How much $$$$ do you make in property each year

Hi Mrs Property

We've worked in vendor finance since 2003.  Karen & I now work in thebusiness full time and it provides our lifestyle and also supports our buy and holds.

Sorry about the lack of specific numbers you asked for but, if you're checking to see if it's possible to live off a specific niche in real estate, in our case, it is.

Cheers,  Paul

Hi number 8

We have a couple of good examples on our web site but here's a quick outline, if you bought a property for $400k tomorrow and subsequently on sold it with an Instalment Contract for a higher price.

A well structured project requires the following actions to be successful:
1.  Arranging financing for your loan
2.  Locating the right property to buy
3.  Negotiating the best price and terms
4.  Marketing to prospective buyers
5.  Screening prospective buyers, taking into account the requirements of the new National Credit Code
6.  Finding and instructing solicitors who are familiar with Vendor Finance Contracts
7.  Arranging on-going independent administration of the new purchaser's loan.
8.  Arranging for independent third party collection of the new buyers weekly payments (instalments)
9.  Arranging ongoing inspections
10. Handling all the paperwork, i.e. ensuring your loan administrator issues all the necessary Notices to the new purchasers
11. Making the payments on your mortgage.  Your new purchaser's weekly payments should be paid to your independent loan administrator, whose responsibility it is to make mortgage payments.
12. Arranging payment of your positive monthly cash flow.  This will be done by your loan administrator by way of your monthly statement of accounts
13. Down the road, arranging a refinance or sale for the new owners and collecting your fixed capital gain lump sum (backend profit).

The project should generate cash flow three ways.  They are:
a)  Upfront; in the form of the deposit the new buyers pay to purchase the property.
b)  Monthly positive cash flow; this is the profit made each month, over and above all costs for the property.
c)  Back-end profit; this is the difference between what you bought the property for and what the new buyers owe us when they transfer to a traditional home loan or sell the property.

Our solicitor charges us $980 to draw up the Instalment Contract.  We pass thiscost to the new purchasers.

The range of weekly payments is very large, as are standard mortgage payments.  It just depends on the price of the property. 

The deposits we receive usually range from $10,000 to $20,000 and the FHOG can be used as part of this deposit.  However we often have clients with larger deposits than this.

We instruct our new purchasers that this way of buying a home is a "stepping stone' back into the traditional home loan system.  They usually stay with us for between two to four years.

The more you mark the price of the property up, the longer your new purchasers stay with you and the more time it takes to access your back end profit.  If you get too greedy, you'll pay for it 

Cheers,  Paul

Hi

One of the great things about vendor finance in real estate is that it can be done so many different ways, e.g. some people may structure the on-selling Instalment Contract for the long term, to enjoy the interest rate differential over the long term and some may structure the on-sell to encourage their new buyers to refinance into a traditional home loan in, say, 2 to 4 years, so they can access their backend profit.

Most of my answers are the same as Richards.  Those that aren't, just show the flexibility vendor financiers have in setting up their business.  

1. How much are the vendors repayments above the interest rate applied to your money borrowed (is it more than a P&I repayment). i.e. what sort of margin is the monthly cash flow based on?  We lock the new buyers interest rate to our underlying loan, i.e. if our interest rate moves, the new buyers rate moves.  However we also structure our transactions to encourage our new buyers to refinance approximately 2 to 4 years down the road.  This is done by increasing the new buyers interest rate for a number of years, commencing in year 3.  However, if you are using this structure you must check the new buyers serviceability at these higher interest rates and you must be careful not to increase your interest rates to a level that may expose you to a claim of unconscionable lending.  We keep our rates to within 2.5% of the big 4's standard variable.

2. Who pays the stamp duty? As Richard says. In Qld and NSW the state governments regard the property as having been disposed of at exchange of contracts.  In Vic, the government doesn't require stamp duty to be paid until completion (settlement).  This makes Instalment Contracts (IC) in Victoria quite attractive, in that the new buyers don't have to pay stamp duty until completion, i.e. when they pay out the IC.

3. Do you charge LMI (and what is the banks view of this arrangement). Or is this more or less something the banks do not want / need to know? As Richard says.

4. Are the deposits received above and beyond the purchase price? i.e. clear profit? As Richard says.

5. This may tie in with the question above, the end profit, is this price negotiated on the present days value or is it taken on the value of the real estate on completion of the contract?  An IC is simply a standard Contract of Sale with an Instalment Payment Schedule added.  It therefore follows that the price you are selling the property for, to the new buyers, is established at exchange of the IC.

6. I noted somewhere you increase interest rates throughout this period of the contract, has this been established up front and is it in your best interest to keep these projects turning over? i.e. increase rates to a high level?  See the answer to question1.  This increase in interest rates is laid out in the "Schedule of Items" in the Instalment Payment Schedule, within the contract.  We also insist that all our new buyers get independent legal advice prior to authorising the contract. 

7. How is the FHOG achieved when the vendor is on the title and pays the stamp duty? Is this akin to building a granny flat out the back of Mum and Dad's home and applying for the FHOG?  As Richard says.  Upon exchange of contracts, state governments regard a sale as having taken place.  Therefore they pay the FHOG. 

8. Can this deal be done if you have 100% borrowed money? Similar to Q3 above? But is it profitable at a high LVR?  As Richard says.  The higher the LVR the higher the cash on cash return.

Cheers,  Paul

Hi number 8

The Wrapee: Is the Stamp duty concession for First home owners still available?  Yes, in all states that have a stamp duty concession for first home owners, this concession is also available for first home owners buying their home with an Instalment Contract (IC).

I'm guessing that just about all vendor financiers require the deposit to be paid prior to the buyer taking possession.  However, some may allow a portion of the deposit to be paid off with extra catch-up payments over the first ?? months of the IC.

In NSW, if the buyer is not eligible for the FHOG, the stamp duty is due 90 days after exchange of contracts.  In Vic, stamp duty is not payable until the sale is completed, i.e. when the IC is completed, i.e. paid out.  Qld is pretty much the same as NSW but, I think, the stamp duty is payable 30 days after exchange there. Not sure about WA, TAS, ACT & NT.

Cheers,  Paul

Back to your original question, it really depends on how much you want to earn!

Most of the business owners on this site (i am assuming) are doing what they do for the love of property not for the money. We all have our own little niche's in various markets and we all are rewarded accordingly from the love & passion we have with investing/property/developing.

So pick a number… You can earn as little as 50k per annum – millions per annum all dependent on how many projects you are involved in, what strategies you have in place and what size they are!

Cheers,