Hello Everyone
Does anyone have any thoughts on the Equity Lease idea?
For anyone not familiar with the idea, here is a brief rundown:Essentially it a long term(5 or 10 year) commercial style lease between tenant and landlord whereby the tenant signs a long term lease (5 years min) and a slightly above market rent (say an extra $50 a week) increasing with inflation every year.
In return the tenant gets a share of future capital gains (say 30%) paid out at the end of the lease. From their point of view it will help the tenant save the deposit for a home at the end of the lease, a home they would otherwise not be able to afford. And there is no risk involved. They would just pay a slightly higher rent than they would normally. Their interest in the property could possibly be protected by a caveat?
From the landlord’s point of view the cashflow of the property is improved thereby increasing their servicibility allowing them to buy more IP’s. And the long term lease would look good to the lending banks. At the end of the lease, the property can be refinanced to pay out the tenant, or renewed for a further 5 year term.
Any thoughts or potential problems with this idea?
Geronimo
Geronimo, in my understanding and implementation of the Equity Lease, at the end of the lease, no matter if there is a renewal or not, you should refinance and give the tenant their share – it’s something concrete, and they can do with it what they will, while maybe staying on if they like the place. I would definitely have them lodge a caveat also – same as in wrapping, you need to make sure that you can get them their money from the property, so your loan doesn’t want to be too high.
Cheers
MelMel
Thank-you for your post. I agree that you have to be certain you can pull some equity out of the property to pay out the tenant, my property that I have in mind for it is at about 70% LVR and increasing rapidly, so I’m confidant.
Have you done this sort of deal before? If so, where would you suggest advertising for this type of deal?
Geronimo
Same places you’d go to for lease/option, wrappee’s etc. Papers, internets, local papers, bulletin boards, current tenants etc.
You need to put enough info to interest them, and get them to call you so you can explain the rest.
Cheers
Mel
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