Yes, good question. Just bear in mind that you can structure lease option is so many ways, so it is hard to know how they are doing this.

Probably the property would only rent for $200 pw normally. So they want to charge an extra $190 in rent, of which they will give you back $130 IF (note big IF), you buy the property off them. With LOs I think there is less chance that the tenant will eventually buy from you (compared to wraps). Since it is only a lease, tenants would be more inclined to walk away for various minor reasons.

If they walk away, then the owner would have collected an extra $130 pw in rent which they would get to keep.

Even if the too up the option in say 2 years time, the property may be worth $240,000, but they can get it for $230,000 less $13,520 rent credit = $216,000.

So the owner may have made $16,000 on the gain, and an extra $19,760 more in rent than they normally would have (ie $190 x 52 x 2).

You also don’t know the details, the strike price could be increasing annually in line with the CPI, and/or the tenants rent could be increasing as well. In addition they are probably getting the tenant to pay all rates, insurance, repairs etc saving them another $2000 per year.

Terryw
Discover Home Loans
North Sydney
[email protected]

Delboy

It would depend how you structured the LO.

eg one way, you could have a 2 year option, when they wish to renow after 2 years, the value would have risen so you could determine a new strike price and you could increase you loan to this amount (subject to serviceability).

Terryw
Discover Home Loans
North Sydney
[email protected]

Pelican

Yep. Good point. LMI will restrict you, but I think it is better to ‘get it while you can’.

Terryw
Discover Home Loans
North Sydney
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Hi Delboy

I have made a few posts on this before.

I prefer LOs for a number of reasons such as
– easier to get finance
– less problems with equity ownership (ie it is all yours)
– you can access the increased equity
– Can be shorter, say 2 years per option, allowing you to be more certain. ie wraps could drag on for 30 years.
etc

Terryw
Discover Home Loans
North Sydney
[email protected]

I would be very wary of the postive cashflow strategy now. When Steve did it, it was a totally different market. He was getting good cashflow in major regional towns and these had loads of potential for good capital growth – which is what happened.

These days it seems that the only postive cashflow proerty you can get is in the small outer outer whoop whoop type areas. These may have limited capital growth – maybe even negative growth. Even in the so called good areas, we may be seeing a period of low growth for a few years.

So just be careful with what you buy.

BTW you can still get postive cashflow proeprty in the good areas, you just have to look harder and get creative.

Terryw
Discover Home Loans
North Sydney
[email protected]

I agree with Derek, but if you have ever lived in your home, you may be able to claim this as your PPOR instead of the unit – depending which one has grown in value more.

I think GEO means, that if you are classed as a proeprty trader, then there is no CGT. But there is income tax and you do not get the 50% discount on the gain. So it would probably better not to be classed as a trader. I don’t think you can register for this either. You just submit your return and argue your case if audited.

ps I am not an accountant.

Terryw
Discover Home Loans
North Sydney
[email protected]

I would be VERY wary of anything like this.

These are generally hard to resell and this limits their price, they are also hard to get good finance for. And you would be limited with what you could do with them – ie rent them out yourself, management etc.

Terryw
Discover Home Loans
North Sydney
[email protected]

The Royal Institute of Gyneacologists (RIG) has also determined that mortgage borkers are aloowed to perofrm minor operations as well.[blink]

Terryw
Discover Home Loans
North Sydney
[email protected]

In Vic, I beleive that is correct. I have wrapped in Vic and the wrappee did not need to pay stamp duty until they cashed me out- ie when titles transferred into their names.

Terryw
Discover Home Loans
North Sydney
[email protected]

I think it is pointless to purchase a property if there is not likelyhood of capital growth.

Getting a few dollars per week, even $50 per week, is not much money in the long run. (And you will have to pay tax on this). This is eating into your borrowing capacity as well. I would be especially wary of buying in small country towns at the moment.

It is possible to get cashflow positive property with the potential for high capital gains. I have recently seen someone buy something like this in Sydney.

Terryw
Discover Home Loans
North Sydney
[email protected]