All Topics / Creative Investing / Does anyone know anything about Equity Leases?

Viewing 8 posts - 1 through 8 (of 8 total)
  • Profile photo of Cath WoodCath Wood
    Participant
    @cath-wood
    Join Date: 2007
    Post Count: 19

    I went to a course over the weekend called "Real Estate Mastery", run by Empowernet.

    It was free, but we had 8 pretty hard core upsell promotions spread throughout the 2 days, so I reckon we paid for the course in other ways.

    One of the things mentioned in passing was 'equity leasing' and I am wondering whether anyone has any experience around this?

    From what I could gather, this is how it works:

    I buy a house, and I rent it to a tenant for a long term, eg 5 years. The rent they pay is much higher than normal – about the same as the mortgage on the house, so that it's neutrally geared. I think the tenant may even be responsible for some repairs etc, but in any case they look after the house like it's their own, because in effect it partially is.

    At the end of 5 years, the tenant receives a pre-agreed portion of the increase in equity over that 5 years.

    The paperwork is similar to lease option scenarios, in that there's a lease agreement and a separate document which covers the equity agreement.

    I have no idea what percentage of the equity is usually offered, but am guessing this could be negotiated individually, according to what each party thought the outlook was for capital growth in the specific area.

    This has some similarities with lease options, but for the investor, equity leases would give a slice of the capital growth, rather than ongoing cashflow as you get with a lease option. At the end of the term, the investor retains the house, and the tenant takes their cash and theoretically would then use it as a deposit on their own home, somewhere else.

    I don't know what happens if the tenant wants to break their lease before the 5 years is up, and I have no idea how the tax side of it works. Like I said, it was mentioned in passing, but it piqued my interest.

    Does anyone know anything about equity leasing? Has anyone done it?

    Cath.

    Profile photo of MrFairGoMrFairGo
    Member
    @mrfairgo
    Join Date: 1969
    Post Count: 93

    Hi Cath

    Sounds interesting – especially in cases where the rise is rapid.  I am smarting at the moment over a property we are about to go to contract on for 128k, but the house is really worth over 190k.  I don't mind the lessee getting a slice, even half, but that much is ridiculous!  Especially when they should have gone to contract over a year ago but have been messing us about.

    What percentage of the equity increase was suggested ?  50/50, or more in favour of the lessee or lessor?
    Was mention made of the situation where the property loses value?

    Thanks

    Profile photo of Cath WoodCath Wood
    Participant
    @cath-wood
    Join Date: 2007
    Post Count: 19

    Hi Mr Fair Go,

    Ouch!  At first I thought you meant you were BUYING at that price, and was wondering why you were so bummed, lol.

    I haven't got a definitive answer on the percentage yet, but it sounds like it might be in the vicinity of 20-30%.  Will let you know more when I find out.

    I don't know what would happen if the property went backwards, but would imagine that nothing would happen.  You couldn't get a tenant to agree to pay high rent then take a share of any equity slide!   I can only say that if you bought a house that lost value over 5 years, it could probably be said that it was poor buying.

    Regards,

    Cath.

    Profile photo of MrFairGoMrFairGo
    Member
    @mrfairgo
    Join Date: 1969
    Post Count: 93

    Thanks for that Cath.  Yes please, I look forward to that figure when you have it.

    Actually, I reread our agreement with the lessee, and see that technically it expired with the lease back in June.  So I have offered them to be able to buy it at a price about 25k below "street value".  I think that's pretty fair under the circumstances, since (1) they are 6k behind in their rent, and (2) we could easily get street value for it.  I'm not called "Mr Fair Go" for nothing!

    Profile photo of Cath WoodCath Wood
    Participant
    @cath-wood
    Join Date: 2007
    Post Count: 19

    Sounds more than fair to me 

    Profile photo of Kiwi-FullaKiwi-Fulla
    Member
    @kiwi-fulla
    Join Date: 2002
    Post Count: 371

    Hey There,

    The beauty of these instruments are they are all flexible……. I tend to work out what the total payments over the term, (from the tenant) are and then work out an annual scale plan ….. if they go the whole 5 years … and they are paying say 500/week then I subtract the market rent (say 300 in this example) and the total amount of over pay would be $52,000 now if they stayed the whole 5 years …. then I would give em $75K and take off 20% for each year they finish earlier.

    So if your house was worth 300K now and in 5 years it is worth $450K they get $75K and you get $75K profit + it has cost you nothing during the 5 years….

    You can either sell and pay out your payment to the tenant or refinance and pay them out and keep your share invested….

    Basically you can work out what works for you and them.

    If hte market softens …. then you can protect your interest by not stating a figure as such … but a percentage of the net difference between the start value and the 5 year value.

    Good luck with it.
    Kiwi

    Profile photo of Cath WoodCath Wood
    Participant
    @cath-wood
    Join Date: 2007
    Post Count: 19

    Hi Kiwi,

    The numbers you have plucked out are pretty much exactly the same ones as I did when I first looked at this.  I too came to the conclusion that the 20-30% that was suggested seems on the low side, and that 50% of the equity increase would make sense for the tenant.  However I am looking forward to talking to the guy that is actually doing these.

    Actually now that we mention it, are you doing these?  Your website focuses only on the lease options, are you doing equity leases too?

    I would think that the way to go would be to refinance, and hold onto the property.  That way, you would have been neutrally geared for the 5 years, and at the end of it would have an equity stake which would grow considerably from that point on.

    Another question for you Kiwi, on the paperwork for the lease options.  I did one of these a couple of years ago, but I had a heck of a time getting the legal side of it together.  I went to a lawyer who wrote me complete gobbledigook, which was unusable, then I was shown a couple of other agreements that were being used by other people.  In the end I used the 3 examples as the basis for writing my own, then the tenant wanted a couple of alterations made as well!

    I was not particularly confident that this was the best result, since I'm not actually a lawyer myself.  I never had to test it in court, but I wouldn't have wanted to.

    So my question is, how did you get your legals sorted?  Did you use a lawyer and if so would you mind telling me who?

    Many thanks,

    Cath.

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

    Hi Cath

    We do our Lease/Options mainly in NSW and use Tony Cordato.  We highly recommenc him.

    We haven't done a Lease/Option in Vic but have heard through the grapevine that Lewis O'Brien is the solicitor to use there.

    What State are you in?

    Cheers,  Paul

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

    An alternative way to finance your home.

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