All Topics / The Treasure Chest / receiving cashflow

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  • Profile photo of GavinGavin
    Join Date: 2002
    Post Count: 42

    Hi Steve,

    We found your seminar very informative and we are currently working through the wrap library. We have a query in regards to the suplus cashflow generated by the wrap. You market the wrap as a great form of cashflow however the wrap library indicates that the purchaser must pay their repayment directly into our mortgage account. This method does not generate any cashflow until our mortgage has been paid out. We were hoping that the purchaser would pay their payment into our bank account, and then the bank would debit the minimum payment from that account into our mortgage, leaving us the difference between the two payments which use to reinvest. Is this possible?
    If not, how do we get access to the difference between the two payments?
    Sorry if this seems a basic fundamental question to ask but we are new to the game and are still in the learning stage.



    Profile photo of GavinGavin
    Join Date: 2002
    Post Count: 42

    Is there anybody out there that can help us[?]


    Profile photo of wilsonkaywilsonkay
    Join Date: 2002
    Post Count: 52

    Hi there Carolynne,

    No question is ever basic or fundamental. You must have a mentality of asking questions and lots of them!! You remind me of when I was at the Australian Property Investing Master seminar when i was also afraid to ask Steve a very fundamental and basic question, but at the end of the day it had to be asked!

    OK – I will have a go at answering your question for you.

    I believe the approach you are suggesting is certainly possible and could be done, however it would not be my preferred option. My recommendation would be to pay off the mortgage with the additional cash flow to pay the loan out faster, due to the laws of compounding interest you would save yourself a lot of money by doing this, I believe probably more than you would be re-investing it in other properties (that’s obviously open to scrutiny!!). Remember that the first rule of wealth creation is to illiminate debt wherever possible (particuliarily “bad debt” such as credit cards). So I suggest you get your wrapee to deposit the money straight in to your mortgage and not touch it! This will pay out the loan faster should the wrap go the distance and anything after that will be pure profit! It would also be easier from an administration point of view.
    I guess given the above this is one of the good reasons why it is important to hang on to your JOB so that you can raise the money for additional investments.

    What are other peoples thoughts?



    P.S. Rememeber this is only my oppinion and this information is only worth exactly what you paid for it, which was nothing :-)

    Profile photo of GrizzlyBearGrizzlyBear
    Join Date: 2001
    Post Count: 32

    Hi Carolynne

    We invest 100% of the payments to us off our loan. On my calculations, ALL our loans will be repaid within 5-6 years due to the power of compound interest as Tim correctly points out.

    We could take our cash flow today and use it for other investments, but we are happy to pay down our debt whilst we don’t need the cashflow.

    It’s horse for courses though.


    Profile photo of FWFW
    Join Date: 2002
    Post Count: 478

    It’s definitely horses for courses.
    If you’re happy to stay in your job and let your wraps business tick along, then you can reinvest the money in the mortages.
    For me, I want the monthly cashflow to replace hubby’s income asap, so I will use the profit each month to help buy more properties. Then when cashflow has hit a high enough level that hubby doesn’t need a job any more, I’ll start to pay off debt.
    With my current loan, I’ve been asked which account I want to deduct my monthly payments from, so I’ll arrange for my wrap buyer to pay into that account, therefore the profit each month will be accessible.

    Keep smiling
    Felicity 8-)

    Profile photo of MikeKellyMikeKelly
    Join Date: 2002
    Post Count: 16

    Hi team, hey I’m with Felicity. Keep in mind, that if you use the profit to pay off your debt, you’re really only saving cents, compared to investing the profit to fund another wrap that makes you considerable money.

    Let me explain how my head works: (God help my wife) <:O)

    Let’s say you make $10K profit for the year and invest this in the principle component of your wrapped house.(to give you a larger spread) At 8% interest this means you’ll be saving 8% on $10K ($800.00) interest per year. (rubbery figures)

    So if you owed $100,000 before, you’d pay $771/month on a P&I loan(25yrs)

    If you paid the $10K off(lets say as a lump sum for the exercise) your debt would be $90K @ 8% with repayments of $694/month(P&I). That’s a difference of $77/month. That means over the year you save interest of $66/month x 12 mths = $792. Still a good saving.

    [Keep in mind, the difference between $771/mth and $694/mth is $77/mth, but the interest component of this is $66/month. 8% of $100K is $666/mth, 8% of $90K is $600/month being a saving in interest of $$66/mth. These figures are obviously going to be “rubbery” as the $10K is paid off progressively, not in a lump sum, but for the explanation of the concept, it’s fine]

    Remember your Home Buyer’s repayment stays the same, so you only gain the difference in your interest saving.

    Now lets say we use an alternative strategy to invest this $10K in another wrap property. Let’s say we have this $10K and use it for the deposit and legal on a $70K property(with a loan of 8% over 25yrs)and we sell this proeprty for $82K at 10%(over 25 years) on a wrap.

    Let’s look at these figures:

    Your loan repayments are $486/month ($63K loan @ 8%)
    Your Wrap repayments are $745/month ($82K loan @ 10%) no dep for eg.

    Your monthly profit is $259/month. (certainly better than $77/month)

    Now this gets better if you go Interest only on the underlying loan for a few years:

    Your loan repayment: $420/mth ($63K @ 8%)int only
    Your Wrap repayment: $745/mth ($82K loan @ 10%)(P&I) no dep for eg

    your profit is $ 325/mth

    Obviously, while you’re saving $77/mth in the one transaction, someone else is creating MULTIPLE properties from the same $10K investment by duplicing the process each time and generating another wrap property.

    Keep another few thing in mind as well.

    When you sell a property using a wrap, you’re not allow to refinance that property while the wrap is proceeding(in QLD at least). Meaning if you put $10K into that mortgage, kiss it goodbye until the wrap home buyer decides they will pay you out, because you can’t redraw it or get it back out.

    Also, let’s say you have decided to keep the one property and reinvest the profit in the underlying mortgage. This prevents you from purchasing another property as your cashflow is used for this strategy employed. If this Home Buyer goes into default, 100% of your wrap portfolio(ie your one house) is now at risk and not performing. And YOU have to keep working to pay the underlying loan repayment while you’re find a new home buyer.

    Alternatively, if you decided to buy the second property, and one of the properties went into default, only 50% of your portfolio has suffered and the other property will nearly cover the underlying loan payments while you find a new home buyer. Much easier for you to find $100/as opposed to $400. Yeah sure the advance payments would cover the gap, but you’re making false progress.

    As Felicity has stated, each to their own.

    I have the Wrap Secret Library and I love it. My understanding of Steve’s strategy was to only invest 30% back into the underlying loan. There’s certainly logic in this strategy and it works GREAT for Steve and many others. I don’t think anyone could deny Steve’s outstanding success with wraps and his accounting background obviously encourages him to protect his investments as much as possible, which this strategy also does if interest rates go through the roof.

    Persoanlly, we use the wrap profits to pay off our OWN home mortgage as this interest is not tax deductable. When we have $10K in extra equity in our own home, we then redraw this to purchase a wrap property, whihc makes the interest being charged on this amount tax deductable. We’ll keep going until our own house is a total tax deduction. We’ll never loose out house, as well have enough properties in our portfolio generating income to cover own own home repayments shoudl something go wrong. remember, the home buyer is paying the underlying laon Plus a profit to us.

    This is only my two cents worth. It’s not right or wrong. Just right for me.

    Happy investing all.

    Remember, Life’s about Family, Fun and Finance (Maybe in that order)


    Director of

    “Positive Cashflow for a Positive Lifestlye”
    “Life’s too short to be Negative”

    Profile photo of Steve McKnightSteve McKnight
    Join Date: 2001
    Post Count: 1,763

    Hello Gavin,

    Thanks for your post.

    At the time of writing the wrap manual we were led to believe that the only option was to pay off what you received as a wrap off your loan.

    However, we have since had a review of legal opinion by several people. Now, while not advice and not a substitute for getting separate legal opinion, we are now led to believe that you must pay the principal component off your loan, but you may keep the interest component.

    Now in practice this is a difficult thing to do because the P & i components of payment change.

    I think that the best way forward is to seek to redraw your loan say every six months and then take out the interest component but only if you need to.

    The only other option I can think of is to have a split payment system where you receive the interest and the principal goes off your loan. Set a benchmark figure and then adjust it every six months.

    To this day David and I allocate 100% of the repayment off the loan because by doing so we decrease debt and increase cashflow. This is not out of necessity, but as part of our overall cashflow management.

    And Mike – thanks very much for your great post and contribution to the forum. How’s the website going [:D]


    Steve McKnight

    Steve McKnight | Pty Ltd | CEO

    Success comes from doing things differently

    Profile photo of GavinGavin
    Join Date: 2002
    Post Count: 42

    Thank you to Steve and everyone for your replies.

    You have certainly given me alot to think about. I am in the same situation as Felicity and want to increase my cashflow for the same reasons. At least I know that it can be done now.

    Thank you Mike for your detailed reply. It took me a while to get my head around the numbers but I think I have it now.



    Profile photo of MikeKellyMikeKelly
    Join Date: 2002
    Post Count: 16

    Hi guys, Carolyn more than happy to help. Hope it did. It took me 2 yrs to get my head around it myself. [:)]

    Hi Steve, sites going well. Actually I was posting the link on my site for this forum and decided to have a peek. Couldn’t resist thowing in my two cents worth on this post.

    Actually, you brought up a very good point Steve (as always), is the paydown of the principle a requirement of Vic property law? I guessing that as opposed to tax law as our accountant has given us the all clear on the interest only strategy. Would love to hear some further feedback on this if your able to.

    We’re actually in the process of getting a private ruling from the ATO to confirm it once and for all.

    Great to see the forum building in strength. Hope I can drive heaps of traffic to it for you Steve. It deserves to be a winner.

    Be happy everyone, life’s too short to be Negative.

    Remember, life’s about Family, Fun and Finance (probably in that order).

    “Positive Cashflow for a Positive LIFESTYLE”
    “Life’s too short to be Negative”

    Profile photo of JasonBettlesJasonBettles
    Join Date: 2001
    Post Count: 1

    In addition to the cashflow consequences that Mike has mentioned you might want to consider the liability affect of depositing all of the money into the mortgage.

    As Steve and Dave discuss in their package it is important to structure your affairs so as to avoid the adverse consequences of being sued. If someone were to sue you and win forcing you/your entity into bankruptcy/liquidation then any equity in the property will be available to the bankruptcy trustee/liquidator. Therefore, whilst you had great intentions in paying off the debt early, it will all be lost.

    Consequently you might want to consider drawing out the equity as you go along, so if the wrap all falls over, at least you have your spread somewhere else.

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