00:22:37

Hi Tony,

You hit it right on the head.

Don't know if it was Henry Kaye he went to, but it was a seminar off some type. Great thing about deposit bonds is that they are really only a way off holding a property until its time for settlement. Just pay the bond fee and let inflation look after resulting valuation. Don't know about signing tenants to a commercial lease, must ask him what he intends to do.

One thing he did say was that this type of investment needs to be done in areas that regulary show an increase in valuation. In St Kilda it has been around 15% growth each year for the last couple off years.

Phil and Kristine read my first article again and you will see what he did, although Tony has explained it beautifully.

If I find a similar development Tony I will email you. I believe there is going to be a major Townhouse development in South Melbourne, about 50-60 units, maybe that will be the deal to look at.

Regards to all Murray

 

[WebBoard]

Michael Croft

Reply: 1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Michael Croft
Date: 19 Feb 2001
Time: 07:08:47

Hi All,

A great strategy in a rising market. BUT if you are planning to do this in Melb or Syd right now BE VERY VERY CAREFULL.

'Don't try this at home kids', not until you've done your homework.

Regards, Michael

 

[WebBoard]

Robert

Reply: 1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Robert
Date: 19 Feb 2001
Time: 08:41:46

Hi Michael...

Your right there, especially about Sydney. There is currently a large glut of units in the inner city circle. Some of these Lend Lease constructions have only 70% occupancy. Construction companies kept building unit blocks (of hundreds of units a block) and have caused their own problem of not being able to offload the remaining stock. Especially at the prices they were asking. Watch out for a large drop in unit prices in inner Sydney....

But these are my observations and may prove to be wrong so check it out yourself....

Robert

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Gee Cee History Again
Date: 20 Feb 2001
Time: 19:02:39

This is a great way to make bucks on paper. Sort of like musical chairs. Just hope you are not the one left holding these units to settle on especially if there is a oversupply of units coming on line.

It happened at the end of the last boom run.

Just don't follow the herd. They may all be heading for a cliff.

 

[WebBoard]

Yuchun

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: yuchun
Date: 20 Feb 2001
Time: 23:23:50

Hi Robert,

I've been to Henry Kaye's course. I think the idea sounds great and I do truely believe that his strategy works.

I've done some research after attending the seminar and I've spoken to bank managers and mortgage brokers in regard to purchasing these inner city properties. I found that most lemders are not very keen on lending for inner city properties. The max. LVR they are willing to do is 70%.

Like Henry said in his seminar 'if the bank won't lend you 90% LVR, then it's not a good investment'.

I can understand why banks are only willing to lend up to 70% LVR in Sydney CBD - because the units in Sydney CBD are oversupplied!! I am expecting a fall in unit prices. However, since the younger generations are the lifestyle people and they want to live in a trendy area, I think the prices will eventually come back up. And therefore these properties will always be in demand. So maybe in a long term, HK strategy will still work!!

One thing he didn't mention in his seminar is, say after 10 years you decide to sell one of your properties, apparently the value of the property has been doubled in value, ie you will have to pay a huge CGT. After you pay off the mortgage and CGT, what else do you have left?

This is only my personal opinion.

Regards, yuchun

 

[WebBoard]

Owen

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Owen
Date: 21 Feb 2001
Time: 09:16:08

You wrote

>>>>>One thing he didn't mention in his seminar is, say after 10 years you decide to sell one of your properties, apparently the value of the property has been doubled in value, ie you will have to pay a huge CGT. After you pay off the mortgage and CGT, what else do you have left?

So you buy a $300k 1br in the city ($90k deposit plus costs) with a $210k loan (70%). You then sell it 10 years later for $600k, pay off your original $210k and pay 24.5% CGT on the $300k ($73500). This leaves you with $316500 cash in your pocket (minus expenses).

Sounds good but relies heavily on 3 things. You have a $90k plus expenses deposit to get in, your rent will cover the mortgage and that a 10 year old 1br apartment in the city will in fact double in 10 years time along with every other 1br apartment in the city.

 

[WebBoard]

John (Brisbane)

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: John (Brisbane)
Date: 21 Feb 2001
Time: 09:34:39

Hi Yuchun,

You wrote..

Q.>>>>>One thing he didn't mention in his seminar is, say after 10 years you decide to sell one of your properties, apparently the value of the property has been doubled in value, ie you will have to pay a huge CGT. After you pay off the mortgage and CGT, what else do you have left?

.......I'm not too sure how this works but will mention it to prompt a response from our other members.

A.<<<< How about if you wait to sell until you are retired or momentarily not working. This may not always be possible, but if you've done well in IP you should have that luxury.

You will have to pay CGT at your top marginal tax rate. What will that be if you do not have a salary and or large taxable income??? Pretty low I would imagine.

Comments....

 

[WebBoard]

Yuchun

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: yuchun
Date: 23 Feb 2001
Time: 15:23:14

I apologise that I didn't phrase my question correctly.

With HK strategy you borrow I/O loans and refinance every few years, aren't you going to end up with more liability than equity? So when you sell the property, after you pay off your mortgage and CGT, you probably end up with very little in your pocket or none at all.

I am just wondering what you get from this strategy, rental income? cap gains? or extra cash from refinancing?


regards, yuchun

 

[WebBoard]

Owen

Reply: 1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Deposit Bonds ( A True Story)..A follow up.
From: Owen
Date: 21 Feb 2001
Time: 10:52:45

You wrote -

>>>>>You will have to pay CGT at your top marginal tax rate. What will that be if you do not have a salary and or large taxable income??? Pretty low I would imagine

It's actually half your marginal rate or half your capital gain at your full marginal rate - depends on how you like to look at it. Capital gain as far as the tax office is concerned is still income, it's just taxed a bit differently. So if you aren't earning anything and you make a $300k capital gain this means you have earned $300k for that year. Your marginal tax rate will be 47% so the same calculations apply.

I asked my accountant about that one a while ago.

Of course Henry Kayes idea is not to sell anyway.

In the orginal example you would have a $600k IP owing $210k. His idea is that you would borrow to up to 80% LVR (an extra $270k) in a LOC and live off this money. Only do this as long the rent will cover the interest costs. If the rent will only cover 60% LVR then you can only use up to $150k. Of course if you only spend $50k of the available funds then you are still earning a positive income from the rent.

The problem with this is 20 years down the track you could still owe loads of money. At some time you would have to sell something and pay some loans down.