Navra Cashbond?

[Lissy]

The sad part is that so many mums and dads go to a financial adviser who tells them they need to diversify - and lo and behold, he has exactly the managed fund to do it. Never suggests direct investment in shares or property (although I know there are some limitations under law about giving that sort of advice). So mum and dad sign up for the managed fund, adviser gets nice little commissions flowing in, and everybody thinks how wonderfully diverse they are in their investments.
Goodness, I am in a cynical mood this morning.

 

[brains]

Cynical but true, Lissy.

The problem with the financial advisor field is the comissions. Of course they are going to steer customers to where their comissions are best, not what is always best for the customer.
Nothing beats self education.

 

[Kevmeister]

Bill:

Heres my take on your example:

1. It is illogical to buy an annuity returning $35K per annum over 5 years when all you need from it is $11,500pa to service the property.

2. So, let's get more realistic about the cashbond we'd need in that example. Assuming an interest rate of 6% for the loan and 4% from the annuity we'd need a cashbond of $72,000 approx (gee, I hope my spreadsheet is right!).

3. So the total property "cost" to you is only $400K + $78K = $478K.

4. After 5 years the property value has increased to $561K. We have no money "left over" from the cash bond.

5. Our total profit from this exercise is $561K-$478K = $83K. This equates to a return of 17.4% over the 5 years, or about 3.25% pa.


As to whether the risk would be worth it? That's for each individual investor to decide. I certainly could not do this secured against my family home.

But for an asset-rich, income poor person, the ability to "make" $83K virtually out of thin-air is still better than making $0K.

I've just worked with your numbers - whether they are realistic or not I have no idea.

 

[Kevmeister]

Originally posted by brains
The problem with the financial advisor field is the commissions. Of course they are going to steer customers to where their commissions are best, not what is always best for the customer.
Nothing beats self education.

Certainly some fund managers have better accomplishments than others but no-one can guarantee that they are going to be able to make money in a particular market since that is controlled by forces that the fund manager can't control.

And we're also told that past performance is no guarantee of future performance (doesn't every PDS have this?) but I'd sure as hell still prefer to pick someone with a proven track record in the past than some without a proven track record or someone with a poor track record.

Fact is, Steve Navra here is relying on his own past performance to comfort people in the potential earnings of his fund. No-one has crystal balls, that about all they can do.

Self education is best and if that serves you well, I see no reason to pay up-front commissions to a fund manager or financial adviser if you haven't received "advice". That's why I decided several years back to make my own decisions and use a discount fund broker. I don't ask - they don't tell - they don't charge - and I don't pay.

 

[Les]

G'day all,

Also not a guru, but having seen a bunch of figures, and "mild" returns, I got to thinking "what's missing" ????

Answer (maybe several):-
1. If cashbonds are Tax deductible, where has Tax saved been entered into the figures quoted?? (I didn't see it...)

2. As I recall, Cashbonds can allow a Bank to lend against the guaranteed Income stream at 100% of income (rather than the usual 35%) - so, when quoting a "required" size of Cashbond, do you REALLY need a $72k cashbond? Or will a $30k Cashbond suffice??

3. Also, as I recall, Steve always did say that any investment MUST have an expectation of reasonable Capital Growth to make it worthwhile. What is reasonable?? (7%? 10% .... )

Steve would do a far better job of responding to most of these (I figure he's pretty busy at the moment) - but I hope these thoughts add some further useful data,

Regards,

 

[Steve Navra]

Originally posted by Les
Steve would do a far better job of responding to most of these . . .

Hi Les,

Yes it is a bit frenetic at the moment

I WILL answer ALL the questions . . . just that I prefer to allow the forum members the opportunity to work through the issues themsevles first! (This is the best form of education,is it not.)

There are a few cynics out there . . . aaaah well, perhaps soon I will turn them into 's

Regards,

Steve

 

[Tibor]

May I add another point to the ones discussed?

What about opportunity cost? To me to pay 20K (extra in interest) for a 5 year annuity which allows me to buy another 300K worth of property is peanuts (or cost of doing business).

Maybe it is worth to calculate without it how much slower is your wealth creation plan, then the objective will become much clearer.

So, as this is not what I would be worrying about, but

1) How can I utilise the 300K with the highhest growth and still reasonably yield?

2) How quickly can I REPEAT the entire process?

If someone does not understand that this is a fastpath to financial freedom, OK stay on the traditional way. One day even managed funds will get you there. I would just prefer to get there a bit faster.

Tibor

 

[Bill.L]

Hi all

Kev,
In regard to wher I got my figures from, it was your workings on the 220k cashbond and Steve's on using it for the 400k property, so I looked up a possible candidate suburb for high growth(has been in past few years) , that was around the 400k. Even if we assume the banks will allow up to the 100% serviceability of the cashbond income, you would still need more than the $11.5k p/a to allow for the unexpected,(eg,long vacancy,sudden extra maintenance,etc). Also the Carnegie example would show more like $13.5k needed per annum according to the figures I saw on realestate.com

Les,
I didn't go down the road of tax because it is the low income/high asset type of people who this strategy would appeal to. You would expect the deductions to be somewhere in the 30c tax bracket, but to include tax would mean a hefty CGT at the other end, probably at higher rates than the deductions.

Steve,
Yes I am one of those cynics, I don't know that the next 5 years will be a repeat of the last 5. Obviously if there is 7-10% growth p/a then the cashbond strategy will work fantastically well. My thoughts are that it will be(especially where I have purchased )

Too many people will take an element of a strategy and because they can't find exactly the right opportunity, will adapt the strategy to their hopes. There are probably people who have purchased inner city apartments using cashbonds and expect 7% growth because the sales agent said it would!! Even if (and it's a big IF) they do get 3% growth p/a for the next 5 years, they will be worse off.

bye

 

[Donna L]

I HAVE A CASHBOND! I AM USING THE STRATEGY AND IT WORKS.

Two years ago, my bank stamped my file "NO FURTHER ASSISTANCE AT THIS TIME". The loan officer, all of 23, said "You really should pay down your loans Mrs L - tut, tut, tut". I think I had 150k in equity available but no serviceability. However, my husband had just changed careers, was going to be on a rising salary and I new that serviceability would not be an issue long-term. I changed banks, (quote that "No further assistance" line with great glee when she asked why I was leaving), and with my 150K and a property with deposit bond from 2001 in hand, I converted 80k to a 5 year cashbond and knew that this would now give me the serviceability to convert the remaining equity into the 20k deposit on the OTP in another 18 mths or so.

Now, the 80k cashbond pays me $719 a fortnight or $18694 a year or $93470 over the 5 years. I pay tax at 30% of $1694 p.a. (the rest is my own money) and I pay interest on the 80 k loan of $4776 p.a. which is tax deductible at 30% so over the 5 years I will pay $4041 in tax on earnings and claim back $7164 in tax deductions. So, over the five years, I receive $93470, I pay out $23880 in interest and receive net tax deductions of $3123 meaning that of my original $80k I receive back $72,713. So for just under 8k I have secured a property for 302k (now worth $360k), have purchased another OTP which has risen $35k. (Total value of these properties is over 800k)

As mentioned earlier, the bond payments are largely tax free so my $18694 p.a. net is equivalent to a $26705 p.a. pay rise. But more importantly, as most of us who have property know, the actual cost of maintaining an investment property after tax deductions and depreciation is really not that much. In my case an average property costs me about $3-5k a year before tax and this is all but wiped out by the depreciation deductions so the cashflow from the bond can largely be put back into the bond or sit in an offset account in case you need it for vacancies etc. It's very comforting to see it bouncing up there every fortnight. In fact, however, I am using the money to assist with living expenses but when my daughter finishes school in a couple of years that money will be just put back into the loan. In the meantime, I am happy to end up with a debt of $80k over the next five years because I can live comfortably in the meantime and the properties I have purchased will have accrued considerably more than that by then (I only need about 3-5% p.a).

So I am a happy customer. Yes I could have appplied for low-doc loans for the original 150K but in the end, I still have make the repayments and life would have been very tight. I still juggle a little but can let the belt out a few notches!

 

[Kevmeister]

Bill L:

In regard to wher I got my figures from, it was your workings on the 220k cashbond and Steve's on using it for the 400k property, so I looked up a possible candidate suburb for high growth(has been in past few years) , that was around the 400k. Even if we assume the banks will allow up to the 100% serviceability of the cashbond income, you would still need more than the $11.5k p/a to allow for the unexpected,(eg,long vacancy,sudden extra maintenance,etc). Also the Carnegie example would show more like $13.5k needed per annum according to the figures I saw on realestate.com

I was simply using your figures on the cost of holding that Carnegie property. You said $11.5K pa so that's what I used. Yes, it could be $13.5K or $20K - only the purchaser can decide what is reasonable.

An important point, however, is that in your original example you allowed for $117K "left over" from the cash bond but did not reinvest that amount anywhere in the meantime. For example, using the $220K cashbond for "comfort" reasons and then putting the surplus back into an offset account against the original loan. That would make a significant difference to the calculations.

Also, Steves example of a $400K property purchased with a $35K pa cashbond is also unrealistic because that amount pa could probably fund two such properties, assuming they are tenanted even at a modest yield of 4%.

Les:

I'm not 100% sure about the tax deductibility of the loan for the cashbond. But Steve advises at his course that income from the annuity is "real" income, and you have to get some kind of exemption from the ATO to not pay tax on it, because it was funded from your capital. If you're not paying tax on the income side, then why should the ATO let you claim a tax deduction for the interest on the loan side of the equation?

But for an asset-rich, income poor person, the ability to "make" $83K virtually out of thin-air is still better than making $0K.

This was my comment from the earlier post Tibor effectively says the same thing when he talks about "opportunity cost". I think cashbonds really are all about taking advantage of the "opportunity", so long as you are comfortable with the increased risk.

The increased risk is akin to "counting your chickens before they hatch" (ie. spending your capital growth before you've earned it).

 

[Donna L]

The tax deductibility is twofold. Firstly you are using the loan to buy an income producing bond and secondly because the income from the bond is allowing serviceability to purchase income-producing properties.

 

[beech]

hi Kev the loan for the cashbond is definately tax deductable as its required to purchase an income producing asset.

And you do pay tax on that small income derived from the cashbond at your personal rate.

The individual tax ruling as Steve suggests you do is to confirm in your particular case that in fact the loan for the cashbond will be tax deductable.
To my knowledge all rulings applied for on behalf of his clients have been successful.


Darren


ps,good post Donna re your particular case for using cashbonds,excellent info.

 

[brains]

Thanks for the post and explanation Donna. I'll have to go over your figures again to absorb them all.

 

[Bill.L]

Hi all,

Just wanted to bump this thread for further discussion as I am becoming convinced that over the long term this cashbond strategy can only work in a high growth/ low and dropping interest rate environment. The other proviso is that you need to be cashflow positive.

Because we are nearing serviceability limits with our lender( very conservative), I have been playing with numbers of an actual example of an IP that we bought in 81 and sold in 90. Because of high interest rates in the 80's, if the house had been purchased with borrowed funds, it would have been very negatively geared. The first interesting number I came up with showed that if we had kept the house and added all losses back into the loan, then the loan in 2003 would have grown to $217,000 on a property that is worth $220,000-$240,000 today!! This figure is reached by excluding tax benefits and allowing nothing for maintenance over the period.

One could ask where is the benefit of property investment!!!

Using tax benefits(assuming 50% return of loss from tax office) the situation looks better with a loan of only $71,000 in 03 against current value.

My point is that if you exclude the last 5 years of perfect investment/growth conditions, the cashbond strategy for the asset rich/income poor will not work, as the tax benefits cannot be utilised. Many people who have serviceability problems are probably down to lower marginal tax rates as well.

I'll try and get some figures on using cashbonds to fund the prop we bought in 81 and see what I come up with.

bye

P.S. Using a philosophy of continueing to pay down
the loan using 10% of gross wages only, would have paid out the loan by '98 and now have an asset earning $8,000 pa net(b4 tax)

 

[Steve Navra]

Do your numbers

SOME ANSWERS:

The money borrowed to set up a cashbond is at a cost:
6% to as high as 7%. Be conservative and lets calculate using 7% as the cost of the borrowed money.

The Return on the cashbond say at 4.5%.

So the difference in costs say at 2.5% pa

Borrowings: $100,000 at net cost of 2.5% X 5 yeas = $12,500.
ALSO, let us assume the tax deduction is unavailable.

So, nothing for nothing . . . cost is $12,500 in cold blood.

Extra serviceability created = $20,000 pa (not counting the interest) at a buffer rate of 8.4%
Therefore extra serviceability = $238,095 - $100,000 (For the cashbond) = $138,095 extra borrowing capacity that you would NOT have had.

QUESTION: What return is required to make this a viable proposition??

$138,095 @ 1.75% return = $150,595 after 5 years. (Gain of $12,500) And you BREAK EVEN

ANSWER: The extra $138,095 need be invested into an asset class(property) that can return at least 1.75% pa.

To all the skeptics out there:
If you do not believe you can acquire a property that returns more than 1.75% pa on average . . . then a cashbond is NOT for you.

NOTES:

I stongly defer to Rolf's comments:

a) The cashbond need only be used where other finance cannot be obtained.

b) Other options . . . lo docs / no docs / equity loans are available. In some cases where an income needs to be declared on the application form (with or without proof / tax returns et al) the cashbond is extremely useful, so as to make an honest / non- fraudulent declaration.

c) We (Myself and clients who utalise the cashbond) do not openly discuss the intracacy of the structure . . . so as to prevent abuse of the system which will adversely affect our relationships with various banks. (This happened in the past where an unreputable group used the method in a 'shonky' way.)

d) I am comfortable to help clients with the structure IF they are prepared to work with an 'ethical' finance broker . . . example someone of Rolf Latham's stature.

Sincerely,

Steve

 

[Bill.L]

Hi Steve,

I have done the numbers! And I still don't like what I see.

In your scenario the figure to break even if its a property investment is around 3.5% , because your $138,000 would only buy a $130,000 property given a 106% lend using other equity.

Also when I used numbers for actual property value, interest rates and rent yields since 1981 to 2001(4 cashbond lends in a row), and include rates,insurance and property management, an original $44,000 loan grows to $237877 by recapitalising accumulated losses. I also used the annuity payout each year as an up front payment into the loan to reduce interest.

There is also no allowance for maintenance and the property is assumed to be rented for 50 weeks pa. The value of the property at the end of 2001 was $190,000- $200,000.

The striking points for me were how costly this strategy would have been in the era of high interest rates right through the 80's and during the period of low growth in the early 90's while interest rates were still relatively high.

Given that this strategy has worked well for the last 5 or 6 years, a prudent investor would realise that over the longer term(22 years) it is a losing strategy and will sooner or later return to the norm.
The above property example I used has had between 5-8.6% gross yields through the 20 year period(though currently it is only around 4.15%), and compound cap growth of 8.25% pa.

bye

 

[Steve Navra]

Originally posted by Bill.L

I have done the numbers! And I still don't like what I see.

Dear Bill.L,

I strongly suggest that you NEVER buy a property:

1) All the problems that you seem to come up with are indicative of all properties, WITH OR WITHOUT A CASHBOND!

2) There are on-costs like stamp duty, maintanance et al with every property. The cashbond merely enhances serviceability.

3) Growth potential relates to purchase price and timing: Rental Reality ensures that you do NOT buy out of sinc . . . maybe you should do the course and gain an understanding of all the factors before you voice such vociforous critique?

4) Lastly you say your example property achieved compounded Capital growth of 8.25% . . . and that in your opinion 3.5% is required for using a cashbond to break even. Well then thats 4.75% in excess of what you think is required.
SO WHAT EXACTLY IS THE PROBLEM??

Hmmmmmm, I never much react to negative remarks . . . after all everyone is entitled to an opinion and this is an open forum.
Just that you seem to be on a CASHBOND BASHING CRUSADE . . .

I sometimes wonder why?

Sincerely,

Steve

 

[duncan_m]

Originally posted by Steve Navra
Hmmmmmm, I never much react to negative remarks . . . after all everyone is entitled to an opinion and this is an open forum.
Just that you seem to be on a CASHBOND BASHING CRUSADE . . .

I sometimes wonder why?

Sincerely,

Steve

Steve, thanks for tirelessly persisting thus far

Duncan.

 

[Bill.L]

Hi all,

Interesting how if someone offers an alternative point of view using numbers of an actual example it's BASHING.

Steve, it's 22 years too late to suggest I never buy property and 19 years for the second one, and 16 years for the third one etc. Please re-read my post and comment on the long term use of your cashbond strategy over the last 20 odd years.

bye

 

[Mikhaila]

Hi Bill,

Would you mind posting your detailed figures and assumptions? This is just to make the discussion more productive. It seems to me you making some kind of assumption somewhere and it looks so bad for you. If your property averages 8.2% growth every year, I honestly struggle to come up with a reason why cashbond would not have worked regardless of interest rates. Did you calculate based on 5 years CB term or longer? The only possible catch I see is if you buy CB say at 5% return with 8.5% lending rate and in the next year or two the lending rate goes to 18%. How likely is that?

I was sceptical of the CB solution mainly due to lack of proper information about it and abundance of misinformation. I attended the seminar and it’s just clicked. I explained in less than 45 min to my partner how, why and when (all my previous attempts were logically sank in less than 5 min !). The partner is very knowledgeable when it comes to this subject as she works in mortgage operation for big financial institution.