WRAPS

A good starting place would be to spend some time reading the Getting Creative forum, and also some of the archived material.

Keep smiling
Felicity

Just go and find some really desperate and broke Australians (not hard to do)then screw them for an interest rate above what you are paying the bank and hope that the interest rates don’t go up.

resiwealth
You obviously don’t know much about wraps. I recently did one with a rate lower than my bank rate, and sold the house at market value.
My buyers weren’t broke, they simply had jobs that banks and other lenders don’t like much, and a small deposit.
They were absolutely over the moon to be able to buy their own home for them and their adorable little girl.
If you don’t like wraps, that’s your choice, but there are plenty of people who are extremely glad to have a chance to own a home, and I can tell you now, they don’t like being described with terms like “battler” “desperate” or “broke”, to use a few. They also don’t think they’re being screwed – go take a look at the interest rates some of the non-conforming lenders charge “imperfect” borrowers, let alone early repayment fees etc, and suddenly wrapping seems cheap in comparison.

Keep smiling
Felicity

If the Vendor Finance arrangement has the following features the income stream received, once the wrap arrangement has begun, is considered to be principle and interest by the ATO. The income stream received before the wrap arrangement is entered into is considered rent. Reference ID2003/968.
Typical Features of a Wrap (Vendor Finance Arrangement)
1) The purchaser pays a deposit at the time of entering into the arrangement.
2) The settlement (change of the title deed to the purchaser) does not take place for several years after the arrangement is entered into.
3) The purchaser has the right to occupy the property prior to settlement
4) The purchaser pays a weekly amount (regardless of the name it is given in the arrangement) for the right to occupy the property
5) As part of the arrangement the purchaser pays the rates, taxes and insurances on the property.
6) The balance of the purchase price to be paid on settlement of the arrangement is reduced by the weekly instalments.
7) If the purchaser fails to complete the arrangement the deposit and weekly instalments are forfeited.

Now what about the profit on the sale of the property? Is that normal income or capital gain and when is it taxable? Assuming an agreement similar to that described above the answer to this question revolves around whether the vendor is in the business of selling houses or an investor just realising an investment. The key issues in differentiating here, according to ID2004/25, 26 & 27 are:
1) The Vendor did not use the property for any other purpose than to enter into the wrap. A straight rental of a property before entering into a wrap arrangement would avoid this point.
2) The property was sold at a profit
3) The wrap arrangement was entered into within 6 months of the vendor purchasing the property.
4) The Vendor is in the business of purchasing properties to resell. It would be difficult for the ATO to argue this case if the Vendor only bought and sold one property.

If you are caught by all of the above then CGT cannot apply to the sale of the property as the profit on the sale is revenue in nature. If a transaction is caught as income, CGT does not apply or in other words CGT is the last option if income tax doesn’t catch it. But even if you weren’t caught by the above and CGT applied there would be no discount if the property was held for under 12 months. If you did hold the property for less than 12 months before entering into the wrap it is better to argue that you are in business and caught by the above because the profit on sale would be revenue in nature and as a result not assessable until settlement which could be 25 years away (ID2004/27). If you hold the property for less than 12 months but it is subject to CGT you don’t qualify for the discount but would be assessable on the profit when entering into the wrap.
Section 104-15(1) of ITAA 1997 states that a CGT event happens when the owner of a property enters into an arrangement with another party to allow them to live in the property and title may transfer at the end of the arrangement. Section 104-10(3) states that the time the CGT event happens is the time of entering into a contract for the disposal of the asset, not when settlement (title passes) takes place.
For example this means that the vendor who enters into a wrap on a property that has been previously used as a rental and held for more than 6 months will be subject to CGT on the property in the financial year the wrap agreement is entered into. Accordingly, if at this stage the property has not been held for 12 months no CGT discount will be available even if they eventually end up holding the property for 25 years under the arrangement.

Disclaimer: Please note this information is general in nature and constantly changing so please don’t act on it without consulting your Accountant.

Julia Hartman
[email protected]
http://www.bantacs.com.au

Like you sense of humour! [biggrin]
It is not uncommon to offer interest rates of 3% to a wrap buyer… and sell for same price that you purchased property. It is not in the selling it is all in the buying and or terms for buying that is the key. -humble thought from Kiwi
[baaa]

let me ask… how do you make money providing a 3% interest rate and selling the property at purchase price??? you’ve got me!

Quite frankly the wraps I’ve done over the last 3 years have not made me as much money as if I’d just kept them as rentals.

I’ve been refinanced out of around half of them which means they are worth a lot more than what I wrapped them for.

If I’d kept them as rentals I would have all that capital gain for myself. As for the other half, I reckon most of those will go over the next year or so.

Wrapping can be quite intensive and a lot of hands on is needed to do it properly if you have a number of properties. It certainly is not the be all and end all of property investing imo.

Hey Rob,

Why lease options in preference to wraps? Any key reasons or is it because the word “wrap” has been sullied by a sensationalist media?

Cheers

Oldtimer
I have always looked at wraps as a cashflow business, and that’s it. That strong positive cashflow is the reason I have been able to buy as many houses as I have – we’d already been stopped at around 4 with normal rentals (and yes, they were positive cashflow, but only a small amount each). It’s also the reason my husband doesn’t need a job any more (well, almost!).
The next step is to take some of the excess cashflow from wrapping and put it into buy and holds. Yes, that’s where the long term wealth is. But if we’d used buy and holds up until this point my hubby would still be working at a job and we’d still have a long way to go before he was free.

Keep smiling
Felicity

Yes Felicity I know where you are coming from and you are right.

My situation is a little different. I have been a real estate investor since around 1974 I think. Over the time since I think I’ve just about seen it all.

My income from investments is quite good these days so getting finance is no longer a problem for me.The cashflow is not as important as growing the overall wealth.

I have learnt how to do wraps now so I can pass on the strategy to my children and some of my friends. Something learnt is never wasted.