Hi CY,

Thanks for making your first post and I invite you to keep posting in the future too.

I’ll try to answer some of your questions…

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1. Do I have to tell my bank If I ‘m going to wrap the property? If yes, is it BEFORE or AFTER settlement ? What is the penalty (if any) if I didn’t tell?

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I would encourage you to adopt a policy of being totally honest with your lender and certainly put it in writing that you intend to wrap the property.

Telling half-truths is no way to be investing tens of thousands of dollars.

I am currently working with a mortgage originator who has mentioned that he’s sourced a financier who is happy to do wraps… I’m building the details as a new part to this website and hope to release it soon.

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2. Do big banks /major financiers allow wrap? or do I have to settle with the ‘low doc’ products?

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Obtaining finance was certainly easier when I began wrapping than it is today and it seems that the big banks are not interested given the demand for home loan products associated with the latest boom.

As for a low doc loan – I’d only use this product if you don’t qualify for regular finance due to the interest premium charged.

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3. What is the ‘proof’ of home ownership to the wrapbuyer? (since I have the title in my name)- so that if I go bankrupt the house stays with them –

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Usually your purchaser will place a caveat on title stopping you from selling or refinancing the property from under them.

However, there is no guarantee you can offer except to point out the biggest reason you’ll go bankrupt is if they stop paying… so as long as they keep paying then…

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4. Do I have obligation to let the wrapbuyer know what is my loan balance ?

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No, although in Vic. you may need to establish that you are appropriately paying off your loan from the proceeds they pay you (ie. at least the principal version).

But under a policy of full and honest disclosure – why wouldn’t you show them if it builds trust?

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5. In NSW , can I legally pay IO to my original loan & charge PI to wrap buyer ? (increase cashflow)

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I don’t know the position in NSW, but I’d be very surprised if you could do this. I am certain that this is not possible in Vic.

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6. If I put and/or nominee- and we have same day settlement with the wrapbuyer- do I still need to pay stampduty?

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CY – this is a question to ask your legal adviser as the rules vary for State to State.

Out of interest though and for discussion purposes, in Vic. the nominee clause only applies where you know the nominee before you buy the property and they have appointed you as thier agent.

You are also not allowed to earn a commission.

That’s why I point out the need for appropriate legal advice in the State that you live in (NSW?)

Regards,

Steve McKnight

Andrew,

The business that we use to establish entities for our accounting clients, together with an outline of their pricing, is http://www.shelcom.com.au/services.htm

You might also expect to pay about $400 (2 hours) of time for your accountant / lawyer to fill in the necessary paperwork and ensure that the documents you receive are correct.

Accordingly, the $1,650 you were quoted does not appear to be unusually large.

Regards,

Steve McKnight

Andrew,

In your circumstance outlined here, my opinion is that when you are cashed out in three years time you would need to pay the balance of the CGT… probably on a gain of about $19,000.

Now, the actual amount of tax that you pay would depend on the entity you have purchased the property in and your own personal ‘structure’.

If you purchased it in a company, the you would pay tax at a flat 30% ($5,700).

In your own name you would get a 50% exemption, but you may pay at the top marginal rate???…???

I suggest you talk to Mark about this when you meet with him in the next few days.

Bye,

Steve McKnight

Edited by – [email protected] on 20/06/2002 12:11:40 PM

Hi Felicity,

Just taking Darren’s point a little further…

Just as the Commonwealth Bank would keep a set of keys to a home, neither do I and it would be certainly inappropriate to just barge in.

However, the contract that I use for my wraps contains a special condition that does allow me to gain access to the property to ensure that there has not been any unauthorised renovations, or that any agreed upon renovations have been done according to my consent and specifications.

To date I have not found need to use this clause, but it is a handy power to have just in case.

Bye,

Steve McKnight

OK, let’s have a look…

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I haven’t got to this point yet.
I have recently brought 3 properties(outer east) with subdivision potential. The first has just been submitted to the council, they are supposed to respond in 2 weeks. My thinking is, that the money I make on selling the land can be paid into the mortgage, such that the property becomes cash flow neutral or just positive.

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How much money to you think that you’ll make with the subdivision. I recommend that you flesh out a more detailed exit plan so you’ll know what has to be done to get your money back.

Can you be more specific with the numbers of the deal… i.e. how much cash in, cost of subdivision, details of finance etc..

I’d be very interested to see how the numbers stack up to compare the risk:reward on the deal.

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After developement expenses and capital gains tax are paid,whatever is left over, will be a deposit towards the next property, so you are able to leap frog into the next property very quickly. I have to wait one year, before selling however, as only half of the profit is then capital gains taxed at your top marginal tax rate, this then being 25% tax versuds 50% tax if sold in under one year.

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Hmmm, unless you are deemed to be in the business of subdivision, in which case the profits that you make are income and not capital gains.

What sort of property are you looking for in your next deal? In fact, I think you would really benefit from having a two or three year plan that outlines what you are doing and how much money you stand to make.

I regard deals of this nature to be earned income rather than passive income.

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Joint venture is a thought, in that I have just seen a property owned by a builder, with the potential to be strongly cash flow positive, so if he can sell me the property at a discount, he can have my land to build his next townhouse in return.

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This isn’t so much a joint venture as it would be a straight deal negotiation.

A JV would be you supply the land, the builder supplies the property and you share the profits or output on an pre-agreed basis.

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At the moment its still my thoughts, depends on council approval and the price he is willing to sell his current property.

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Regina, I strongly urge you to be more specific with developing a plan to make this work. It seems to me that it is all a bit too remote and that a lot has to happen in order for you to make money.

Property development is a dangerous arena for newbies, especially with rising interest rates. I urge you to proceed with caution and to not bite off more than you can comfortably manage.

Regards,

Steve McKnight

Alf,

I suggest that you draw a distinction between fishing for deals and then actually going into detail to evaluate them.

Fishing for deals

I use the 11 second solution to try and quickly gauge if the property is likely to be +ve cashflow. This is done when you take the weekly rent, divide it by 2 and then multiply the result but 1,000.

For example, a property that rents for $200 per week would give an 11 sec. outcome of $100,000 ((200/2)*1,000).

Anything around this level passes for further analysis.

Deal evaluation

Due diligence is the process of discovering what is not obvious about the property. My due diligence process comprises many standard forms that cover the broad topics of (in order):

1. The numbers (making sure I know what I am getting myself in for from a financial perspective).
2. The underlying property (making sure I know the state and quality of the underlying property I am buying).
3. The existing tenant (if I am buying a property with an existing tenant).

Further Comments

You’ll find that 95% of deals you come across won’t make it past the 11 sec. solution. This makes this simple calculation very valuable from a filtering tool.

Then I go on to review the numbers in more detail (as the numbers don’t lie).

Finally, if it stacks up on paper and I can agree on a price that I’m happy with then I’ll buy it subject to getting finance and a builder’s inspection to my satisfaction.

I can see no sense in paying for a building inspection on a property you are not completely interested in.

If appropriate I will also get a quantity surveyor’s report too.

As for depreciation – I don’t factor it in when I buy, but I see it as a bonus. However, other investors with a need to wipe out tax might be more inclined to place more emphasis on depreciation benefits.

It all depends on your strategy… do you want to make money from day one, or do you want to save tax now and maybe make money in the future with potential capital gains?

Regards,

Steve McKnight

Matt,

The introduction of GST had an adverse effect on the laundromat industry as, generally speaking, 10% of the profit went up in suds.

This was because a $2 machine is geared to accept either one or two dollar coins. That is, you can’t put in $2.20.

It’s a massive jump to go from $1 to $2 or from $2 to $3 because of the GST.

As such, profits generally fell.

As for general feedback, I’d just like to remind you to weigh up the risk vs. return and be mindful that getting finance may be tricky if you are looking for more than 70% LVR.

Finally, be sure to draw a distinction between a leasehold business (where you are presumably buying the machines and taking over an existing lease for the building) and a freehold business where you buy the machines and also the building they are housed in.

Sourcing finance for a leasehold business adds a layer of complexity in the deal.

I’d imagine the real value in the business is the location it is in and the amount of repeat business. For example, a laundromat near a Caravan Park or multi-family property would be better placed than something in a more established family area.

Why not place the details of the financials for the business for analysis on the forum? I’d be willing to cast my eye over it for you.

Cheers,

Steve McKnight

Klaus,

While the government can change its mind at any time, the FHOG was ‘budgeted’ in the last Federal budget until June 2003.

However, the $10,000 FHOG for new properties will be reduced to $7,000 (the same as is available for existing houses) from 1 July 2002.

Regards,

Steve McKnight

Regina,

Would you feel comfortable listing out the basics of your joint venture… ie. what are the responsibilities of each party, how profit / loss is to be distributed etc.?

I’ll provide some feedback with my thoughts on the set up and it would be an excellent discussion for people who have no experience in joint ventures too.

Thanks,

Steve McKnight