WRAP!

Hi Swifty,

Now I don’t know whether I’ve misunderstood your question, or whether you’ve misunderstood how Wraps work…

So please allow me to very briefly outline how a wrap works, and then maybe that’ll either help you or you can come back and correct my misunderstanding (!). So here goes:

You buy property for $100K. You pay 20% deposit, and have standard mortgage of say 7% with a 30yr amortisation period. Therefore weekly P&I repayments on $80K at 7% over 30yrs = $122.74.

You find potential buyer who can’t get finance from traditional lenders. You enter into contract to onsell the property to them at an agreed price, over the amount which you paid (say +20% in this case) with deposit (say $10K – perhaps with the assistance of FHOG) with the balance to be paid in installments over 30yrs (ie. same timeframe as your mortgage). You calculate their installment payments based on their purchase price (in this case $120K), less their deposit ($10K) = $110K. Their interest rate will be set at a margin above yours (in this case let’s say + 2% = 9%). Therefore in this case their weekly installments will be $110K over 30yrs at 9% = $204.14.

So the figures in this case would be as follows:

Cash in:
20% deposit = $20K
Closing costs (at approx 5%) = $5K
less Wrappee’s deposit = $10K
Net cash in = $15K

Cashflow:
Wrappee’s weekly payments ($204.14)
less Your weekly payments ($122.74)
= $81.40 per week x 52 weeks
= $4232.80 per year.

Therefore CoCR =
$4232.80 / $15,000
= 28.2%

Now – clearly this example is oversimplified, however it should give you some idea of how a wrap works. Does this make it clearer for you? If not, or if I’ve missed your point entirely (!), please post again with your question![biggrin]

Cheers,

Adam

Oasis Finance
for your Vendor Finance solutions
Achieve the Dream!
[email protected]

Hi Swift

Let’s take the very average residential property and let’s say you buy it. So it now yours and you want to know what to do with it. There are many techniques you could use at this point but let’s just look at two.

Rent it. This is a gross generalisation but in a lot of places in OZ, if you rent it you will turn the property into a negative cash flow (geared) property because it will cost you more to keep it each month than you get in rental return.

A wrap. If you wrap the same property you will turn the property into a cash flow positive investment property.

The above two examples are gross over simplifications and a lot of the pros and cons of each technique are missing but what I’m trying to convey is that it’s what you do with the property that makes it produce positive or negative cash flow.

Sure, when you first look at a property it might have owners who have structured the property as positive or negative. It’s up to you to decide your best investment strategy and decide if you’ll keep it that way or use another technique.

Good luck.

Cheers, Paul