do these numbers work?

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

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

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

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

Hi, Dr X and others

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

Thanks,

iLearner