My wife is 5 months pregnant so in the interest of increasing cashflow before she stops working, I want to change our only IP in NSW (Pottsville, 25min north of Byron Bay, 25min south of Gold Coast airport) from a standard tenancy to a lease option. Current tenants are renting periodically (ie: no lease) and I’d like to offer it to them first.
I’m a believer in Steve’s win-win approach and understand that a lot of negotiation will have to take place, but want to get an idea if my starting point is reasonable.
2 year old Villaworld 4 bed 2 bath dlug 700sqm 2km from beach
Current rent $400 propose $500 (what portion of this should come off purchase price if option is exercised?)
Current value $450k propose $550-650k
Deposit $10k term 10yrsI am seeking out mentors with the skills I aim to develop so if there’s anyone on the Gold Coast with experience in renos, flips, lease options and creative investing in general – we’re gonna be on one income soon after all – I’d love to buy you a drink some time and pick your brain!
There are many different ways you could structure it.
eg:strike price, is it
a) fixed or
b) increasing or
c ) decreasingDeposit – there is usually no depsoit as it is an option you are selling, so you may have an option fee instead
Option fee
a) is it refundable (not usually)
b) does it come off the purchase price?Rent, does it
a) reduce the strike price, or
b) notThere are many combinations of the above which you can work with. Sit down with some figures and spreadsheets and run some numbers – otherwise you may be selling yourself short.
This is how I did it in the past.
add 20% to the value and this will be the strike price
Then work out the loan repayments on a 30 year loan, PI and take this as the rent.
Apply a small portion of the rent to the strike price so that it reduces like a PI loan so that after 30 years they have $1 to pay.
Add in clauses so that the rent increases with the CPIWhat I found was property prices increased and after a few years the tenants had much more equity than I did. But I guess this is what you pay for the weekly cashflow.
Another way may be to agree on a formula which will give them X% off the market value (average or 2 valuations, 1 by you and 1 by them) when they want to purchase. This way you will get some of the capital growth too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Have you ever done a vendor finance deal where the buyer was unable to continue repayments half way into the deal?
Obviously you wouldn't wish this upon anyone, however it is somewhat advantageous to the vendor as they can put a new tenant in, and still retain 100% of ownership.
Just interested in your experiences.
Cheers,
YIYes, one of the tenants ran away – a midnite runner. I kept the option fee and all went to court to get an order that they had abondoned the property and got a judgment for money owed for the clean up etc. The property had increased in value a fair bit so I didn't pursue them for the debt.
Also had another property in which the tenant died inside. The family came back and handed the keys in and didn't want to exercise the option. That property had increase in value a fair bit too. I sold the property because of death!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
YI Yes many times.
Have a couple of properties here in Qld we have wrapped about 4 separate times.
Marital split up job loss seen them all. Thankfully in most cases they have merely walked away and let the property in 1 piece and been pleased to have been released from their obligations.
The question comes as to whether they are entitled to a refund of their instalment payments including FHOG.To date i have never offered one.
Richard Taylor | Australia's leading private lender
It sounds almost ideal as long as you have two things:
– Property vacated without too much damage (hopefully none, of course)
– Strong rental market to get someone else in their quickly.If you can manage both of the above, then you basically had a tenant paying an above market rent for a while. +CF to the max!
Terry – we sold a property because of death too… as good as I am at seperating all emotion from property deals, that one just got me!
Demand for wrapped properties is more than you can handle certainly in Qld.
Richard Taylor | Australia's leading private lender
Do you have a property manager for your IP's Richard, or do you manage and do background checks on potential tenants yourself?
Yes we do all of the complete assessment ourselves under our Vendor Finance Company First Home Owners Group and have 2 full time staff that do the day to day management of the loan statements, rates notices and field all of the phone calls etc.
Richard Taylor | Australia's leading private lender
Do you do the same checks for normal tenants compared to potential vendor finance buyers?
And off topic… how close are you to reaching your own Investment Goals in life?(if you don't mind me asking)
No any potential wrappee has to pass a normal loan application check as far as we are concerned. My Business partner normally does the Building Inspection and we go from there.
No i dont mind you asking. I retired at 39 living off my property and other income and after 6 months of being home under my wife's feet she told me to go and get a job and get our of her way. I set up my boutique mortgage broking and Fin planning business and now find i work more hours than ever before and just love helping clients.
Fortunate enough not to have to push a product or have to make a sale can merely go about my day to day business of helping others and also get paid for it. I have 3 children and hopefully 1 of the 3 will get interested in the business and take over when i call it a day for good. Only 46 so still a few years left in the old dog.
Richard Taylor | Australia's leading private lender
Terryw, thanks for your quick reply and fresh ideas for approaching lease options. (I won’t read too much into your choice of Diamond Joe Quimby for your picture… ;-p) The ensuing back and forth between you, ‘007 and YI has been great reading too.
The more numbers I crunch the more I think I like the idea of wrapping. Potentially better yield and lower outgoings.
Are there any pitfalls a first timer like myself should look out for when setting up a lease option or wrap?
I would prefer LO over wraps for a few reasons:
1. you are not assigning ownership until the option is exercised
2. easier to get finance
3. LO can be set up in many different ways.
4. maybe easier to kick out the tenant
5. if things go wrong, no issues about ownership of equity.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Is it possible to structure these wraps or lease options so that the wrappee can accelerate the deal and own the property outright sooner than originally planned? For instance, if they suddenly inherit enough to pay off the whole thing in one hit?
Yes, the can usually make extra repayments on the wrap loan or pay it out in full. WIth the LO they just will have to exercise their option – and this will depend on the wording of the agreement.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi there,
As the wrap kits are no longer available – where do we source the relevant contracts/ documentations????
Have an existing negatively geared property I need to turn into a positively geared investment. Saw the wrap kit & what it contained & thought it was everything I needed… till I realised it was no longer available.
Any info re getting off the ground would be much appreciated
G’day Jeff,
Thanks for joining the thread. Sounds like you and I have the same goal – to get a cash sucking negatively geared property off life support and turn it into a lifestyle generating cash cow! If you’re interested in chatting by phone some time to share ideas, fears and the like, I’m keen too.
Email me directly if you’re interested [email protected]
Hi Jeff
Which state are you and the property in ?
Richard Taylor | Australia's leading private lender
These type of deal are also readily available in the United States. Its a great way to purchase without having to arrange finance. However like everything else you need to do your research carefully before proceeding.
Nigel Kibel | Property Know How
http://propertyknowhow.com.au
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Hi Richard
We are in Qld.
Cheers
Jeff
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