Hi all, I have been reading many posts about wrapping, but was wondering if some one could point me in the right direction on where to start. I have been reading about acl coverage, finance licenses, CCI regulatory… And also VF association?
I am in WA, am currently selling my ppr to build a smaller place and reduce my overall debt. I also have another investment property which is negatively geared, and rented out for another 10 months…
My main aim is to start VF transactions in order to replace our day to day income (eventually).
Any help would be appreciated..
We started in vendor financed real estate in 2003. As Karen, my wife, was a stay at home Mum, she was full time in the business right from the start. I've got to say coming to the realisation that I could give up my full time job in 2009 was a great day. As you can see, we weren't the fastest vendor financiers out of the blocks but we got there and I'd suggest you absolutely refrain from giving up your current cash flow (job) too early.
Recently in WA, the Consumer Protection people have been taking a big stick to vendor financiers who they perceive don't use Lease/Options (L/O's) in an ethical way. While L/O's aren't regulated by the National Credit Code (NCC) it seems extremely important to me that they're used to set people with the best chance of success. To me, this means that VF'ers who are offering home ownership via L/O's should be making some serious enquiries as to whether their buyers have a reasonable expectation to be able to exercise the Option and get a traditional home loan at the end of the term of the Option.
We prefer Instalment Contracts as they are regulated by the NCC. However, if we use a L/O for 12 months to establish "serviceability", we always establish in our minds that the buyers have a reasonable expectation to get a traditional home loan and/or offer to roll them over into an Instalment Contract at that point.
For us and for most vendor financiers it's vital to set your buyers up for success. If you keep this as your number one priority the money will follow and you'll build a long term business.
Thanks for your information Paul.. Myself and partner have our own business so I can spend as much or as little time on this as possible. Our business is quite manually intensive, and I have always been interested in property as my #1 income, but have never done anything about it. I now want it to eventually replace our business income – however long that takes.. Having set this business up 10 years ago, both of us working full time as well as setting up business, it know the feeling of the day when you can both quit your paid employment… I have always said also that I am not out there to rip anyone off, just want enough to pay for my day to day living..
Now I want a better liefestyle, without working so hard
to start off with, do I need to get a licence or register with any one before I start. I am interested in the Instalment contracts way, altho I havent read much about lease/options, and will do so in next few weeks.
Are there any sites or products I could check out to give me a full run down on it all. I know Steve used to do a Wrap pack many years ago??
I know there are a couple thru The Results Programme that are offering a weekend thing for about 4K, but I cant get to Melbourne at that time.
Really Appreciate your help
Just another quick query on this issue too, I assume after a few houses you will not have much equity to continue purchasing, so how do you continue to get houses to offer a VF option?
Yes Steve used to have the Wrap Kit and Rick used to have the Wrap Pack. An alternative is to turn your vendor finance (VF) education into a profit making venture. This of course presupposes that you have a property that would benefit you by its sale with VF or you could purchase a property and sell it with VF.
In either case I'd suggest you do it as part of a joint venture (JV) with and experienced VF'er. Sure you will forgo some of the profit by entering into a JV but at least you can get your initial VF education as part of a profit making transaction, instead of it costing tens of thousands of dollars (most 2 to 3 day events are general in nature and have an up-sell to a mentoring course at the end of the event).
Doing a JV initially also saves you from the numerous newbie mistakes most VF'ers make. The problem with these newbie mistakes is that they often continue for quite a number of your initial transactions. I know that if we'd done our first transaction with an experienced VF'er we would have probably made the same amount of money as we actually made, even after sharing the profits with a JV partner. Thereafter our profits would have been much higher than they were.
We started of the lazy way i.e. we had equity in our home and we bought 4 properties and sold them with VF before we ran out of money. Then we really had to learn the "business". But it was a great way to learn the basics so we were pretty lucky really.
Thanks again Paul for your help. I know you guys do JV deals.. Do you consider deals in Perth? My current investment has only had tenants in for 2 months on a 12 month contract. I was hoping to sell our ppr so we can reduce the debts on our next ppr which we are building. Our ppr is worth about 620 and our investment about 370 in today’s market. Is it worth us trying VF on both do u think? Do I need a ACL to do a deal either in joint venture or when I go alone? Look forward to hearing back from you.
Without the tenants being in the picture I would have suggested you considered selling your IP with VF but only if that made sense in the overall plan for your portfolio. I never suggest selling with VF just for the sake of it as, ultimately it's the real estate you own that builds your real wealth. As the tenants have 10 months to run, if you come to the conclusion that this property isn't a good "keeper" then I'd consider marketing it with VF in about 8 months time.
The situation with your current PPOR, again, isn't straight forward. Do you need most of the money from this property to build your new PPOR? If you do then selling with an Instalment Contract may not be the way to go as, with a vendor finance sale, you trade off time to get fixed capital gain and positive monthly cash flow. If you have sufficient capital then you'll have to decide if your current PPOR is a "keeper" or would it be suitable to sell with VF, within the overall plan of growing your portfolio.
It is unlikely that you will be regarded as providing credit "in the course of a business" if you sell one property with an Instalment Contract, whether or not it's conducted in a JV. After that, it's my opinion that you will need an ACL (JV or not). However this question, in relation to the new National Credit Code, has yet to be tested in court. Of course, take your own legal advice on this issue.
Thanks Paul, I will hold onto the IP til closer to when the lease is due, and I may approach the tenants 1st. With our PPOR, I am looking at using 100k from it for our next house, and then using 50-70k for our next IP. However if I went VF with our PPOR I would need both that and our initial IP to bring me a reasonable +CF to sustain our new mortgage.
Can i ask you therefore Is it reasonable to get some one on VF for a property worth close on 650K?
If I were to keep both properties and live in the new one that I am building, is it reasonable to say expect about 200PW +CF from both put together.
When I worked a little calculation, with a min deposit from both and. +2% on top of the interest rate that I am paying, I personally think the repayments for both would be too high? But that is just me and I understand the mind set of some one wanting to own their own home is completely different to mine.
Would appreciate your advice on your own experience with these values and likelihood of success before I consider putting this home on the market.
Yes, properties are sold in the $650K price range with VF all the time. Is the pool of buyers at this price point less than the pool of buyers available for a $400K house? Yes but we still get plenty of enquires on the higher priced properties.
If you sold both properties with VF, I'd say you could comfortably achieve $1,000 per month positive cash flow.
However, if you were to sell your current PPOR with VF, you are going to seriously delay access to the $100K you need for your new PPOR, i.e. it's very unlikely that you'll get a deposit from a VF buyer anywhere near that. Looking at the not to distant cash requirements for your new PPOR, I'd suggest that selling your current PPOR traditionally may be the way to go at the moment.
Thanks again Paul, seems we just have a 2 way forum going here .
If I could get 1000 pm +CF on both, then that would hugely assist paying towards my mortgage on the newly built PPOR, the only other issue that I would then need to clarify, is where do I stand in obtaining my next IP, as I would not have a deposit for 1. I am happy to sit with just the 2 in the short term, but how do I go about securing my next one?
My short term goal is to do VF deals to eventually replace our incomes, then I will incorporate buy and hold properties for long term wealth.
Hope you can help on this too?
Thanks again for all your help.
TracyDeal MakerParticipant@deal-makerJoin Date: 2011Post Count: 33
Although it seems you are having a two-way conversation with Paul and nobody else is contributing … you are lucky to be talking to the right guy when it comes to vendor financing and wrapping. We know Paul and he is a buck of knowledge and backed up by experience when it comes to this topic.
Sherry and Jason
First up, thanks Sherry & Jason. Flattery will get you everywhere
Tracy, if you were to sell both properties with VF, I believe $1,000 pm +CF on both is very achievable.
In answer to your question, "how do I go about securing my next one?" I'd buy it with VF. In the current slow market this too is very achievable, using either Deposit Finance or an Instalment Contract.
Ultimately all Vendor Financiers run out of money and/or borrowing capacity and are unable to buy more properties to on-sell with CF. This is when you really have to learn how the business works
Your plan is similar to ours, i.e. vendor finance to generate cash flow to support our lifestyle and buy and holds and buy and holds for our long term wealth.
Thanks Sherry and JAson, glad I am in the right hands.!
Now Paul, I am just a little confused, just a little mind you .
If I were to buy my next property on VF is it possible to still get +CF from it. I will already be paying higher than normal mortgage payments on it, so if I rent it out, I would have thought that it isn’t likely to return +ve or am I able to then on sell it on VF terms..
I know down the track I really need to learn more, and become at lot more creative. I just want to be able to move on following these 1st 2 properties in the short term..
By the way have you heard of David Siacci and their investing? From what I have read, it is VF with a twist, and more on control of property than buying? What are your thoughts?
The answer to your first question has heaps of "if's" and "maybe's" involved, so this answer has to be pretty general. First up, if you are buying a property with VF for investment purposes, don't buy from a VF'er as they have already built their profit into the sale. Buy in their market, i.e. buy with VF from "standard" sellers. Not easy when you first start out but I guess that's the case for almost everything new you try.
We use VF to build our buy and hold portfolio and maintain our lifestyle. On the portfolio building side of things we buy (or control) a number of properties and on-sell them with VF to create positive cash flow. We then use that positive cash flow to support our long term buy and holds.
In relation to Dave & Julie Siacci I've got to declare that we're personal friends. We started out in VF at the same time. With that declared, I think they're great at what they do
Thanks Paul, it seems I need a lot of experience in this field(that of controlling rather then buying property) in order to move into a cash flow positive life style? I think I am going to try again to sell our PPR and at least get our mortgage down some what. The trouble is, it didn’t sell at the beginning of the year so I am not holding my breath.
On another note, I listened to David and Julie on line a few weeks ago , they seem very down to earth… How come you are not doing these seminars? Seems to be money in just that, as oppose to investing!! Although they are close friends, would u recommend some one like me doing a weekend course or would I be better off going into a couple of JV’s? I understand they started off doing Rick Ottons course? Is that any good do u know?
Thanks for your help along my way so far , much appreciated
Your questions are excellent and give me heaps of opportunity to stand on a bunch of people's toes Please feel free to give me a call on 0447 973 235.
Cheers, PaulProperty TraderParticipant@property-traderJoin Date: 2002Post Count: 111
Hi Paul, thanks for the offer to call you, I have been quite sick and trying to get over pneumonia…. Not good, but I will definitely call you when I am back on my feet.
Thnx againrusty05Member@rusty05Join Date: 2011Post Count: 94
Hi guys, – sorry, long post….
Paul, it seems you're the go-to guy in this area and if you don't mind I'd love your advice on our situation, too.
Like you Sandtracker, I have our PPOR on the market without a lot of success. Ideally we need to release some capital (at least 100K) for our new PPOR, and while we do have another IP that we can sell if we need to, I'd rather not because it takes care of itself nicely.
TBH I've never really taken to the wrapping thing, don't know why but I just haven't. ALTHOUGH today our agent told me that she has been contacted by a lady who has sold her house in Sydney and is relocating to the area (details are sketchy at best). They fell in love with our PPOR pics on the net (house is only 18 months old) but wants to rent for up to 5 years with an option to buy at the end because they're starting a family and she wont be working in this time. – I assume less disposable income.
I'm not sure if this would be called a wrap or even if it would be possible. but without knowing much about her, assuming (maybe falsely) that she has enough for a 20% deposit which they may not, and a sale price of $560000, what would happen if I was to suggest:
-20% deposit upfront = $110,000
-As well as the 20% deposit, she pays us rent of $500 pw (rental appraisal has been $470 – $500.) Our IO repayments are 515pw but dripping in depreciation.
– Balance ($450,000) to be paid in full at the end of the 5 year period.
The question is what would be the motivation for her to accept this? – pretending she had a $110k deposit????
*If she brought outright in this price range now it would be a little under $600,000 inc stamp duty – $110 deposit = a mortgage of about $490000 (around $650pw) whereas with paying a deposit and renting it would be $500pw. Saving of $150pw.
*She would, in effect be living in the home she is one day going to own, and obviously likes.
*It would keep her in the market and she can recieve the capital growth (if any) over the 5 years, by locking in at today's prices.
*If weekly income is an issue, she wouldn't have rates, maintenance to deal with.
Would it be unrealistic to demand market rent as well as a 20% deposit?
The benefits for me would be:
-We are able to move on to our new PPOR without a major firesale.
– We can access the $110,000 downpayment that we need for our new PPOR.
– With depreciation the rent would cover the mortgage (just, without making anything, although that wouldn't be the aim here).
– The sale gets finalised within 5 years (although we do miss out on any capital gains)
I know there are so many variables that its pretty airy-fairy, but once it's out there it's hard to take it back so I'd love to know what people think – is it do-able, would it be worthwhile for either party etc.
Am I dreaming?
What you are describing is a Lease/Option, i.e. a Residential Lease and a Call Option. This would give the tenant buyers control of the property, with the Residential Lease giving them possession of the property and the Call Option giving them the right (but not the obligation) to purchase the property at anytime during the term of the Option, for a fixed price.
If you are happy with the figures above that's fine. However, in comparison to a lot of Lease/Options, the upfront option fee ($110,000) is quite high and you haven't offered any "equity credit", i.e. no portion of the rent is credit towards the purchase price.
The interesting thing about Lease/Options is that they are hugely flexible, i.e. they can be structured in just about any way the two parties can agree on.
I think your biggest hurdle may be the size of the upfront option fee (deposit) you're asking for but, as they say, if you don't ask, the answer in no
Also, knowing VF'ers quite well if you don't want the property to be on-sold again with another Lease/Option (an arrangement sometimes called a "sandwich lease/option"), make sure you tell the Agent that you will not allow any sub leasing of the property.