Hi All,
I have stumbled across a possible vendor finance deal during one of my searches.
The regional house is for sale for $198k and currently rents for $280pw.
As a straight up buy and rent this would be negatively geared.
But….
The tenant wants to enter into a very long lease and has kept the house very neat and tidy.
doing my (back of envelope) sums, entering a lease to buy option with the tenant, with current interest rates, would make the property neutral or slightly positively geared.
My Question….
How do I approach the situation?
I have basic knowledge of lease/rent to buy deals but am unsure of how to extract all the information I need without coming across too keen.
Can I just go and knock on the door and ask the current tenant if they would be interested in a lease to buy option?
I would only enter the deal if the tenant wanted to do this.
What questions do I ask the agent without sounding too keen?
This is the first time I would be potentially entering a VF deal, any help/advice would be greatly appreciated.
Best Regards,
Dane-o.
Why would you want to do that? For a few extra dollars per week in rent what would you be giving up?
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
My main strategy is to buy and hold, accumulation creates real wealth.
But at this stage I am trying to accumulate cash flow to give up my day job. Anything will help.
How much on average can you chuck on top of current rent for lease to buy option?
that will determine if I decide to dig deeper.
will go home tonight and try to find info on acceptable increase %.
Any one who has done a wrap/lease to buy option, I would love to hear from you…..
BR,
Daneo
But if the property is neutral or slightly postively geared how are you going to make a profit out of it? You would need a big back end profit when they cash out the option.
I have done a few of these and the 'tenants' make much more than the buyers.
They only way you make money is if they don't take up the option for some reason.
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
My sums tell me this property is positively geared!
Surmising a 10% deposit with an income of 50k it should generate $40-$50 per week.
what do you mean "income of 50K" ?
280pw x 50 weeks = $14000 gross. (50 weeks, I'm conservative)
Turns out to be about $50+ negative. (without knowing rates, ect…)
Your income Daneo! Separate from your rental returns
180K @ 5.6% = $195 per week repayments + management rates etc
less improvements in your tax position ……..mortgage insurance, depreciation etc
Add rates, management fees, accounting fees, insurance, repairs
See if it is positive gear or negative
call the local council for rates
Jpcashflow | JP Financial Group
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Email Me | Phone MeYour first port of call in finance :)
OK. I know what you mean. I wapprebe setting it up under a discretionary trust structure, so changes things a bit. My (back of envelope) calcs. include man. fees, settlement/purchase costs, insurance, rough rates guess, connections, ect..
But that is off topic.
Can I just knock on the door and ask the tenant if they would like to enter into a L2B option?
Is it best to tell the agent my intentions early?
What are the real pros and cons?
Terry,
You raise a good point about the end of the lease option, one of the big cons against proceeding.
Thats why I am asking you guys!
How much extra can you put on top of existing rent?
Or am I better off making some improvements, air con, ect… and slightly increase rent to try and get it neutral?
Thanks for the feedback so far, appreciated.
Many minds make light work.
* will be
Daneo79 wrote:OK. I know what you mean. I wapprebe setting it up under a discretionary trust structure, so changes things a bit. My (back of envelope) calcs. include man. fees, settlement/purchase costs, insurance, rough rates guess, connections, ect..But that is off topic.
Can I just knock on the door and ask the tenant if they would like to enter into a L2B option?
Is it best to tell the agent my intentions early?
What are the real pros and cons?
Terry,
You raise a good point about the end of the lease option, one of the big cons against proceeding.
Thats why I am asking you guys!
How much extra can you put on top of existing rent?
Or am I better off making some improvements, air con, ect… and slightly increase rent to try and get it neutral?
Thanks for the feedback so far, appreciated.
Many minds make light work.
Any mark up etc is up to you and up to how good your negotiation skills are. As much as you can get.
I
n my view, if there is going to be capital growth you don't want to be selling an option.
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
And don't forget to add land tax to your calculations, especially if using a discretionary trust.
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 Dane-o
I've never had a great deal of success converting long term tenants into vendor finance buyers but you never know your luck.
I've done a few 'numbers' on the property, concentrating on generating cash flow for you. The scenario is based on buying the property at a good discount and on-selling it with an Installment Contract. The pdf containing the 'numbers' is available by Clicking Here
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Yes agree with Paul there, never been able to convince an existing tenant to take on the home they already live in on a rent to buy. They have a hard time understanding they can own the home for a bit more cash each week. They usually dont want to pay more to enjoy the same house, even though they can own it. Its a bigger headshift for them.
You can still negotiate with the seller and see what you come up with but dont count on the existing tenant to come through for you.
Cheers
Sheree
Thanks for the Breakdown Paul.
From a purely cashflow now! view it could be viable.
guess I have a bit of thinking and further investigating to do.
But if you and Sheree have had no luck converting tenants I don't believe that I will either.
I will do my sums and work out what my cost of action would be. (what I could miss out on while setting this up)
I would prefer to find a property that fits my existing model (renovate and split the block) because then I get to hang on to it for further growth as well.
I always have my eyes open for alternate or different deals, this one caught my attention.
Thank you for your feedback so far.
Will let you all know how I proceed.
Hi Daneo
Just a quick point on selling with vendor finance (VF) and Land Tax. If you sell the property with a Lease/Option (Rent To Buy), as mentioned by Terry, you'll have to include Land Tax in your 'numbers'.
However, if you sell with a VF Instalment Contract you can submit a Land Tax variation form and the Land Tax liability moves to the Instalment Contract purchasers. And, if the property is the purchasers' PPOR the Land Tax liability disappears
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Wow,
Did not realise that.
thank you very much. You have been most helpful.
I will investigate the land tax rulings and charges for WA.
I was under the impression that no land tax was applicable for properties under 400k. (Gov. website)
time to call and ask more questions.Hi Daneo
Have a look at this WA Dept. of Finance document at Click Here. I believe the first paragraph on page 2 is the relevant one but check with a vendor finance savvy solicitor.
In NSW, when I ring the relevant government department usually nobody knows what I'm talking about (they don't see many of them) but, when we put the Variation application form in it's always worked.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hey
If youre looking to buy through vendor finance, if you dont have a deposit but a good income etc, where do you actually search for these properties?
Cheers
Use a company that offers Vendor Finance where you choose the property.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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