Hi,

To throw in a different opinion, if I was betting on the next city in Aus to experience above average growth, I'd be putting my money on Sydney.

Adelaide is at the tail end of a recent boom, Queensland is experiencing a increase in prices, but when Sydney goes again, it will make both look insignificant by comparison.

All in all, there is money to be made everywhere. Your choice is best determined from your experience and skill base rather than picking a location and trying to strike it lucky.  That is, what you do is more important than where you do it.

Cheers,

While I'm known as an expert in vendor finance, it has now been a number of years since I have entered into a new transaction. The information given below is according to my recollection as to how things used to be, but I wouldn't be surprised if there were changes which I am not aware of.

First up, it is important to note that vendor finance is ONLY a useful tool if the person can afford the repayments. The key target market may be people with strong incomes but not enough for a deposit, or those that are creditworthy but are refused traditional finance (such as business owners, those aged over 50 etc).

One of the biggest mistakes that can be made is selling a property to a person who cannot afford it. Indeed, just take a look at what is happening in the US. It is fair to say that many poor vendor finance sales were coved over with capital gains so that when the buyer defaulted the loss was masked by capital profits, which were then shared.

However, in times of flat prices or worse, decline, vendor finance contracts MUST be underwritten by strong incomes and cash reserves. In summary, if someone is on the line as far as affordability is concerned, I WOULDN'T do the sale for the downside risk is much higher than the upside risk.

With that caveat made, here are some further important comments:

1. Legality

VF is legal in Victoria however the laws are onerous. If you do it as a business, then you need to be registered as a credit provider. All contracts must also confirm with Consumer Credit Code. The ONLY person I would go to in Victoria to handle the legals on a VF sale is Lewis O'Brien (Balwyn).

2. Morality

Crtitics of vendor finance have been as one-eyed as were the proponents in the early days (and I would put myself in that bracket). VF is not evil or good, it is simply a method by which property is sold. However, the agenda of the person using the tactic will quickly come to the surface when the clauses pertaining to the contract are scrutinised.

Many a rouge has been fooled into the prospects of instant riches by selling property to people using VF. The truth is VF is more about a relationship than riches, and if you are not interested in investing into the relationship then it's best to stay away.

I have seen some contracts that any level-minded person would regard as grossly unfair. So too have I seen poorly informed scaremongers pick selected truths, and half told stories, to push personal agendas.

In summary, the morality of the technique is dictated by the use, not the existence of the facility. I say prosecute the offenders and allow the prudent legal framework to govern good practise for the remainder.

3. Settlement

In Vic, it used to be that there were two settlements. #1 when the person moved in; and #2 when title transferred after the final payment. The SRO was happy to pay the FHOG at #1, but proof of interest in the property had to be proved.

Other states were happy to provide the FHOG, but they wanted to see a passage of time to ensure the contracts were bona fide.

The best place to go for more info is the SRO. They should have a policy statement or something they can provide as to the payment of FHOG to VF sales.

Stamp duty was payable at #2. Other states had it that stamp duty was payable upfront.

4. Payment of FHOG

From memory, the FHOG application form required that the applicant specify where the grant was to be paid. If you want to share it that is up to you. Remember though… if you are doing this to launder FHOG money from the government then that's probably fraud. There would need to be a genuine prospect of the contract advancing, and this will be proven with the passage of time.

5. Your Scheme

Considering my comments above, I would regard your proposal as highly suspect. As mentioned by another, the payment of multiple FHOG on the one property in quick time will attract prompt review, and, I suspect, legal rebuke.

Also, the concern would be how the 60% was kept in trust. This smacks of the possibility of abuse unless kept in a solicitor's trust account, and there is an open-ended commitment that the funds could be used for a future purpose that may never eventuate and hence the need for ongoing management and admin.

No, I'm afraid I don't like the sound of it.

Finally, aside from the merits of the idea, I suspect you'll find that if the contract does not proceed to #2 settlement on account of default, then there is an obligation to repay the FHOG rather than retain it.

I hope this has helped both you and others who are contemplating vendor finance as an investment option.

Regards,

Hi,

To answer your questions…

1. No one is going to view your personal information. You can enter in any name you want – real or otherwise – and the only reason you may want to leave your email address is if you want the system to remind you to come back and redo the calculations in 90 days.

2. The site does not have an AFSL. We do not proport to be offering any kind of financial advice. We are not recommending or advising on financial products of any nature. Having said that, I do have an Diploma of Financial Services and am PS 146 compliant. I do not have an AFSL.

3. Of course it is legal. But, if you have any doubts, don't use the sevice. It's designed to be a blessing.

4. If you'd like to turn this into your own spreadsheet and use it privately then please do. You can see the forms and I have given you the calculations. For someone who knows Excel, it should take you about 10 minutes to create.  I'm not interested in selling software that does this. It is something I wanted to do for free to help people.

All the best,

Great post Neilvs.

Although my head is getting shinier, it's not quite a crystal ball (yet) . To be honest, I'm surprised by the sustained growth in property prices and am a loss to explain what's been happening in Melbourne for the past 5 or so months. Incredible.

Still, while I was wrong on the price growth, I was right on the interest rates. If people don't manage their debt, then we could see a lot of heat go out of the market if and or when there are more forced sales.

I still recommend staying away from the cheaper end of the market and doing quick deals rather than hanging in for the long-term.  There is a lot of uncertainty around at the moment, and this will make investing volatile.  I'm sitting on a fair wack of cash and using it to buy good deals that don't require speculation to be profitable.

I'm interested in hearing how others are making money at the moment, and what deals are being left on the table because of the uncertainty.

All the best,

Well said Simon.

If you had a home and an investment property, you would be better of with the LOC being against your home, since the interest paid on a PPOR is non-deductible.

For example, let's say that you had three choices with your $5,000 monthly pay packet:

1. Put In The Bank

You could put it in an interest bearing account and draw it down.  You would earn interest, but this interest would be assessable for tax purposes, so the exact amount of the return would be ($Interest * (1-tax rate)).

For example, if you could earn 5% interest per annum, then assuming no drawdowns then you would earn $20.83 interest for the month.  Assuming you paid 30% average income tax, your after tax return would be $14.58 (which then equates to an after tax return of 3.5%.

2. Pay Off Your Investment Property Loan

Assuming you had an outstanding loan of $100k and interest was at 8% per annum, paying the $5k off your IP loan would save you $33.33 per month (using simple interest calcs). Since this saving is not taxed, it could be seen as an effective way of maximising wealth, EXCEPT that the interest here is tax deductible.

Had you paid the interest, then (say) 30% would have been deductible meaning that the tax shield would be $33.33 * 30%.

That is, the after tax effecive interest rate would be $23.33. This equates to an interest rate of 5.6%.

So, what seemed okay at first glance may not be so good afterall.

3. Pay Off Home Loan

Let's also imagine that you had a home loan of $100,000 with interest also at 8%.  This interest is non-deductible as the loan is for a private purpose.

If you pay off the $5,000 against the loan you still save $33.33 per month.  However, now:

A. The saving is not taxible (unlike option 1 where the interest was earned (not saved) and hence was taxable; or
B. The interest is not deducible (unlike option 2).

So, in order to earn $33.33 per month, you would need to gross $33.33 + (1- tax rate).  That is, in pre-tax salary you would need to earn $47.61, so that once tax was taken out you would end up with $33.33.

Therefore, now the tax effective interest earned is 11.4% (($47.61 * 12 )/ $5000).

Summary

Therefore, looking at the three interest rates that have been notionally adjusted for the impact of tax:

Option 1 yields 3.5%
Option 2 yields 5.6%
Option 3 yields 11.4%

This rather simple maths model (with the assumptions herein) reveals why it is usually more advantageous to pay off non-deductible debt first, then deductible debt, and lastly invest the money in separate interest earning accounts.

Cheers,

An interesting topic and one that I am often asked.

The first point to answering the question must be: what do you want from your investing, as it is the response there that should dictate the way you invest (property / shares / businesses) and also the method used (relative to $ and time).

Of course, there are pros and cons to investing in units. The advantages would be:

1. Generally more affordable due to less land content
2. Can be easier to rent, yet tenants can tend to be more transitory
3. Sometimes less maintenance as there is less to maintain
4. Yields are generally slightly higher

On the flip side though,

1. You often have to deal with body corporates where there is common property. This leads to a loss of control.
2. Unit price growth tends to underperform house price growth (in $ terms) over the long term

In my own opinion, I am reluctant to invest in units mainly due to the loss of control in having to deal with a body corporate. If I buy units then I try to buy the entire site, strata subdivide and sell them individually.

That's not to say you can't make healthy profits investing in units. You can. It's just not my niche.

All the best,

Hi Arthur,

One of my first ever resources was a product that outlined how I wrote classified ads to attract vendor finance leads.  I have a few spare copies in the office (I think). If you would like one then send me your address as a PM. I'm happy to send you a copy if I can find one. Please, I don't want 1,000 people PMing me – just Arthur.

As a general rule though, it's a good idea to sell the benefits in the ad, remembering that the ad will not sell or close the deal. It exists only to get the phone to ring.  Therefore, a possible headline that could work is:

Who Else Wants To Buy A Family Home With No Deposit?

Hopefully you get the drift.

Hi Scully,

You should be able to go through local council planning records.  If that brings no joy then another option is to look at the title which will show when the land subdivison was done, and assume the house was built soon thereafter.

Cheers,