Hey team,

Thanks for the comments about the book. There's no doubt that property prices have moved higher since the 0 to 130 was released.  I accept that some will view it as outdated, however I continue to use the same theories to make good profits today.

It is fair to say that residential +ve cashflow properties are now very hard to find. I recommend people interested in this approach look to commercial property where tenants generally pay outgoings, and as such, the cashflow outcome is better than residential (where the landlord pays outgoings).

I hope to write a free report soon titled 'Where Have All The Positive Cashflow Properties Gone?'. Keep an eye out for it as it will be available in the months ahead.

Enjoy the rest of the book. It is wise to read widely, but your plan of attack will need to be made based on which approach will get you to your goals the fastest and with the least risk.

Cheers,

Hi,

Many people have asked what has happened to the Wrap Kit that I produced some years ago.

At the time, it was the only resource available on how to do vendor finance sales in Aus (and in Vic in particular). Rick later put out a version that adopted and advocated a slightly different approach (and was more based on the NSW legal framework).

My version has been out of print for some time now. This has been because I have been convinced that some investors have used vendor finance incorrectly and misled buyers with dodgy tactics. In short, I did not want to advocate an approach that was seeming to do more harm than good.

I do hope to make some of the information freely available for public use and debate in 2008. My hope is that a better informed public will be able to protect and educate themselves on vendor finance, and that the fear, hype and greed will be fairly addressed.

Hey Blaze,

Thanks for the post and welcome to the community.

First, congrats on the property purchase. It is no doubt an exciting time!

Your question about how to leverage to buy a second (or third etc) property is a good one, and it is a topic that all investors must address sooner or later.

As far as the finance is concerned, one of the many finance experts on the forum should be able to point you in the right direction as far as options go. Some comments I can make though are:

1. The tax situation is a little confused when you rent one bedroom out. Your principal place of residence (PPOR) is usually capital gains tax free, but this is not the case if you rent out a room and claim some of the loan interest as a deduction. You will need to apportion the gain… some will be tax free, some will attract CGT. This shouldn't put you off as such, but it is something to be aware of.

2. Did you buy the property for income or growth? Your decision about your expected profit should point you in the right direction about how to finance the property. For example, if you wanted income, then you would try to max your income and min your expense. As such, an interest-only loan may be appropraite at a high loan-to-valuation ratio. For example, perhaps an 85% interest-only loan (anything above 85% may attract mortgage insurance) could work for you as it would preserve your deposit base and also max your income.

3. Be wary funding new property purchases with debt. Others disagree, but I feel the safer and more sustainable approach is to sell and cash in some of your equity rather than refinancing to the hilt.

4. I'd love to see more accurate financial info about the expected cashflow and growth from this property. I think this would help you get clear on the likely end outcome.  For example, here is a very rough set of numbers based on an interest only 80% interest-only loan @ 9% interest:

Rent: $16,200 (your figure)

Management: $1,296 (8%)
Outgoings: $3,000 (your figure)
Interest: $14,400 (9% interest on loan of $160k)
Total exp: $18,696

Cashflow: $2,496 (say $2.5k)

Annual growth required to cover -ve cashflow: 1.2%

If you assumed an average growth rate of 5%; the value of your property compared to loan and -ve cashflow would be:

Year; Value; Loan accum + negative cashflow; Equity
0 ; $200k ; $162.5k; $37.5k
1 ; $210k ; $165.5k; $45k
2 ; $220.5k ; $167.5k; $53k
3 ; $231.5k ; $170k; $61.5k
4 ; $243.1k ; $172.5k; $70.6k

Hopefully you can see how the numbers come up. I would do a speadsheet based on this sort of approach.

The question is, at what point do you access equity to go again? And at that time, do you sell or refinance?

Generally, and subject to affordability, it is better to refinance for getting to properties 2 to 4, but after then you will probably need to sell and keep going.

Has this helped?

Hi guys,

Sean, thanks for posting your reply. You seem to have thought through it carefully.

Some further thoughts that I would like to add are:

1. Are there strings attached to the deal your in-laws are offering? For instance, what if you decide to sell soon after moving in to people your in-laws don't like.

2. The 100k would be enough to get into a buy-reno-sell situation, but that can be a lot of hard work if you are planning to do the work yourself. Still, DIY projects are a great way to learn. Things in the eastern suburbs are quite expensive though… If you go down this road then get advice about how to do it in a structure that won't affect your ability to get the FHOG or other incentives.

3. You can always rent for 12 to 18 months while your in-laws property is 'fixed up' for you both to live in.

Box Hill is a good area, and experiences strong demand from a growing Asian culture. I lived in that suburb for 5 or so years and know it well. What street is the house in?

Cheers,

Hi,

I'm not sure I understand your question fully, but I'll have a go at answering it for you.

First of all, if you want the interest to be deductible, then it won't be a PPOR (CGT free), but rather an investment property.

Tax law requires that there be a connection with the earning of income and the expense, and the expense cannot be of a private nature (i.e. a home).

So, you will need to create a valid investment model, which can be negatively geared. That is, you will need to charge and pay a market rent. Whether you create a seperate investment structure to do this is up to you.

A possible model then would be as follows:

1. Buy new PPOR in a new structure. For discussion sake, let's say you set up the 123 Family Trust to buy it in.
2. You buy the property (let's call it 123 Smith Street)
3. You refinance your current PPOR to pay for the deposit and closing costs. The interest on this redraw is deductible provided 123 Smith Street is an investment property (even if it makes a cashflow loss).
4. You get an 80% loan for 123 Smith Street, offering the title up as security. Assuming you are either the Trustee, or director of the Trustee company, you will be asked for a personal guarantee. The interest on this loan will be tax deductible too.
5. You will need to pay a market rent to 123 Family Trust. You may offset this cost by potentially renting your current PPOR for a short time without compromising the CGT status of it. You will need to see an accountant about this.
6. When you sell 123 Smith Street, any capital appreciation will be subject to CGT.

I hope this will help get you started. I really think you need to see an accountant. I would also say that this is a highly leveraged strategy, meaning you are borrowing a lot of money. This often carries a lot of risk.

Cheers,

Hi,

To throw in a different opinion, if I was betting on the next city in Aus to experience above average growth, I'd be putting my money on Sydney.

Adelaide is at the tail end of a recent boom, Queensland is experiencing a increase in prices, but when Sydney goes again, it will make both look insignificant by comparison.

All in all, there is money to be made everywhere. Your choice is best determined from your experience and skill base rather than picking a location and trying to strike it lucky.  That is, what you do is more important than where you do it.

Cheers,

While I'm known as an expert in vendor finance, it has now been a number of years since I have entered into a new transaction. The information given below is according to my recollection as to how things used to be, but I wouldn't be surprised if there were changes which I am not aware of.

First up, it is important to note that vendor finance is ONLY a useful tool if the person can afford the repayments. The key target market may be people with strong incomes but not enough for a deposit, or those that are creditworthy but are refused traditional finance (such as business owners, those aged over 50 etc).

One of the biggest mistakes that can be made is selling a property to a person who cannot afford it. Indeed, just take a look at what is happening in the US. It is fair to say that many poor vendor finance sales were coved over with capital gains so that when the buyer defaulted the loss was masked by capital profits, which were then shared.

However, in times of flat prices or worse, decline, vendor finance contracts MUST be underwritten by strong incomes and cash reserves. In summary, if someone is on the line as far as affordability is concerned, I WOULDN'T do the sale for the downside risk is much higher than the upside risk.

With that caveat made, here are some further important comments:

1. Legality

VF is legal in Victoria however the laws are onerous. If you do it as a business, then you need to be registered as a credit provider. All contracts must also confirm with Consumer Credit Code. The ONLY person I would go to in Victoria to handle the legals on a VF sale is Lewis O'Brien (Balwyn).

2. Morality

Crtitics of vendor finance have been as one-eyed as were the proponents in the early days (and I would put myself in that bracket). VF is not evil or good, it is simply a method by which property is sold. However, the agenda of the person using the tactic will quickly come to the surface when the clauses pertaining to the contract are scrutinised.

Many a rouge has been fooled into the prospects of instant riches by selling property to people using VF. The truth is VF is more about a relationship than riches, and if you are not interested in investing into the relationship then it's best to stay away.

I have seen some contracts that any level-minded person would regard as grossly unfair. So too have I seen poorly informed scaremongers pick selected truths, and half told stories, to push personal agendas.

In summary, the morality of the technique is dictated by the use, not the existence of the facility. I say prosecute the offenders and allow the prudent legal framework to govern good practise for the remainder.

3. Settlement

In Vic, it used to be that there were two settlements. #1 when the person moved in; and #2 when title transferred after the final payment. The SRO was happy to pay the FHOG at #1, but proof of interest in the property had to be proved.

Other states were happy to provide the FHOG, but they wanted to see a passage of time to ensure the contracts were bona fide.

The best place to go for more info is the SRO. They should have a policy statement or something they can provide as to the payment of FHOG to VF sales.

Stamp duty was payable at #2. Other states had it that stamp duty was payable upfront.

4. Payment of FHOG

From memory, the FHOG application form required that the applicant specify where the grant was to be paid. If you want to share it that is up to you. Remember though… if you are doing this to launder FHOG money from the government then that's probably fraud. There would need to be a genuine prospect of the contract advancing, and this will be proven with the passage of time.

5. Your Scheme

Considering my comments above, I would regard your proposal as highly suspect. As mentioned by another, the payment of multiple FHOG on the one property in quick time will attract prompt review, and, I suspect, legal rebuke.

Also, the concern would be how the 60% was kept in trust. This smacks of the possibility of abuse unless kept in a solicitor's trust account, and there is an open-ended commitment that the funds could be used for a future purpose that may never eventuate and hence the need for ongoing management and admin.

No, I'm afraid I don't like the sound of it.

Finally, aside from the merits of the idea, I suspect you'll find that if the contract does not proceed to #2 settlement on account of default, then there is an obligation to repay the FHOG rather than retain it.

I hope this has helped both you and others who are contemplating vendor finance as an investment option.

Regards,

Hi,

To answer your questions…

1. No one is going to view your personal information. You can enter in any name you want – real or otherwise – and the only reason you may want to leave your email address is if you want the system to remind you to come back and redo the calculations in 90 days.

2. The site does not have an AFSL. We do not proport to be offering any kind of financial advice. We are not recommending or advising on financial products of any nature. Having said that, I do have an Diploma of Financial Services and am PS 146 compliant. I do not have an AFSL.

3. Of course it is legal. But, if you have any doubts, don't use the sevice. It's designed to be a blessing.

4. If you'd like to turn this into your own spreadsheet and use it privately then please do. You can see the forms and I have given you the calculations. For someone who knows Excel, it should take you about 10 minutes to create.  I'm not interested in selling software that does this. It is something I wanted to do for free to help people.

All the best,