All Topics / Help Needed! / Any thoughts on this deal?

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  • Profile photo of persistencepersistence
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    @persistence
    Join Date: 2004
    Post Count: 12

    I don’t yet have any property or equity but have finally saved enough for my first deposit.

    I’ve come across a property on a quarter acre block with a yield of 6.7%. The vendor is willing to vendor finance 20% of the purchase price at 1% above his interest rate. I won’t have any problems financing the remaining 80% through the bank, so this means that I only need to come up with the closing costs to purchase the property and can keep hold of my hard-saved deposit.

    The place needs some fixing up, which should cost about $5000 (I can use some of my savings for this). Renovations should increase the yield up to 7.8% and should give me around $20,000ish equity.

    I’ve spoken to the council about the possibility of subdivision and the very helpful town planner there suggested that I would be better off putting another dwelling on the back half of the block (the current house is happily situated right at the front of the block) rather than subdividing. I could get a prefab home on the back of the block for around $80-$90,000 (I’m estimating this figure…. and I’m not sure yet where this money would come from… has to be financed from somewhere) and rent this out for around a 9.2% yield. This brings the average yield to 8.5%.

    By this time I would also have equity in the back property of around $40,000. (total equity position around $60,000ish).

    My question is: Even though the average yield is still on the low side at 8.5%, do you feel it would be ok to overlook this in a no-money down deal such as this one? Let’s say that the whole thing took a year to pull off (worst case scenario) and the only money I had to put up was the $5k for renovations and $18k deposit for building the home on the back of the block, this would be a cash on cash return of 230% within a year.

    Am I way off here in thinking this could be something worth considering? Am still v new to thinking about property like this…

    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    I think it is great how you structured that. I would look at the cost of all the finance first especially the cost from the vendor. Otherwise, 230% sounds good to me!

    Remember, you need to sell to collect…

    Robert Bou-Hamdan
    Mortgage Adviser

    M: 0414 347 771
    E: [email protected]
    W: http://www.mortgagepackaging.com.au

    Comments made are of a general nature and should not be construed as individual advice.

    © 2004 Mortgage Packaging Pty Ltd

    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
    Join Date: 2002
    Post Count: 371

    you can also think about getting hte seller to cover the closing costs on condition that you increase the purchase price…… as long as the whole thing still values up (ligitimately of course)…… should be a sizzler. – due diligence and check comps on comparable props to make sure the 20% vendors funds are not just profit sharing. :o)

    Profile photo of persistencepersistence
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    @persistence
    Join Date: 2004
    Post Count: 12
    Originally posted by Kiwi-Fulla:

    due diligence and check comps on comparable props to make sure the 20% vendors funds are not just profit sharing. :o)

    Thank you both so much. Kiwi-Fulla, can you explain what you mean by this last part?

    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
    Join Date: 2002
    Post Count: 371

    Sure ….. just make sure the so called 20% the vender is letting you utilise is not just adding onto the property price and overinflating it so that you get blinded by the fact that you are not putting any funds into the deal… it all has to add up or you could get Bit! ;o0 if you know what I mean…. nothing worse than getting stuck with a property that you can’t get rid off in an emergency unless you take a big loss on it. – be carefull and have fun. Kiwi![baaa]

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    The bank valuation should make sure you are no overpaying. I personally am not too worried about yield if there is potential for capital growth. Especially when getting vendor financing. Sounds like a good deal.

    Terryw
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    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
    Join Date: 2002
    Post Count: 371
    Originally posted by terryw:

    The bank valuation should make sure you are no overpaying. I personally am not too worried about yield if there is potential for capital growth. Especially when getting vendor financing. Sounds like a good deal.

    Terryw
    Discover Home Loans
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    This all depends on whether you would like:
    1. income now
    or
    2. Capital gain later

    mostly you do not get both at the same time…. however I have some properties that are getting the cake and eating it to so to speak….
    Cheers,
    Kiwi[baaa]

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