All Topics / Creative Investing / do these numbers work?

Viewing 20 posts - 1 through 20 (of 25 total)
  • Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Hi everyone,
    I’m considering my first lease option deal. I have read so much in the last couple of months that I’m overwhelmed with information and seem to get stuck when it comes to doing things in practice. Want to run these numbers by everyone to see if it makes sense.

    market value of property is $200,000
    (this will also be offer price).
    current rent is $180/week

    Option price I’m proposing is $247,000
    option term will be 5 years
    Option fee will be $7400
    rent will be $370 per week with $160 credited towards purchase.

    This way, the tennant buyer will have a 20% deposit in 5 years to purchase the property.

    Do these numbers make sense?

    Any suggestions or comments?

    We buy properties in all conditions. Can offer Immediate Cash Settlements, No Real Estate Agents Required
    [email protected]
    phone 0412 437 582

    Profile photo of grossrealisationgrossrealisation
    Member
    @grossrealisation
    Join Date: 2005
    Post Count: 1,031

    hi Dr.X
    Not sure the numbers to me look right will come back to once I have cruched them.
    what is interesting for me is that I’m the first to answer the post after 34 other visitors which gets me thinking are the figures right.
    Its like how long has this property been on the market and the real estate say 9 months and your the first one to offer any thing, you re look at your figures.
    funny things we humans

    here to help

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    thanks Gross,
    I look forward to your input. People sometimes just want to look but not comment (I do this sometimes). If the figures were wrong, someone would have jumped down my throat by now. People love to tell you when you dont have it right, with great pleasure.

    I dont think there is a right or wrong in lease options, I just wanted other’s opinions

    What types of deals have other people done in lease options, if you dont mind sharing

    Numnbers please

    We buy properties in Adelaide. Can offer Immediate Cash Settlements, No Real Estate Agents Required
    [email protected]
    phone 0412 437 582

    Profile photo of grossrealisationgrossrealisation
    Member
    @grossrealisation
    Join Date: 2005
    Post Count: 1,031

    hi Dr.X
    unlike most if I view I give a view.
    at least the poster gets different idea.

    here to help

    Profile photo of batts71batts71
    Participant
    @batts71
    Join Date: 2004
    Post Count: 57

    Hey Dr X,

    Im a rank novice in the L/O market, but my thoughts:

    Great cashflow, with $360 rent per week. But with $160 credited back towards the pruchase price you are providing $41,600 in credits over the 5 year term. Meaning your back end profit (minus the credits) is only $5,400. In addition are you crediting the Option fee towards the purchase price? That being the case the T/B would only need to come up with $198,000 at closing ($247,000 – $41,600rent credits – $7,400 option fee)

    In the USA L/O deals tend to be structured over a shorter period of time (12 – 18months) with goal being getting the tennant buyer to the closing table in order to get a decent back end profit. Also in this scenario you are accessing your back end profit much quicker.

    If I’ve got my numbers right, in your scenario you would create nice cashflow (up front option fee and high rent) but Zero capital growth/back end profit.

    Cheers,

    Batts

    Profile photo of grossrealisationgrossrealisation
    Member
    @grossrealisation
    Join Date: 2005
    Post Count: 1,031

    Hi batts
    From your post you have looked at the us markets whats the push for investing in the us real estate stock.
    interested because I’m taking one of my companies to the us fast food industry.
    email me at
    [email protected]

    here to help

    Profile photo of batts71batts71
    Participant
    @batts71
    Join Date: 2004
    Post Count: 57

    I am actually living in the USA at the moment, Seattle Washington. Ive been here for 12 months, and returning sometime in 2006.

    From what I have seen/read/heard the USA property market seems similar to Australia, in so much as there are boom areas and stagnant areas.

    Vegas has finished its boom (where builders are now discounting prices), Florida is strong, Seattle is strong, and Reno (lake Tahoe) is rising fast. Very similar to Oz where the “sea change/retirement” locations are experiencing strong population growth.

    I’d personally be a little nervous investing too much in say the Seattle as its dominated by 2 companies – Boeing and Microsoft. If one of the companies relocates or has a slump (like another Sept 11) then I can see a lot of vacant house appearing. Apparently several years ago when Boeing went through a slump there were billboards erected that said, “Would the last person to leave Seattle please turn off the lights….”

    Cheers,

    Batts

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Hi Batts,

    thanks for the info,

    you are correct, I structured this deal so that the T/B pay out their 20% deposit for the deal in the 5 year period, that way they can come up with the 80% by traditional financing.

    The thing that concerns me the most about lease options is, if they are structured in a way that they had less than 20% saved by the end of the period, they may not be able to exercise.

    My question is, is it our responsibility to make sure they can come up with a deposit, or theirs???

    Keen to hear your thoughts on this one!!!!

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    and yes, the option fee is also credited to the purchase price.

    The whole idea is that they have 20% of the purchase price at the end of 5 years!!!

    Like I said, this is my first deal (have not done it yet, just playing around with numbers)

    Any other suggestions?????????

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    anyone!!!!!!

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of Yidn_Shalom25Yidn_Shalom25
    Member
    @yidn_shalom25
    Join Date: 2005
    Post Count: 43

    If I was a homebuyer I would love you!!!!…..But as an investor I’d say that you are taking a MASSIVE BLOW!!! However, it really depends on your goal of the lease option…If your goal is to add capital value or cashflow or both. Although to me it seems like you are avoiding both potential Cap and cashflow return gains by being far too generous to the option holder and ignoring your potential profit for the risk involved (for instance you could buy and hold and still make that capital gain or even better in a stagnant market-in less than five years) . I really want to caution you with these figures because I think you are taking a massive risk with your absolutely minimal cashflow return relative to the pittance of capital growth you will realize; thereby seriously degrading your CoCr. You see, if you have a rental of only $210 and a purchase price of over $200,000 with closing costs included, you are receiving a cashflow only on a ratio of approximately 0.8-0.9:1 like most negatively geared properties, and so what is the investing sense of paying the bank (out of pocket) for 5 yrs so someone else will be able to afford a home. You may be providing a solution for someone else, but you are definitely not profiting yourself from it, because the negative cashflow from this deal will diminish your overall profit from the option call after 5 years, not to mention the negative affect of the small asking price and option fee you charge. If your ratio were more like 1.4 x every 1000 (of purchase price) rather than a meager .9, then you would be having recurring positive cashflow, plus you would solving someone’s housing difficulties. I think you need to either pass the deal, or re-negotiate the terms-particularly the amount of rent that is credited to the option. That would mean you would need to start fogetting about quickly providing the LO tenant a 20% deposit quickly and start thinking seriously about the potential risks you face. If I was making the terms on a five year basis, I would increase the option fee by about $3000 and increase the asking price by about 10%, then I would retain $280 rental, while crediting $80, thereby making my position cashflow positive…I would then source a tenant who could utilize FHOG and leave the rest of the deposit saving to the LO tenants whom i’m sure would be confident they could put aside 10% of their salary towards the deposit every week/month etc. over the course of the 5 yr lease. Hope you don’t go ahead on the current terms
    sincerely

    yidn

    Profile photo of Yidn_Shalom25Yidn_Shalom25
    Member
    @yidn_shalom25
    Join Date: 2005
    Post Count: 43

    PS. It is definitely their responsibility to come up with the call price at the end of the lease. And if they are maxed out and cannot afford it, your goal of helping them will turn into a nightmare for them.

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Thanks Yidn

    with your numbers, they will be short $24,000 by the end of 5 years, and you are saying that its the T/Bers resposnibility to come up with the difference. OK, makes sense.

    So what is the general rule that you use on lease options?

    Looks like an increase on 10% per year on asking price and 22% rent credits, would I be right?

    Could I then do, asking price of $220,000 on a ONE year lease option,
    option consideration of $6600
    Rent of $360/week with $80 rent credits

    This means that T/Bers would need to come up with $33240 at end of year to purchase on 80% LVR.

    Is this doable?

    Could I then increase the asking price and rent by another 10% at the end of year one if they want to extend?

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Dr X

    If I was structuring this deal, I’d set it up as follows:
    1. Option price (strike price) – $245,500
    2. Weekly rent- $386.50
    3. Option fee – $7,400 (to be added to the deposit)
    4. Rent credit – $50 per week
    5. Option term – 5 years

    Based on the cost of my borrowings ($209,000), the weekly rent would leave me with a positive cashflow of $300 per month. However out of this $300, I’d have to be paying maintenance, rates and insurance.

    Hopefully the tenant buyers would save well during the 5 years of the option or, alternatively, they could increase their weekly payments and these extra payments would be 100% rent credit.

    If this is not possible we would ensure that the wording of the option document allowed for sufficient extensions so that enough rent credit can be accurred to eventually allow the tenant buyers to purchase the property.

    Just one of the infinite number of ways of doing it :-)

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Hi Paul and thanks for your input.

    Increasing the purchase price by 15% in 5 years. Is this a good enough projection of future price? I would have thought 15% in 2 years would have been sufficient.

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Dr X

    Sorry, I think it must be too late and I’ve missed your point ;-) We purchased at $200,000 and we sold for $245,500. That looks pretty close to a 23% mark up in 5 years.

    I usually structure our transactions based on the number of dollars I want to make as a back end profit. In this case I was looking to lock in a $35,000 back end profit when we’re refinanced out.

    As you where asking for comments based on a L/O transaction, that’s what I’ve been looking at so far and with your signature mentioning Adelaide I’d guess Instalments Contract aren’t an option.

    If your client’s have sufficient serviceability, I’d secure the property for $200,000 and then mark it up to $250,000. They then get an 80% traditional loan and you give them a second mortgage for $42,600 ($50,000 – $7,400).

    Good luck.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of Yidn_Shalom25Yidn_Shalom25
    Member
    @yidn_shalom25
    Join Date: 2005
    Post Count: 43

    Dr X.

    thanks for responding;

    My figures were very tentative and I have no set figures I go by as I have never LO’d before but am seriously considering it; although I do have a limit of CoCr which I would stick by when going into LOs. My figures were just used to illustrate my concern that you may be giving up too much profit for the sake of the potential homebuyer.

    I am learning from others posts here as I go. What I want to ask is, what is your goal with the LO?…..I don’t really understand the investor benefit of using an LO for positive cashflow if it is only a yearly lease or a five yearly lease. To me, I would want a wrap/LO to last at least 15-20 years as I would then be able to apply compounding interest to the recurring pos. cashflow by investing it into other high yielding and also high capital growth ventures with balanced risk levels. This is opposed to the idea of seeking to receive unrealized cap gains of only approximately 50,000 after 1 or 5 yrs, and then having my purchasing power further diminished by only being able to re-finance on that growth at an 80% LVR, while also suffering the burden of increased interest rates on my new loan/redraw. It seems to me you seek to profit primarily from a pre-set option cap gain, am I right? please correct if i’m wrong. I understand the logic in a stagnant market of locking in cap gains. But my philosophy is that positive cashflows and cap gains can be made creatively in any micro-market regardless of the property cycle. Perhaps I am too optimistic

    regards, Yidn

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Hi Yidn and others,

    Like I said, I’m fairly new to lease options and with investing I think its akin to ridng a bike, only experience can teach you how to do it properly, If you talk to me in a year from now, my strategies would probably have changed as some of this theory turns into practice.

    For now, our main reason for adding Lease options to our portfolio is to add equity and positive cashflow.

    The reason I like max 5 year terms is so that our equity and cash that we have tied up in those properties can be unlocked for use in another project. thats the theory, in practice, we still have numbers to play around with as you can see,

    these posts have helped, thank you all very much !!!!

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

    Profile photo of ilearnerilearner
    Member
    @ilearner
    Join Date: 2004
    Post Count: 56

    Hi, Dr X and others

    I am interested in this idea. Does your lender allow you to do it?

    Thanks,

    iLearner

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    hi ilerarner

    why does the lender have to know what you are going to do with the property after purchase?

    We buy properties in Adelaide. Immediate Cash Settlements, No Real Estate Agents, No Fees.
    [email protected]
    phone 0412 437 582

Viewing 20 posts - 1 through 20 (of 25 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.