Serviceability wall

[Richard Feynman]

RF, I think you're referring to cashbonds.....

Sure was. Don't know why he hell I typed deposit bond.

Must be getting old

 

[MTR]

How have people gotten around the serviceability wall? If you have a motza of cash but no serviceability can you still invest in property? Would love to hear peoples experiences and advice.

I am currently using lo doc lender RAMS for my current development, low fees and interest rate low. However you will require your accountant to sign off on higher income to service the loan

Mtr

 

[jerrybee]

Now that I think about it, there's something about this cashbond trick that I don't understand.

So you have 100k saved, or from equity in a LOC. You use that to buy cashbonds which returns you roughly 20k a year. That 20k a year boost in income gives you roughly 5x borrowing power, which is 100k...but you started with 100k to begin with...? If it increased your borrowing power by 10x I could see the sense in it, but doesn't this just bring you back to square 1? Obviously I've missed something?

 

[Redom]

I'll let Rixter talk about the specifics of cash bonds as i haven't seen it used before.

But the way such strategies could work to improve borrowing power is by switching capital for yield.

I use the example of ATM's as its one that i've seen before. For example, one can achieve a 28% yield on their ATM investment BUT the capital cost per ATM machine would not be recovered at the end of the useful life. So if one spent 100k on ATMs and its worthless after 10 years. They are compensated for this with a very high yield.

For each year over the 10 years they add 28k to their income. This 28k is used for servicing and then translates into higher borrowing capacity.

I assume the cash bond works in a similar way.

Cheers,
Redom

 

[jerrybee]

Ah I see, it's the higher yield that makes the difference. Of course. Thanks

 

[Rixter]

Now that I think about it, there's something about this cashbond trick that I don't understand.

So you have 100k saved, or from equity in a LOC. You use that to buy cashbonds which returns you roughly 20k a year. That 20k a year boost in income gives you roughly 5x borrowing power, which is 100k...but you started with 100k to begin with...? If it increased your borrowing power by 10x I could see the sense in it, but doesn't this just bring you back to square 1? Obviously I've missed something?

Jerrybee, a CB allows you to increase your asset holdings to approx 4-5 times the CB purchase price over and above your current capacity. ie $150k CB will allow you $600k+ approx extra asset base in portfolio holdings.

The extra CG exposure by increasing your portfolio aset base (providing you have done your homework & bought well for CG) more than offsets your CB purchasing cost over the term.

At the end of the CB term you are left with a small amount of balance on the original LOC. This is due to the interest rate difference between your LOC & the CB being returned to you and therefore it comes at a price. Think of it as you are effectively purchasing an income.

This is why you should examine your own personal sitution and decide whether its for you.... only after you have explored and/or exausted all other less inpacting options available.

Like I said earlier, its a strategy for the more experienced investor who has a substantial size portfolio and is asset rich cash flow poor.

I hope this helps.