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Reloading Warchest & Unlocking Value Through Cash Out Financing

It's been more than a month and half now since we last rented out our home in order to generate a healthier cashflow due to the unexpected situation that happened back in thefamily.


Things are looking much better these days, with my Dad stabilizing and improving every single day through the rehab and he is also able to eat like a normal person now (he wasn't able to swallow when it first started).


Our family also managed to turnover some of the business around and cashflow is looking very much healthier than before, though there's still way to go before we can rest on our shoulders.


For myself, I have also started a new role this month which means cashflow will be alright in terms of the incoming salary every month. Whilst feeding the family and paying the school fees are not an issue, we are still very much vigilant on our spending as we tend to save as much as possible.


We probably have to cancel overseas trips and travels in the next 2 years until things get a lot more stable. If we have time, we will most probably head a trip back to visit my Dad.







The Original Idea


For a few months now, I've been looking for viable ways in order to increase the amount of warchest I'm holding.


While there are no immediate compelling investment opportunities at the moment, I do have some use for it in my mind which may or may not come true depending on the situation.


Still, I would think that raising the amount of warchest would come in handy at some point, especially with borrowing costs very low these days, and I have the choice to repay all of them back after the lock in period (usually 2 years) is over, should I want to.


My original idea to increase the warchest was to sell the property we lived in, and then move my family to some place which costs cheaper. Buying a resale HDB comes to mind, especially given that my wife and I had now converted to aSingaporean status, and we certainly want to make the full use of it.


However, we managed to find a tenant to lease our property at the end, for a lease tenure of 3 years, which now means the rent itself will be able to take care of the mortgage costs over the next 3 years.


To me, that itself, turns a "liability" into a"cash generating investment machine".


Our cashflow looks a lot lighter from thereon, but the fact that we are still "renting" a place from our in-laws doesn't solve the long term solution at the end of the day that we still need a roof over our head.


Cash-Out Financing


Then comes Cash-Out Financing.


Cash Out Financing is basically a concept of borrowing from the bank.


It involves putting your property as collaterals to the bank, who then values the property based on current market situation, and then decides how much cash they are willing to disburse to you as a loan.


This usually works in an advantage where you purchase your property long ago and you decide to unlock the value by cashing the difference out in cash, while still keeping the name to your property.


Putting your property as collaterals to the bank is definitely less riskier to the bank than taking out personal loan based on income because the bank knows that in the event of default, it still has assets that they can auction off to get some money back.


Because of this, the loan rate tends to be usually very low (compared to personal loan), and in my case, I get a rate that is slightly cheaper than the mortgage rate I'm currently paying.


For example, the bank values your property at $2.1m and you have an existing loan with the bank of $400k.


The bank will take an approximate amount of 70% hair-cut from the valuation and then deduct the full existing loan before deciding how much to disburse the rest of the cash to you as additional loan.


If you have used any of the CPF amount in your purchase previously or used them as loan repayment (which I think everyone does), the bank will have to deduct and discount that too.


So what we have in the example is something like this:





From a borrower's point of view, the risk discretion will still apply on whether you are ultimately able to repay your loan amount back.


Do take note that you are also incurring a financing charge cost to the bank, and unless you can churn out higher than what you borrow at, then it is likely that it is not a good idea to proceed with that.


I'll take a risk with this one, just because I think I have some ideas on where to put my money where it can churn out higher than the 1.85% I am paying, and more importantly it allowed us to unlock the value of our home at today's current market valuation without having to sell them.




Thanks for reading.





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34 comments
CoryLogics

btw i check my log, no notification from your post...grrrr

CoryLogics

Basically utlising your net worth from property. Value goes up, more cash from financing. Worst situation, market melt down, stay in HDB lor. The essence is still able to recognise different property valuation matters as part of networth.

quekdon

Stay prudent,be prepared all the time.

lynlynnakamori

Thank you & happy for you
for your Dad has speedy recovery...Jia You 3F

Spinning_Top

Glad to hear your dad is making good progress in recovery...

3Fs

Reply to @Spinning_Top : Thanks, he is much better now and still recovering with his therapies.

SongfaBKT

😅Thanks for the advise by dr.tti (veri give face(≧∇≦)b)and apologies for wet blanket feel, always good to know the downside too.
Some things are non-reversible…

SongfaBKT

Reply to @layers : nope, just like to eat soupy things a lot, feel bkt is quite nourishing due to its TCM herbal stuff(can change to herbal chicken soup next time)
Hope everybody(me included) is well nourished…
Oops, not vested in breadtalk…their net profit margin is haiz…

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Turtle_Investor

Dr TTI, well said. I mean your explanation of a true proton cannon not you are an arshole 😂.

Conservatively, I wouldn't considered borrowed money as warchest because simply, they are a loan to me and not truely my own assets.

I am sure u could beat 2% pa easily based on your track records but the risk of being wipe out is real when table turn against you as quickly as what happen during GFC, lehman Bro just gone down over a weekend and that's it.

Not trying to pour cold water but this is something you cannot afford to not think about, worst case scenario.

Okay turtle is also an arsehole today. Dr TTI's fault.

ThumbTackInvestor

haiz. Here comes TTI again.
I really didn't wanna comment here cos it's really not my business and I'm kinda busy looking at some companies right now, and most importantly, I dun wanna be the wet blanket here amongst the high fives and the approval from the rest..... but @SongfaBKT quoted me and now I gotta clarify.😂
See la.
LOL.

I really dun think this is considered a "war chest".
TBH, I also don't think this is particularly... hmm.... ok, just sayin it out. Just don't think this is a wise move. Let me substantiate.

A proton cannon only works if you have UNENCUMBERED liquidity. Yep, unencumbered is the key word.
Or at the min, if cannot be unencumbered, then shld at least be hedged such that you get access to it or preferably, MORE access to it when things go south. That's the whole idea of hedging isn't it?
Whatever u used to hedge, it runs COUNTER to the general sentiment.

This here... is just leveraging up in another form.
Kinda like a errr... solar powered proton cannon.
You think it's a proton cannon, but when Thanos comes and his underlings blanket the sky, suddenly your proton cannon is just a toy.

Let me explain quickly.
Sure, it looks like a sure win. You borrow at what, under 2%? Everyone would know how to get a ROI above that. What's the catch? If the idea is so easy, then u gotta look left and right and wonder if you're the only genius around.
Thing is, the capital is tagged to the property which acts as collateral.
If there's a crisis, you'd find that the collateral (property value) gets revalued very quickly by the bank, and suddenly, they'd call back the loan OR ask u to put up more collateral... at the worst possible time.
Yes. It is literally the worst possible time.

U might think that somehow you can identify when things go south and quickly deleverage everything, get out and all that.
I doubt so though.
If we suddenly say get a crisis precipitating event tomorrow, say I dunno, Xi goes crazy and decide to go all out trade war, or Iran decides to send a few missiles to Trump, or Trump decides to... do whatever Trump loves to do.....

The 1st thing is across the board, all equity indices go deep red.
Suddenly you'd be in the red with whatever you used that leveraged capital to buy. Very tough to take a loss cos at that point, u wouldn't know if it's temporary or permanent.
And even if u take it, a single event like this would easily wipe out years of trying to arbitrage between your ROI and the 2% or so cost of capital.
Sides, I suspect, and this is what most logical ppl would do, youd try to deploy the leveraged capital into some higher yielding instrument thinking of earning the arbitrage between the yield and your 2% cost.

If u try to hold your positions, in a more prolonged recessive event, your property will be revalued by the bank. Because the value held as collateral is relatively large, once u are asked for more collateral... I think it'd be very very hard for u to put that up.

If something as basic as a sudden medical situation can warrant a 180 degrees change in your life direction... well, you certainly don't have the earning power or the financial moat if something like this happens.
That's why I say, your loan will be called back at literally the worst possible timing.

Would this happen? Well, I guess a valid argument here is if u argue that u think this is unlikely to happen. As in u could say that u don't see a crisis on the horizon anytime soon or something along those lines. I don't disagree actually.
But... hmmm, how do I explain his quickly....
If the consequences of an adverse event is SO bad, regardless of how low the risk, IMO, it's a no go
WB puts it somewhat similarly when he says that lotsa otherwise very clever ppl, end up doing stuff that's not that smart in a bid to get ahead by that little bit, but ends up getting wiped out. It's just not worth it.

Maybe I throw in my own industry as an analogy.
If I had to choose to do a surgery... 1 surgery has a 10% risk of resulting in a complication that's not good, but reversible and won't have long term effects other than maybe, some pain or inconvenience to the patient
OR
another surgery that has a 1% risk of killing the patient...
well, Give me the 10% risk anytime!

Cos if the 1% happens... it's just not worth the other 99 times out of 100 times that you got it perfectly, and u get lauded as a world genius for doing it so great 99 times!
No use! The 1 time would destroy everything.
That's what I mean here.

This ain't a proton cannon, and thinking it is, can be fatal.

OK, like I said, I really dun wanna be the arsehole again, amongst all the congratulatory messages... but hey, who ask 1 of u to quote me
😂

U might feel that u need to do something crazy to get back on track quickly but...
really.
The real money is made in finding that 1 simple edge that u alone identify and can do better than most ppl...
and executing that edge again and again and again and again...
kinda like compounding your competitive advantage.
Yes, it takes time.
That's how it's supposed to be.

Tonight's Nike's earning release (After trading hours), so I'd paraphrase them.
Just (don't) Do It.

PS: All of u fan boys, dun go anal on me. It's just my opinion
And anyway, I wouldn't give a damn even if u do, so mai waste your energy.
😝

WolfOfHougangStreet

Reply to @3Fs : Looking forward to reading more about the risk management part!

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Evilcrownofthorns

impressive that you have almost paid up a 2 mio house at your age!

layers

this one is proton cannon + spirit bomb. 1million additional warchest

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