For those out there who are experienced with Wrap and L/O, why would an investor choose to Wrap when one can Lease down a property thereby avoiding the risk of a “wrappee” wanting out and thereby creating a problem over how much ownership belongs to the investor and how much belongs to the wrappee?
With the L/O, the tenant buyer of course, does not own the property, merely owning the ability to purchase same at a pre agreed price. If and when they want out, there are no ownership issues to deal with.
Your answers are much appreciated.I have done both, and agree, LOs seem better for a number of reasons as you mention.
I think previously people wrapped as the ‘tenants’ were able to get the FHOG straight away (in some states anyway). Don’t know if this is still the case.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry.
So the FHOG gave the wrappee access to a block of cash which in turn served as a deposit. This was in all probability still less than what a usual S&P would recquire, plus the unavailability of further finance, gave the wrappee a good reason to wrap. I understand this.
However, even with the FHOG, the tenant could still have leased-up? Or would the government not allow this and only allow the Grant for an actual purchase, which is technically what the WRAP is.
To me it seems that a L/O is more of a win-win solution than a WRAP – certainly for the investor. The “try before you buy” line will not apply to a WRAP!
How does one work out a solution so as to avoid the legal entaglement of wrap walk-out?Hi Mitzvah
The FHOG is not available when a L/O is used. In those States where Wraps are legal (all States except SA), the FHOG grant is available when a Wrap is used (with State based variations on when it’s payable).
With a L/O you may get an uncommited “try before you buy” tenant buyer. This may mean you end up with someone in your property with a “tenant mentality”, instead of a “buyers mentality”. It’s up to you how commited you’d like your buyers to be to your property.
Arguably, with a L/O you are commited by the various Residential Tenancy Acts to be responsible for the maintenance of the property. With a Wrap, your wrapees are responsible for all maintenance. This also applies to Council Rates, Water Rates and Building Insurance. With a L/O you pay, with a Wrap they pay.
With a L/O, if the tenant buyer doesn’t excercise the Option and the Lease expires they may have to walk away with nothing. If a Wrapee “walks” the Instalment Contract is terminated and all Instalment Contracts I’ve seen indicate that the Wrapee must vacate and that all monies previously paid by them were vested (owned) by the Wrapper as soon as these monies were paid, i.e. they have no right of any refund.
Having said all this, we find that our decision to use a L/O or a Wrap, very much depends on the situation of our purchasers. Both the Wrap and the L/O are great techniques. Our suggestion would be to educate yourself on both so you can use each one appropriately.
Good luck.
Cheers, Paul
Paul & Karen Dobson
negative2positive
Turn your negatively geared property into positive cashflow.
Phone: (02) 4984 9540Talk to us about Wrap Training Joint Ventures.
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
I may well be missing something here but, as I understand it, a wrap will provide you with cash flow each month but a LO will not.
I am hoping I am wrong on this but here is a rough example:Someone buys an investment property in Sydney. With the curent low rental yields a 420k property might produce a rental income of 325 pw. After all tax considerations the property would cost the investor approximately 3000pa. (for the first few years).
Now, if the investor wrapped the property he/she would receive a monthly net income (after all expenses apart from tax) of around 400pw.
But, if the invester sold it on LO and gets say an additional 40% in rent ((325*40%=130)+325=455) the property, after all tax considesations, would roughly break even. It would’nt produce any monthly income.
So, based on this, why would someone LO?
I am hoping I am missing something here as personally I can see some big benefits in LO if it produces cash flow.Any insights into this would be appreciated.
Tony
Hi Tony
Doesn’t look good for Sydney does it?
There are many ways to structure a LO. The 40% extra is not fixed, the figure could be more – but are their people out there that would pay this?
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Tony.
Why bother with a Tenancy Agreement at all? Can’t both parties sign a lease-option agreement whereby all expenses are shifted over to leasee?
Cheers,Hi Mitzvah,
The answer to your questuion is “I don’t know but I imagine the expenses can be passed on in some way”. However, with most Sydney properties the passing on of the expenses would not be enough to make the investment cash flow positive. By my calculations it would make most of them cash flow neutral.
As I mentioned before, perhaps (and hopefully) I am missing something.Tony
Originally posted by mitzvah:Hi Tony.
Why bother with a Tenancy Agreement at all? Can’t both parties sign a lease-option agreement whereby all expenses are shifted over to leasee?
Cheers,Hi Mitzvah
A tenancy agreement is just another name for a lease?? The option is a separate contract.
In some states, such as NSW, apparently you can pass all expenses onto a tenant, but if they were to take you to the tribunal, they would be very likely to win and you would be ordered to reimburse all expenses.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Very True. You will lose in NSW. All residentual tennats are covered under the tribunal and act. Landlors must set a rent and cannot pass on anything above the rent except water.
Hi Condog
A solicitor I spoke to suggested just adding up all these expenses, and make the rent more to begin with. This should get around that problem. But you could only do this if the market would wear it.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
You must be logged in to reply to this topic. If you don't have an account, you can register here.
