Ways to increase servicability

[hysterical]

Thank you for all your responses.

 

[Property Meister]

Hysterical,

This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -

When you have a few IPs under your belt Serviceabilty will eventually become 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 seviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to the DSR or Debt Service Ratio. In other words not enough cashflow income to service your IP debt. Now this isnt really 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 you PAYG income and/or increase your IP rental income. As these methods are fairly well reliant and restricted to market conditions alot of investors dont know where to go to from there. Alot forget about the store of Equity they have with their low LVR's created over time by past capital growth.

Thats where a Cashbond or Annuity comes into play - which is method I have implimented 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 cashflow 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 guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a 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 how I have been able to keep purchasing.

Now I know this method is not for everyone as its an advanced strategy for the investor with a substantial portfolio already accumulating under their belt. It depends on your circumstances, goals, time frames & your individual investor risk profile.

Hope this has provided you & everyone else with some food for thought.

Hi rixter

I have never heard of this, is this a new or common thing?

are there any drawbacks

so as per your example you have $100k in your offset or LOC, you baiscally ask the bank/insurance company to pay you $20k pa for 5 years, I guess once you agree to it, you cant change your mind, thus effectively tying up your funds for 5 years, is this correct?

 

[The Y-man]

Hi HotRod

Just curious, what is the typical number of NG properties you reckon one investor will have ?

Cheers

We got to 4~5 per wage earner for a "typical" Melbourne NG property - beyond that, we didn't have cash to feed ourselves with (well look on the bright side, we had it down to 16% income tax )!


The Y-man

 

[Peter_Tersteeg]

Hi rixter

I have never heard of this, is this a new or common thing?

are there any drawbacks

so as per your example you have $100k in your offset or LOC, you baiscally ask the bank/insurance company to pay you $20k pa for 5 years, I guess once you agree to it, you cant change your mind, thus effectively tying up your funds for 5 years, is this correct?

Drawbacks are:

1. It is a cashflow negative situation over 5 years. The cost of borrowing money for the cashbond is higher than the income it generates. This may not be a major issue if it improves your servicing in the banks eyes.

2. Getting lenders to accept a cashbond as serviceabilitly can be tricky if servicing is already tight. I've seen few cases where the lender says they can see the servicing for the next 5 years, but what happens after that?

 

[HotRod]

We got to 4~5 per wage earner for a "typical" Melbourne NG property - beyond that, we didn't have cash to feed ourselves with (well look on the bright side, we had it down to 16% income tax )!


The Y-man

I was gonna say the average punter having a go in property will get maybe 1/2 NG properties, realise that they actually cost money to keep and then sell them up.

The more savvy PI will propbably be ablbe to handle the 4/5 you say but these might be closer to neutrally geared (with depreciation tax benefits) and easier to handle.

 

[Rixter]

Hi rixter

I have never heard of this, is this a new or common thing?

are there any drawbacks

so as per your example you have $100k in your offset or LOC, you baiscally ask the bank/insurance company to pay you $20k pa for 5 years, I guess once you agree to it, you cant change your mind, thus effectively tying up your funds for 5 years, is this correct?

I first learned of the strategy at a 2 day seminar I attended 10 years ago.

I have posted extensively on the subject in the following threads.

Cashbonds for Dummies.

LOE or Living off Rent.

All your questions and more I've covered.

 

[Rixter]

Drawbacks are:

1. It is a cashflow negative situation over 5 years. The cost of borrowing money for the cashbond is higher than the income it generates. This may not be a major issue if it improves your servicing in the banks eyes.

2. Getting lenders to accept a cashbond as serviceabilitly can be tricky if servicing is already tight. I've seen few cases where the lender says they can see the servicing for the next 5 years, but what happens after that?

Commute the CB after its got you across the line, get your LOC funds back, and duplicate again if need be. Terms range from 1 - 50 years. Choose the term for you.

 

[Rob Williams]

so as per your example you have $100k in your offset or LOC, you baiscally ask the bank/insurance company to pay you $20k pa for 5 years, I guess once you agree to it, you cant change your mind, thus effectively tying up your funds for 5 years, is this correct?

Most of these annuity products (eg. Challenger) have an early termination clause. There are penalties for breaking out early, but that is to be expected. So, the short answer is no, your funds are not set in concrete for 5 years.

 

[Jtkumnick]

Hysterical,

The way it works is as follows - you purchase a Cashbond/Annuity or guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a LOC.

Wouldnt the extra $100k drawdown on your LOC just change it from a DSR problem to an LVR problem?

 

[Peter_Tersteeg]

Wouldnt the extra $100k drawdown on your LOC just change it from a DSR problem to an LVR problem?

Potentially it could, but when you've held a well performing portfolio for a reasonable amount of time, people will often become equity rich but cash poor. A cashbond strategy isn't one you see many people try to execute with 2-3 IPs when they started investing 2 years ago.

 

[Rixter]

Wouldnt the extra $100k drawdown on your LOC just change it from a DSR problem to an LVR problem?

What ever the LOC credit limit is the banks/lenders already view it as being fully drawn for the purposes of calculating LVR no matter what the balance is.

The idea is to use a portion of your LOC funds to set up a CB structure and/or still have access to sufficient funds for IP deposits.

 

[Rixter]

Potentially it could, but when you've held a well performing portfolio for a reasonable amount of time, people will often become equity rich but cash poor. A cashbond strategy isn't one you see many people try to execute with 2-3 IPs when they started investing 2 years ago.

Yes exactly PT... as I mentioned previously the CB structure is not for everyone as its an advanced strategy for the investor with a substantial portfolio already accumulating under their belt.

 

[possumcreek]

Hysterical,

This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -

When you have a few IPs under your belt Serviceabilty will eventually become 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 seviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to the DSR or Debt Service Ratio. In other words not enough cashflow income to service your IP debt. Now this isnt really 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 you PAYG income and/or increase your IP rental income. As these methods are fairly well reliant and restricted to market conditions alot of investors dont know where to go to from there. Alot forget about the store of Equity they have with their low LVR's created over time by past capital growth.

Thats where a Cashbond or Annuity comes into play - which is method I have implimented 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 cashflow 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 guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a 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 how I have been able to keep purchasing.

Now I know this method is not for everyone as its an advanced strategy for the investor with a substantial portfolio already accumulating under their belt. It depends on your circumstances, goals, time frames & your individual investor risk profile.

Hope this has provided you & everyone else with some food for thought.

Awesome! I love it, just wish i would have the courage to do something like that. Thanks for sharing

 

[Peter_Tersteeg]

A great way to increase your income is to become self employed. Running your own business can put you in the position where you can define your own income, which is something you usually can't do as PAYG. At the same time, you're also building an asset which is worth something.

The down side is, it's even easier to destroy your income and chew through your existing cash and assets if the business fails. You'll also delay your investing by a few years until the business does get started (if at all).

 

[Aaron_C]

Agreed Peter - although in most cases the income from the business would be the primary reason to go into business rather than its use in property investing.