Hiya Folks,
My name is Alex, I'm new to the world of investing and am currently in the "read everything you can" stage. As a little back-ground, I just graduated university and intend on working as an engineer for the next 10 or so years but I have no desires to work for the rest of my life! To this end, I am looking to secure my long long term future, I've begun by saving money and would like to ramp up the passive side of investment. At the only moment my only asset is my car and the clothes on my back so I realise it is a few years away before I start, but theres no reason not to build knowledge
One thing that piqued my concentration after reading Steve's book was the concept of Vendor Financing. For someone in my position I consider this to be an attractive option as other options such as renting out properties have a lower rate of return for the same outlay from the calculations I have performed.
The only thing I cannot twist my mind around is the concept of an interest-only loan being on-sold at a profit. For example, lets say that I buy a property for $100,000 and interest only payments are $7,000/yr. If I then sell on vendors financing for $120,000 I am running at ~$2,400 profit per year. I'm all ok with this but the next part confuses me;
At the end of the Interest Only loan, I would be required to pay the original $100,000 loan amount. Lets say the loan runs for 5 years, I have received ~$12,000 (5 x $2,400) and then the purchaser pays a lump sum of $108,000? ($120,000 – $12,000) at which point I pay off the original loan and the new loan is now with a bank (assuming the purchaser re-finances). Is this correct?
If this is correct, where would the incentive to refinance be? Considering that the loan I would take out is Interest Only, why would a purchaser then take out a loan of Principle + Interest when the repayments are quite possibly higher? Am I missing a piece of the puzzle? The numbers just don't seem to add up in my head, they do on my spread-sheet.
Any help would be greatly appreciated
Regards,
Alex
Hi Alex
We and our JV partners often buy properties with I/O loans and on-sell them with a P&I vendor finance Instalment Contract. This works for us because all our loans are limited to 5 years on I/O. They then revert to P&I. Us being on I/O and our buyers being on P&I has the effect of pushing our profit forward, by way of greater monthly positive cash flow during the I/O period.
Buyers refinance out of their P&I Instalment Contracts for two main reasons, i.e.
1. They can get a cheaper interest rate via a traditional lender, and
2. When they refinance, they get the Title transferred to their name.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hi Paul and Alex,
Paul is there a standard interest rate that is charged as in I pay 6% and they pay 7%, or do you just do same rate but you I/O and them P&I?
Hi Dippa
Since we started First Home Owners Group in 2000 we have been offering Installment Finance to clients.
We charge a rate of interest based on a couple of benchmarks (depending on the client) but where we have borrowed money to purchase the property (In some cases where we do the loan inside our SMSF) this usually equates to between 1.5% and 2% above the standard variable rate.
When you start to build up cash flow like this you don't need many properties to make a decent Annual income.
Depending on the amount of available cash available you may be better off to consider either Vendor Financing or alternatively 2nd mortgage funding which comes with a higher rate of return.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
You must be logged in to reply to this topic. If you don't have an account, you can register here.
