All Topics / The Treasure Chest / 5% deposit + FHOG = none of my money in a wrap?

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  • Profile photo of JennyNowakowskiJennyNowakowski
    Member
    @jennynowakowski
    Join Date: 2002
    Post Count: 3

    I was reading Fergus’ posts about his spread and how he prices his wrap properties and learnt a lot :-) I haven’t done a wrap yet but I’m going to Steve’s seminar in November.

    Do I have the right idea?

    If I buy a house for $140k and wrap it for $165-70k, charge the wrappees 5% deposit on the $140k ($7k) and get myself a loan at 140k with 5% deposit and put that $7k in for the deposit. Then when they get the FHOG they give that to me as a further deposit and I mark it so on their wrap loan account between me and them, but I keep that money for my expenses, eg conveyancing, etc and I might even have a bit left over!

    Hopefully they’ll cash me out in 1-3 years so by then it would look like this:

    My loan with bank: bought property for 140k with 7k deposit, balance at beginning of repayments 133k, at end of 3 years approx 130k, plus the extra cashflow each month for myself from wrappee’s payments.

    My wrap loan with wrappees: bought property for 165k from me, deposit 14k (5% + fhog) balance at beginning of repayments 151k, at end of 3 years approx 148k.

    When they cash me out I would receive 18k after my loan is paid and then pay CGT on it, approx $4.5k? (I’m guessing here, and also guessing with the loan balances).

    Would this scenario work so basically I don’t have any of my own money in the deal except for maybe the 5% deposit in the beginning when buying the property and then paying myself back with their 5% deposit?

    Jenny

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

    Jenny

    You figs look about right. it is pretty good isn’t it. Imagine if you have a few of these and they start cashing you out at 1 per year. that’s an extra $18K per year-based on your figures, plus all of that cash flow in the meantime.

    Terry

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of FergusGartlanFergusGartlan
    Member
    @fergusgartlan
    Join Date: 2002
    Post Count: 7

    Hi Jenny,
    If the house cost to you is $140K then if you allow 10% for buying costs, and then 20% on that again for margin, it brings your sell price to $184,800 ($140K + 10% + 20%)
    If your prospect can give you the FHOG (which you get only after settlement) and 5% deposit ($7K) that’a total of $14K income.
    At this value I would probably be asking for more than 5% from your prospect as 5% from them will leave you shorter, and take longer to recoup.
    Also I would be surprised if the lender will lend you as much as 95%, but maybe they will.

    I would expect to have to put in 10% ($14K) and pay the buying costs of 10% approx (another $14K) which is a total of $28K of my money in.
    So I’m down $14K (my $28K out minus client $14K in) day one which to me is too much risk, and too long to get back on my weekly spread.
    If I ask the prospect for 10% deposit, then I am only down $7K ($28K mius FHOG and $14K client deposit) which is better, and faster to recoup.
    This all seems to work much better on lower value properties where you can settle on a $60K house and only be down $2K of your own money after receiving the FHOG and 5% deposit.
    But on the $140K property with 10% deposit:
    my mortgage $126K @ 6.4% over 30 yrs is about $181 per week
    client mtge $163,800 ($184,800 less 10% and FHOG) @ 8.4% over 30 yrs is about $287 per week
    so you get a weekly profit of about $105 per week or $5,460 per annum.
    So you can see that after 18 months you have your $7K back and are making profit.
    I hope this all makes sense as I have been writing as I am thinking.
    Very bad habit.
    Fergus

    Profile photo of JennyNowakowskiJennyNowakowski
    Member
    @jennynowakowski
    Join Date: 2002
    Post Count: 3

    thanks for your reply Fergus.

    I would like to do it on the cheaper properties but I live in Sydney!

    You mentioned 10% buying costs of $14k for a 140k property, that seems a lot? I bought a villa in Coffs Harbour last year and I didn’t have 8k buying costs.

    I thought approx 2k for conveyancing, reports, etc, 1k for bank fees etc and 1-2k for extras (insurance and anything else).

    What am I missing?

    Jenny
    P.S. Going to Steve’s seminar in November where he will tell you how to get unlimited finance so I just thought a 95% loan but if I need a 10% deposit I would ask the wrappees for it.

    Profile photo of FergusGartlanFergusGartlan
    Member
    @fergusgartlan
    Join Date: 2002
    Post Count: 7

    Hi Jennt,
    Maybe 10% buying costs is a lot on a property of that value.
    Remember the stamp duty and transfer fee if you are borrowing 95% will be about $4K (NSW) or $5K (VIC – not happy Jan!), which I am not sure if you have allowed for.
    Maybe Steve can give us some direction on this, as I have not bought anything of that value so far.
    Can’t wait for the seminar next weekend in Melbourne.
    Do Well.
    Fergus

    Profile photo of JennyNowakowskiJennyNowakowski
    Member
    @jennynowakowski
    Join Date: 2002
    Post Count: 3

    Hi Fergus,

    yes I had forgotten about stamp duty! But isn’t there a stamp duty scheme for first home buyers so they don’t pay it? Because I would have applied for it except my property was an investment one and it was only for first home buyers living in the property, like the FHOG.

    Jenny

    Profile photo of StephenArrowsmithStephenArrowsmith
    Member
    @stephenarrowsmith
    Join Date: 2002
    Post Count: 3

    Jenny

    Be careful with your tax treatment .
    Firstly CGT only applies to a capital purchase sold after 1 year of being held , technically you are selling on day one ( buy propery and wrap the next day ) but are receiving paymnet of the monies over time so CGT does not apply ( if it did you would be up for tax on whole profit on day one ) .
    Also your tax prfoit is not based on cash flow received ( $ 18 k ) but on profit on Sale ($165 less cost of $130 = $35 k less purchase costs of approx $7 )= $28 k that is taxable as it is received .

    Also regarding stamp duty , you are purchser of the property not the client , you name is on title so the first home buyers exemption ( if applicable in NSW ) does not apply to a wrap property .

    Profile photo of AndrewBrenchleyAndrewBrenchley
    Participant
    @andrewbrenchley
    Join Date: 2002
    Post Count: 6

    Jenny,

    I live in Sydney also, i dont have the time to WRAP but i love the concept, i do Joint Venture agreements and put up the cash, anyway, my deals are done within 2 hours from Sydney, my purchase price is between 78-85K, my lender also lends me 95% + mortgage insurance, my deals costs me round about 9K each.

    ANdrew

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