I have been reading everyones posts and can appreciate that for anyone to begin wrapping you need cash, lots of it or equity – lot’s of it so as to fund the deposits.
Even then the banks will restrict your growth.
How the ??##x! does someone get involved in setting up over 1 wrap a month from zip without already being wealthy ?
Polaris, you’ve got to get educated. A friend of mine is wrapping at the moment and he seems to be doing ok. He went to one of Steve’s seminars. Maybe all will be revealed from Steve’s book. Here endeth the lesson.[]
1. borrow 80% put down 20% from own pocket either from primary residence equity or cash. Lock in 1st IP.
2. Wrap this property with wrappee who has maybe 5% deposit towards the value of your next IP.
3. borrow 95% IO loan towards next IP. Capitalize the MI. This loan is essentially a 100% finance.
4. Wrappee of this IP has maybe 5% deposit which will go towards the next IP. The process is repeated until you max out your borrowing capacity.
5. Set up new company and begin the process again.
NB :
– Lock in 1 IP / month.
– Each property is a stand alone IP.
– Each company max’s out borrowing to complete its string of properties as an individual entity.
– the primary goal in the first five years is cashflow.As the deposit is effectively an advance in your CG you reinvest this immediately into the next IP.Each IP is Vendor financed over a 5 year period. All things going well at five years you will begin to receive cashouts (if not earlier)which will go directly into IP’s of which your goal is CG.Your cashflow at this stage should be more than plenty to put food on the table. The overrun – well invest it wherever you like.
it is not illegal to wrap using a IO loan. It maybe with an installment contract, but you can certainly do it using a Lease Option. And it can be structured to work just like an installment.
What state are you referring to Mathew? These sorts of laws vary from state to state. In Victoria it’s not illegal, but you do have an obligation to maintain the first mortgage at a lower level than the wrap buyer’s mortgage. I’m not sure how enshrined in legalities that is though!
I think wrap is a broad term referring to both. At first I couldn’t understand why some people called LOs wraps as well. I don’t think you will find ‘wrap’ used on any legal documents. I think ‘Installment Contract’ or ‘Vendor Terms contract’ would be more accurate for what you refer to as wrap.
Fair comment, I was having a bad day when I made that post so I appologise if it was a little sarcastic.
I was referring to the instalment contract and not the L/O as I personally don’t think of them both as wraps. To me a wrap is a property that is sold wheras a L/O is simply rented with the option to buy.
I have been told by numerous people including some lenders that in NSW you must do vendor finance instalment contracts with P&I as it is illegal to do them as I/O. As far as I am aware, this was introduced to prevent an investor from selling to a wrapee and continually having a higher LVR than the wrapee.
If I had 30K cash to begin with how do I begin buying 1 house a month starting today? My goal is cashflow in the first 3 years.
Can it be done without cross collatorisation (did I spell that correctly?)and using 100% IO loans with the desposit of the buyer paying for the closing costs and maybe MI. [?]
If you go for the cheaper end, you could go very far using your your own money, then getting a large deposit from the wrapee which replaces most of your deposit. You keep saving in the meantime to help you go a bit further.
Mathew, no offence taken. I too have heard that it is not legal to do installment contracts using IO loans. But I don’t know where this idea comes from. My wrap contracts say nothing about it.
Another point, my VIC installment contracts say all of the wrappee’s repayment to me (wraper) must be paid off my loan. ie I am not allowed to pay the minimum and keep the difference. Does anyone know anything about this?
Please correct me if I’m wrong, but isn’t the whole point of marking up the interest rate to the wrappee to give you immediate weekly cashflow through paying your loan installment and keeping the mark up difference?
When the sale goes thru’ the total mark up difference you received during the contract period is deducted from the sale price as part of their deposit.
I am completely new to investing but understood most of the shortened terms except for IO loans. If it’s OK with you could somebody explain in more details???
Welcome aboard! IO Loan = Interest Only Loan
This type of loan allows the borrower the option of paying interest only, and no principle. Therefore repayments are lower. These types of loans have this feature for 5 years, then you have to start paying off some of the principle. (there may of course be variations between loan products, things change all the time)Of course you could refinance into another IO loan if that suited.
IO loans are good for increasing cash flow as you are not required to pay the bank back additional money. If we accept that the property market will always rise, the equity will grow over time and the capital gain will be the difference between the principle and the new value. If you pay off the principle you will only increase the equity. However if you don’t reduce the principle, the cash you save can accumulate to assist with additional deposits or other expenditures. Also there is a tax benefit derived from IO loans in the sense that the interest charged on the principle remains at the higher level. If we are talking about an investment property then this interest expense could be 100% tax deductable. There is no tax benefit in paying off the principle component of an investment loan.
MI = Mortgage Insurance
a.k.a. (also known as) LMI, or Lenders Mortgage Insurance.
It is the premium that you pay to insure your lender against you defaulting on the mortgage. If you default the mortage insurer pays your lender and then come after you!
Up to an LVR (loan to Value Ratio) of 80% the lenders usually self insure; above that they ask you to pay for their insurance.
Hope that helps
cheers
the B[]
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