Hi everyone,
In the spirit of a free seminar, I attended the National Investment Institute 2 hour seminar this morning. While I found most of what the speaker said was just hype and scare tactics, he had some interesting things to say about so called ‘equity leases’.
I have searched this forum and there hasn’t been any talk of these, so I thought I’d find out if anyone has used this technique.
The fundamental theory seems to be, that if you offer your tenant a cut of the capital growth in the property after a certain amount of time, he or she will then be willing to pay more rent. Also – you can sign them up for a longer amount of time, and they have a material interest in maintaining the property well.
The figures might look something like this:
PROPERTY:
Purchase price: $400,000
Purchase costs: $16,000
Loan LVR: 90% (he reckons you can negotiate 90% without LMI – I doubt it’s that easy, but will assume it to be true
Loan amount: $360,000
Cash contributed: $56,000TENANT:
Weekly Rent: $700 pw (market rate is $400pw)
Percentage of Equity given: 10%
Length of lease: 15 yearsCALCULATIONS:
Property Value after 15 years: $1.67 million
10% of gain in value (due to tenant): $167,000
Extra rent the tenant pays: (700-400)*(52*15)=$234,000
Cash-on-cash return for investor: 8% (uses my normal B+H spreadsheet)So while the investor only has a cash on cash of 8%, this is very high for a city property with huge capital gain potential…
Has anyone tried this? Feel free to rip my figures to pieces… I got a bit confused while I was working them out because there’s a lot to consider! I also didn’t include the calculations for cash on cash and some other things…these are in my *updated* spreadsheet
Anyway, cya all later
-NickNick
This is just like a lease option, but they tenant only gets a portion of the equity.
From the example, it doesn’t appear to be too good for the tenant, so I don’t know if anyone would be willing to pay an extra $300 per week for this one.
There was one person offering something like this on new units in Parramatta a while ago. I think the Hanna brothers are also teaching this technique in their seminars too.
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Yep, I agree with Terry.
I wonder… what happens if there is a capital loss?
And seriously, what is the target market for a tenant that will pay 75% above market rate (that is $700 for a property with a market rent of $400 per week)?
Like most things that come from the NII, it might seem attractive on paper, but what is presented is usually based on the best case scenario and simplified beyond belief.
The devil is in the detail, which I suspect is yet to be properly fleshed out by real life deals done at arms length and on a replicable basis.
I’m happy to be proved wrong though.
Bye,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
If I can afford to pay 700 p.w rent! why would I bother with this sort of deal, I’d be out there and buying myself.
It makes absolutely no sense.
It might make sense with the low priced units, where tenants can’t get standard bank loans.i agreed with Steve, What’s the target market?I think, it’s not a “financial skill” but show you an illusion to attract you to join his Fee Course!
Julian[
]hey guys,
thanks for your responses. they confirm the sentiments that i was having during the seminar…
the example given was the more ambitious one presented in the seminar – the other example was to charge $100 more rent and offer 5% of the equity…
the thing is, the presenter was saying that these equity leases easily make sydney property positive cashflow – yet to do this under the 11 second solution the returns would almost need to be doubled!
the seminar was a free way to get a 6 month subscription to wealth creater, but offered little else
night all
-nickAt a time when we are head to possible deflation – in a property bubble etc.
I doubt very much that property will increase fourfold in 15 years.
Ty
I KNOW THIS AREA WELL – LIVED IN IT
I would not consider going into a deal like this in this area. Reason is that there is so many new units and rental properties in this area and also the prestige Hills corridor / only minutes away.
What happens when the market is flooded with appartments and the median rental falls?
What strategies are in place when the tenant defaults / wishes to terminate the agreement?
I agree with Regina, why would a person who can afford such a high rent not stop and do their own maths and come up with the solution that they can buy their own place and cut out the middleman?[]alot of people talk about a property bubble busting etc… there is not going to be a bust! sydney property is raising at a 20% growth rate in comparison to the national 10%.
the only thing which could happen is the drop to the national average. property is and always will be a good form of investment. where you buy is going to be the key determiner of whether you will grow wealth or not.
property has only declined once in the past 20 years. and that was during the release of the gst before sky rocketing again.
Ernest is right to some extent. A lot of it depends on the location that you buy. There have been cases of negative growth. You just need to look at Residex data to see that. But property investing is for a long term.
You should also remember that equity leases are taken out for long terms (5yrs). If you have done your homework, then you should NEVER be in a situation where your property has not appreciated over 5 years!!
$700 per week for a $400,000 property is a bit of overkill. As people said, no one would ever pay that. The idea of an equity lease is to make it look attractive for the renter and to turn your negatively geared property into a positively geared one.
Initially you would just have to increase the rent to the point where you are in the black. There is usually a clause in the contract to allow for rental increases each year, so that should make the property even better in the following years (even with interest rate rises).
Personally I haven’t tried it, but I will most certainly use it. Why would you want to ‘pay’ money ongoing for a property? Isn’t the whole idea for the property to provide YOU with a passive income??
Adding $100 to the rent (in walkernicks example) would increase the rental yield from 5.2% to 6.5%. Almost unheard of in Sydney now!
At the end of the 5yrs, the renter would have paid an extra $26000. The property would have increased in value by at least 50% (given the stat that properties double in value every 7-10 years). So the property has increased by at least $200,000. You might offer the tenant 20% ($40,000) so now you have a property that you dont have to pay for, that has grown $160,000 (very conservative value for a well researched property) over 5 years!
pineapplelumps
what a totally brilliant name
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