Hi all,
Just on the subject of creative thinking, an idea I have been exploring recently stemmed from a paradigm shift on my part regarding the nature of a wrap transaction.
My essential paradigm of wrapping was until recently, that a wrap was primarily a property based investment, and my thinking and efforts were directed toward the property sepcific side of things. In short, to my thinking the property was the most important thing in the transaction.
Through some reading, not property specific, but rather, relating to the history of the banking industry, and the history of money, it occured to me to look at a wrap transaction as a means for an individual to do what banks do without having to jump through lots of legal hoops, to become a recognised finance institution.
Basicly, I came to see a wrap transaction as a back door into borrowing money, and lending it secured against real estate at a margin, (Incidentally, exactly what banks do). The property, whilst important in so far as it facilitated the establishment of this creditor position was truely incidental in terms of the core nature of the transaction.
This led me to explore the idea of spread, and how to maximise it, and to my mind there were two main approaches to this, firstly , to charge a higher rate of interest, and secondly to borrow funds at a lesser rate of interest.
Numerous wrapers have established that there is a market for ‘flexible’ non bank mortgage finance at rates 1.5%, 2%, even 3% and more above local bank mortgage interest rates, and this has been the traditional wrap approach, finance at local bank rates and add a margin.
This has two considerations however, firstly, it limits your market to those who cannot obtain the cheaper traditional bank alternative, and secondly, raises (rightly or wrongly, i make no moral judgement) the issue of investors ‘taking advantage’ of the ‘poor unfortunate battlers’ who can’t get a traditional homeloan, and (in the relatively few cases where punters truly have been ripped off) couldn’t be bothered getting independant legal advice.
The second avenue of rumination was to explore the possibility of obtaining funds cheaper than locally available retail bank mortgage rates.
To gain access to funds at the local government discount/base rate, would require becoming a recognised financial institution, which would negate to a large part, one of the immediate advanatages of wrapping, plus require capital beyond my immediate and conveniant means.
My next line of though was to go offshore for funds, Japan as an example only, is currently under the ‘zero interest rate’ policy, making the interest charges on retail mortgage finance negligable in Aussie/NZ terms.
The question is then will institutions in one of these countries with low, (by our standards) interest rates secure finance against property outside thier home country, preferable in Aus/NZ.
Additionally, how do they deal with currency issues, cross currency loans, withholding taxes and the like.
This ‘offshore’ approach neccessitates the consideration of more variables, in an investors/financiers risk assessment and risk management stategies.
Ideally such offshore sourced finance would be from a country with a history of stable low interest rates, not wildly fluctuating ones. Additionally the source country would need a history of a relatively stable currency value relationship with the country into which the funds would be taken.
My research of this topic is still in very early days, and I have yet to put any of this into action, however so far I have managed to find one institution, in one country which comes close to meeting these criteria, that lends against Aus/NZ RealEstate.
Witholding tax included, the cost of funds sourced here would be less than (just) 3% p.a. at current rates. Thier currency has a stable history against the AUD and NZD, but the AUD and NZD are at 10 year high against this currency, and so now would not be the ideal time to import funds.
Even given this, the relative value of the AUD/NZD would need to go lower than half of its current value (an event that has never happened in all the historical data I have located so far), before the interest payable would be comparable to local interest rates, which are only a few 0.25 rate rises (in Aus at least) from long term lows.
Whilst there is still considerable due diligence, and research to be done before I am comfortable with this, the prospect of using this mechanism to offer vendor finance at rates equal to or even below local bank finance rates, excites the absolute beegeezus out of me.
The possibilities are endless.
Sorry to be a bit long winded.
Cheers
Milty
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