Hi All,
firstly, I am 1/2 way through the book and am throughly enjoying it…it is my first investment education attempt (in property) and already I am feeling more and more confident to jump in by the page!
My question is as follows (apologies if it is very basic):
1/ Pg 214. When you say that you interest margin in the deal with Mrs G was set by you to 2% and then go on to state that the initial interest rate for her would be 9.5%, did you mean that you would always be passing on the 2% addition to what ever was the current % rate (fixed or variable) on your loan as the financier..?? The reason why I ask is if this is not the case then how do you resonably mitigate the risk of having reduced +CF or even run into -CF should the rates go above the current stated % rate + 2% during the potential 25yrs of the wrap..?2/ Pg 215. In table 13.3 with the purchase price of $49500 and the cash needed of $10502 (with the clients deposit of $6500 taken into account), what did you do with the differnece from the bank loan amount of $39600 with the net cash needed of $10502 if the purchase price was $49500, to me it sounds like a surplus of (39600+10502)-49500=602. The reason I am reading this is that you said that that the investor MUST first own it, but then in your table it looks like you have account for the $6500 that you get as a deposit to enter into the wrap from the client against the startup of the deal…..sorry to confuse, but I am a little confused too!….
Any help you can provide would be greatly appreciated….thanks!
Hi Doogie and welcome to the forum
1/ Pg 214. When you say that you interest margin in the deal with Mrs G was set by you to 2% …, did you mean that you would always be passing on the 2% addition to what ever was the current % rateAnswer: Yes. It will always be above the wrapper’s rate from their bank.
2/ Pg 215. In table 13.3 with the purchase price of $49500 and the cash needed of $10502 (with the clients deposit of $6500 taken into account), what did you do with the differnece from the bank loan amount of $39600 with the net cash needed of $10502 if the purchase price was $49500, to me it sounds like a surplus of (39600+10502)-49500=602. The reason I am reading this is that you said that that the investor MUST first own it, but then in your table it looks like you have account for the $6500 that you get as a deposit to enter into the wrap from the client against the startup of the deal…..sorry to confuse, but I am a little confused too!….The $602 being the difference between the bank loan + deposit – purchase price presmably would have covered legals and stamp duty?
Steve then gets a deposit from the wrappee, and (I think) pays it off his loan. He then would say that invested in that deal, he has $4002 of his own cash.
I hope this helps, I am feeling a bit confused myself.
Cheers
MelHi Melbear, thanks for the reply and the welcome.
So if one week the variable rate is 7% (in the Mrs G scenario) then the passed on rate will be 9% and if the following week the variable rate is 8% the passed on rate will be 10% and the weekly amount to be paid by Mrs G will vary week to week..?? It sounded like (in the book) that the amount was fixed and so was the weekly amount hence the encouragement to have an auto-debit arrangement with Mrs G….??
As for the 2nd part of my question, like you I am still a little confused, I am sure it is just the way I am interpreting the table as the post acuisition/settlement amount obtained from Mrs G is incorporated into the equation which I am interpreting as being the “initial” acquisition numbers, hence the 602 surplus…..I guess this is just rolled into the mortgage as a repayment..?Doogie, the interest rates will not change that often. In fact, the most they can change is once a month when/if the RBA changes the rates.
So the direct debit idea still works well.
Cheers
MelHi Melbear is right…
Unless the rate is fixed, any increase or decrease is passed on to the client so that my margin is always +2%.
I’m not sure I understand the second part, but the flow of money from the eg on page 315 would be:
1. We pay initial deposit (which was 10% in those days) at time of signing: $4,950
2. We pay difference bewteen what the bank will lend us (80%) + closing costs – initial deposit: $4,950 + $7,102 = $12,052.
In summary, we need a total of $4,950 + $12,052 = $17,002 to complete our purchase.
Then once we are the owners we receive Mrs G.’s $6,500, meaning our cash invested in the deal once it is sold on terms is ($17,002 – $6,500)=$10,502
Hope this is clearer.
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
Thanks Melbear and Steve, understood now!…..
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