This is my first entry into this forum – and onto this website and am hoping to learn what I can from anyone willing to share their experiences.
I have been involved in investing in only cashflow positive properties for approx 10 years and have accumulated approx 5 million in property. Often even cashflow positive properties have only a small margin as you only need a tenant to fall behind or a HWS to blow and it can easily start eating away at any small profit you hope to make. For that reason, the concept of wraps is quite interesting as it provides a buffer against circumstances that often rental properties produce (all costing the landlord).
The fact that the tenant is responsible for maintenance and any vacancy of the property goes a long way to making it a sustainable business. Rental properties can be intensive at times both physically and mentally and unless you have rigid systems in place, you are bound to run out of either energy or patience. We have approx 35 properties, and have achieved equity of approx 40% in about the last 5 years through both capital appreciation and building properties ourselves specifically as rentals. Even with that amount of property, it can be difficult to balance the books while maintaining your properties in a condition which will not eventually lead to a poorer quality tenant.
My energy is now being diverted into things which are less demanding and therefore more sustainable. There is a lot of absolute rubbish being presented to first time investers, and recent TV rennovation and auction shows make the public think you just can’t lose on real estate. I have a new show idea for these people-one I would personally find more interesting-I would like to see those people who have lost out on real estate. This would be far more interesting as it would point out some of the pitfalls and help educate people what not to do. I would be interested to talk to anyone with bad wrap experiences.Anyway to my questions: I am hoping that someone with a reasonable level of wrapping experience (good or bad!)can answer 2 key questions that I have about this procedure. (though I can guarantee there will be 10 that follow!)
What percentage of client is from the lower socio-economic group. I ask this because my belief is that it would probably be the largest group interested in this method of finance. I understand there are many others who are possibilities also but this group -especially in country towns- are probably the largest.
If this is the case, my second question is; since property valuations have increased and a wrap requires the client to pay an increased interest rate – repayments are now considerably higher than they were 4 years ago when you could buy $60,000 houses any day of the week thus keeping repayments down. Now those houses are worth $100,000 to buy-add $20,000 to cover settlement costs/stamp duty/etc and then ad 1.5%interest margin and suddenly the deal appears out of reach of many potential clients. A good deal of rents in country towns no longer reflect the value of the home ie you can still rent a place for $140 per week but it is now worth twice as much for the invester to buy.
Has anyone experienced this over the past couple of years of wrapping?
jmn
Hi,
Welcome to the forums. It would be great if you could contribute your experience and knowledge as I’m sure you have plenty to share!
To answer your two questions:
Q1: Re: Socio-economic profile.
I doubt anyone can give you a definitive answer although I’m sure many people have an opinion.
It is true that some wrappers target those who desire the dream of home ownership but don’t necessarily have the financial ability to understand the nature or obligation of the agreement.
Yet, having said that, the target market for vendor finance are those that cannot access traditional finance. That is NOT to say that it is the financially desperate who are the bread and butter of wrappers. Far from it as someone who cannot afford to make repayments can provide no positive cashflow.
Further, you need to understand why it is that those from a low socio-economic profile that cannot secure finance. Usually it’s because they cannot save the 20%+ deposit in the first place, and as such, vendor financing is seen as a low cost way to get into a house on a form of bridging finance until they can cash out using cheaper finance.
The key to win-win vendor financing is finding people, from whatever sociio-economic profile, who can afford the repayments and understand the nature of the agreement.
Recent vendor finance deals we have done have not involved people from low socio-economic profiles.
Q2. Affordability
You are right. Prices have boomed and the wrap deals that I did at the start on the basis of repayment equal to or lower than rent are very difficult to find now.
As such, the equation has changed so that even more people are priced out of owing a home. This is the exact problem that the producivity commission into housing affordablity is looking at.
People and properties suitable for vendoring financing continue to exist today. Yet matching them together so that all parties benefit requires increasing skill – and plenty of hard work.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Interesting post Gately. Good to hear from someone who has been around awhile and accumulated a large amount of postiviely geared properties.
I have reservations about wraps for the two reasons you have mentioned. I am more buy and hold in surburbs of a major city.
1. In my opinion you are probably dealing with a lower socio economic profile person. I dont want to be in that business. Nor do the Banks eh.
2. Properties are presently overvalued so I dont see any need for me to invest now. and it would be difficult for wrappees as the prices have gone up and they are paying a premium price and interest rate. I am just sitting on my hands now and dont intend to add to my portfolio for a few years yet.
Yack and Gately,
Whatever the market you can still find bargains. If you were to buy a property at 10-20% under market value, you could wrap it at market value. That way you get your money and the wrapee is getting fair priced housing and the ability to own it.
Not saying that you can do this every day, but they will come around every so often.J
Thanks for reply Steve.
I am in agreement that deposit is most often the stumbling block for people. It is no different in renting properties to tenants-they can all meet the weekly payments (or so they will tell you!) but often many struggle to find the $1000 or so up front bond.
A further comment/question/observation;
I would assume the “life” of a wrap deal would be only in the order of a couple of years. The prudent client entering into such a deal would re-finance as soon as their equity had built up through either capital repayments or capital appreciation. (do you tell them this and encourage this process?) Therefore the prudent financier needs to ensure the price of onselling of the property takes this into account. My concern as I mentioned is based on how can we make these deals in a tighter climate, more client friendly.
You would hope to net a minimum $10,000 on a property for finding and matching home/client. If they refinance then within 2 years you have probably made in the order of $15,000 before Tax on the deal. Has anyone thought or better still used the option of reducing the onselling cost to the client and in turn having a balloon type payment should they refinance within say 5 years. This would essentially reduce the purchase price and their repayments over that period (and may make the difference initially between affordability or not).At the same time it gives the financier a longer, more durable income stream. Balloon type payments on real estate where your property is increasing in value is surely more plausable than balloon payments on car finance when the life of the loan often “outlives” the life of the car (especially if you drive as me wife does! Hope she does not read this!). The car value has decreased at a time where the balloon payment is required but in real estate, the contrary applies.
Any thoughts out there?
jmn
I have been considering this same concept of a balloon payment for those very reasons, increasing the affordability. I am not sure what is required legally, but it sounds like a good option in the right circumstance.
How would you, however, determine when this balloon payment should be made? There is no guarentee that your client could refinance at a certain time in the near future <5 years say, or that they would choose to. They would have to be compelled to do so, by yourself.
I am not sure, but again, in the right situation..
Rakky ;P
Hi Gately..
Interesting reading and replies so I thought Id pop in as a ‘sample case’ on someone looking at needing vendor finance and why.
I am a new addition to this forum too, only joining yesterday but so much info cant keep away from it and am now hooked as to how I may get going in life again, and now with all this info and connections and opinions etc is only a matter of when!..
My details are on the forum as questions, but briefly…life dealt me some not so nice stuff in last few years. medical etc and am on my own with no start up funds now but medically cleared from cancer..yahoo!…and have good employment….but earn 55,000 per year BUT no deposit and some fairly large debts resulting from the costly cancer and time off work etc blah blah. You cant get cancer in Australia for free you know! You have to pay for it!!. (A mention needed I think to the govt in another forum somewhere from me!) so the normal banks wont even look at me. Cant save AND rent by myself etc etc..so..looking at all sorts of options.
So I dont consider myself a a lower socio economic with the rest of the presumed bunch of needy without a deposit, and only yesterday had this conversation with a company who only did vendor finance for their matched tenants and landlords, but fair trading I think had issues with it on a large scale? Not sure of details, but could be something to look into for you.
Good luck to you..although you have done ok so far Id say! And thanks for all your advice in your emails for me…am adding fast to my skill base in investing and finance etc and now hooked on this site.!..
Sandy
SandyVG
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