receiving cashflow

Hi Carolynne

We invest 100% of the payments to us off our loan. On my calculations, ALL our loans will be repaid within 5-6 years due to the power of compound interest as Tim correctly points out.

We could take our cash flow today and use it for other investments, but we are happy to pay down our debt whilst we don’t need the cashflow.

It’s horse for courses though.

Dave

Hi team, hey I’m with Felicity. Keep in mind, that if you use the profit to pay off your debt, you’re really only saving cents, compared to investing the profit to fund another wrap that makes you considerable money.

Let me explain how my head works: (God help my wife) <)

Let’s say you make $10K profit for the year and invest this in the principle component of your wrapped house.(to give you a larger spread) At 8% interest this means you’ll be saving 8% on $10K ($800.00) interest per year. (rubbery figures)

So if you owed $100,000 before, you’d pay $771/month on a P&I loan(25yrs)

If you paid the $10K off(lets say as a lump sum for the exercise) your debt would be $90K @ 8% with repayments of $694/month(P&I). That’s a difference of $77/month. That means over the year you save interest of $66/month x 12 mths = $792. Still a good saving.

[Keep in mind, the difference between $771/mth and $694/mth is $77/mth, but the interest component of this is $66/month. 8% of $100K is $666/mth, 8% of $90K is $600/month being a saving in interest of $$66/mth. These figures are obviously going to be “rubbery” as the $10K is paid off progressively, not in a lump sum, but for the explanation of the concept, it’s fine]

Remember your Home Buyer’s repayment stays the same, so you only gain the difference in your interest saving.

Now lets say we use an alternative strategy to invest this $10K in another wrap property. Let’s say we have this $10K and use it for the deposit and legal on a $70K property(with a loan of 8% over 25yrs)and we sell this proeprty for $82K at 10%(over 25 years) on a wrap.

Let’s look at these figures:

Your loan repayments are $486/month ($63K loan @ 8%)
Your Wrap repayments are $745/month ($82K loan @ 10%) no dep for eg.

Your monthly profit is $259/month. (certainly better than $77/month)

Now this gets better if you go Interest only on the underlying loan for a few years:

Your loan repayment: $420/mth ($63K @ 8%)int only
Your Wrap repayment: $745/mth ($82K loan @ 10%)(P&I) no dep for eg

your profit is $ 325/mth

Obviously, while you’re saving $77/mth in the one transaction, someone else is creating MULTIPLE properties from the same $10K investment by duplicing the process each time and generating another wrap property.

Keep another few thing in mind as well.

When you sell a property using a wrap, you’re not allow to refinance that property while the wrap is proceeding(in QLD at least). Meaning if you put $10K into that mortgage, kiss it goodbye until the wrap home buyer decides they will pay you out, because you can’t redraw it or get it back out.

Also, let’s say you have decided to keep the one property and reinvest the profit in the underlying mortgage. This prevents you from purchasing another property as your cashflow is used for this strategy employed. If this Home Buyer goes into default, 100% of your wrap portfolio(ie your one house) is now at risk and not performing. And YOU have to keep working to pay the underlying loan repayment while you’re find a new home buyer.

Alternatively, if you decided to buy the second property, and one of the properties went into default, only 50% of your portfolio has suffered and the other property will nearly cover the underlying loan payments while you find a new home buyer. Much easier for you to find $100/as opposed to $400. Yeah sure the advance payments would cover the gap, but you’re making false progress.

As Felicity has stated, each to their own.

I have the Wrap Secret Library and I love it. My understanding of Steve’s strategy was to only invest 30% back into the underlying loan. There’s certainly logic in this strategy and it works GREAT for Steve and many others. I don’t think anyone could deny Steve’s outstanding success with wraps and his accounting background obviously encourages him to protect his investments as much as possible, which this strategy also does if interest rates go through the roof.

Persoanlly, we use the wrap profits to pay off our OWN home mortgage as this interest is not tax deductable. When we have $10K in extra equity in our own home, we then redraw this to purchase a wrap property, whihc makes the interest being charged on this amount tax deductable. We’ll keep going until our own house is a total tax deduction. We’ll never loose out house, as well have enough properties in our portfolio generating income to cover own own home repayments shoudl something go wrong. remember, the home buyer is paying the underlying laon Plus a profit to us.

This is only my two cents worth. It’s not right or wrong. Just right for me.

Happy investing all.

Remember, Life’s about Family, Fun and Finance (Maybe in that order)

Mike

Director of PositiveCashflow.com.au

“Positive Cashflow for a Positive Lifestlye”
because
“Life’s too short to be Negative”

In addition to the cashflow consequences that Mike has mentioned you might want to consider the liability affect of depositing all of the money into the mortgage.

As Steve and Dave discuss in their package it is important to structure your affairs so as to avoid the adverse consequences of being sued. If someone were to sue you and win forcing you/your entity into bankruptcy/liquidation then any equity in the property will be available to the bankruptcy trustee/liquidator. Therefore, whilst you had great intentions in paying off the debt early, it will all be lost.

Consequently you might want to consider drawing out the equity as you go along, so if the wrap all falls over, at least you have your spread somewhere else.