Advice on Wrap financing sourght PLS

[Lesley]

Hi All;

I thank everyone who responded to my previous request for assistance regarding this subject.

However, I only received one private reply as to where others source their Wrap financing.

I have tried to find some Lenders that will do this and so far have only come up with one - and my thoughts were that the interest rate quoted was too high (6.9%) to be able to increase it by 2 - 3% and still have someone interested in the purchase - or do others believe this to be about average?

Can you please help me out here - or is it a big secret???????

I have even discussed this with some Brokers - some did not have a clue what I was talking about until I explained it to them and others came up empty handed also.

I would really appreciate some assistance here - I am not into re-inventing the wheel!!

Regards

Lesley

 

[Mike]

However, I only received one private reply as to where others source their Wrap financing. - Lesley

I could be mistaken but the lack of response maybe in part due to the fact that few wrappers frequent this site.

Other sites which contain a wrap specific forum that may be more helpful are Freestyler, John Burley, Vendor Finance (WRAPS) Association and Steve McKnight's Wealthtips Online.

Freestyler and John Burley forums are free to browse as a guest but I think all sites require a membership fee to post on their forums. The other two forums require membership to access the forum.

Vendor Finance (WRAPS) Association
http://www.financewraps.asn.au/

Freestyler
http://bne003w.server-web.com/~wb190

Steve McKnight's site
http://www.wealthtipsonline.com.au/

John Burley's forum
http://mastermindforum.com/phorum/list.php3?f=2

Melbourne Vendor Finance Meeting

The first meeting for 2003 to be held in Melbourne will be on Wednesday, 12th February at the Hotel Bruce County, 445 Blackburn Road, Mount Waverley. Members: Free Guests: $20 Start time: 7.30pm
Event Date: 12/02/2003

Lesley, I suggest you join some of these other sites to meet other wrappers and keep up to date on developments across all the issues. I don't think this site caters for wrappers as well as the other sites I mentioned.

Can you please help me out here - or is it a big secret???????

I'll send a private message with some contacts that may be able to help further but bear in mind that you may have to look outside your state to source wrap friendly finance. The industry is still not accepted by some lenders so you have to take what you can get at this stage.

...and my thoughts were that the interest rate quoted was too high (6.9%) to be able to increase it by 2 - 3% and still have someone interested in the purchase - or do others believe this to be about average?

Lesley, if you look at the Your Mortgage Magazine website http://www.yourmortgage.com.au/rates/index.cfm?action=productList&category=termloan
you will see that the average 5 year fixed rate is 6.79%. If you can get below that you are doing well. Don't be too concerned with whether a client can afford interest rates up to 10%. Your marketing should be based around their current rent. That is the best yardstick by far at determining the price of a home they can afford to purchase.

Some desparate clients will entice you to accept higher repayments from them to get into a home where the market rent is above what they can afford. Don't allow that to happen even if it means losing the deal. You'll quickly lose your lender if many of your clients default because they were in over their heads, financially.

Bottom line is decide what area you will buy wrap properties, determine the market rent, wrap them to clients who can afford that rent. Make sure your 2-3% cashflow is incorporated in their repayments. If it isn't you either paid too much for the property or the finance cost too much. If the client pays you a large deposit then your cashflow percentage needn't be so high. Taking an Interest Only loan could also get them across the line.

When weighing up the entire deal the so-called Cash on Cash return is also important. You don't want too much of your own money tied up in the deal for too long so the more of your buying costs that can be returned to you in the first year from the client by way of their initial deposit and qualifying for the First Home Owners Grant will improve the deal.

Regards, Mike

 

[Les]

G'day Lesley,

You said:-

I have tried to find some Lenders that will do this and so far have only come up with one - and my thoughts were that the interest rate quoted was too high (6.9%) to be able to increase it by 2 - 3% and still have someone interested in the purchase - or do others believe this to be about average?

Can you please help me out here - or is it a big secret???????


First off, I haven't done Wraps yet - but, to me, the issue of actual % rate would be of minor importance to the average Wrap buyer. If you can put together a deal where they can purchase for themselves, at around the same price as rent, you are on a winner. And, yes, it does happen!! Despite Interest rates....

Also, keep in mind that 6.9% is a JOKE compared to the first property we bought (11.9% - which grew to 18% in 1989). The long-term AVERAGE for Australia is around 10%. So, don't let this stop you from moving on, will you.

I was privileged to accompany Steve McKnight for a day as he negotiated deals with half a dozen different families. The over-riding thought I took with me from that day was the HOPE that Steve generated for people who had none!!! And each and every deal was fully disclosed up-front, so they KNEW what Interest rates were (what the lenders were charging Steve, and what he was charging them) and they accepted this as just a natural business thing. THEY were usually just happy to be able to move on (or stay where they were), rather than "renting forever"!!!! Moreover, Steve could usually do a deal where their repayments were around, or less than, current rental rates. The exceptions occured where people had NO deposit - but then, they knew NO-ONE else would give them a chance ...... And they accepted that they would have to pay more to account for this. For these people, the hope he generated was amazing. It was an inspiring day!!!!!


As a further thought, Lesley, what area are you looking??? e.g. Wraps would NOT work in Sydney where property might be $250k - Steve wraps in Ballarat (Victoria) where homes cost between $50k and $100k. As we all know, rents decrease as prices climb (e.g. a $100k house might fetch $150 / wk, but a $500k house WILL NOT fetch $750 / week....) Most wrappers I know operate in "larger country towns" rather than cities, or in outskirts of cities where prices are low (e.g. Logan, in Brisbane)

Regards,

 

[Lissy]

Hi Les
Never say never....
Rick Otton does wraps in Sydney with houses priced around $250k and where the repayments are definitely much higher than the rent...

 

[Mike]

Hi Felicity,

Rick has been in the game a long time now and can afford those size mortgages. He probably doesn't have much of his own money tied up in the deal and the deposit is probably financed by investors. Clients who can afford repayments above market rent are usually earning a good income. In otherwords, the house is probably cheaper than they could ordinarily afford if they had the deposit and could obtain first mortgage finance.

Us mere mortals who pay the deposit ourselves are restricted by the total funds an insurer will agree to underwrite. I believe that figure is about $500,000 per individual. Lenders who have 3 insurers could lend up to $1.5 million per person, for example. Now you see why a newbie must buy at the lower end of the market to start their business and as the business grows must begin using investors to provide deposits if the newbie wrapper doesn't have another source of income to provide the deposits themselves.

Regards, Mike

 

[Lissy]

Mike
I am well aware that Rick is in another stratosphere when it comes to wrapping !
I was just making the point not to say it can't be done, because it CAN. Okay, you need to be in a different position to do it than the average newbie wrapper, but it can be done.

 

[Les]

G'day Lissy,

I had said e.g. Wraps would NOT work in Sydney where property might be $250k

Perhaps I should have said "probably not" ???

I must admit, though, to being surprised anyone can wrap anything in Sydney (it's just to d...ed expensive) - but there you go. It seems it can be done !!!

Thanks for the input,

Regards,

 

[michaelg]

Hi,

To compare, if a property was marked up by 25% and interest rate by 2-3% the repayments would equal about 10% gross rental yeild.

That, plus rates and expenses, thats how a wrap payment would roughly compare with a rental payment.

Michael G

 

[brains]

I might be wrong, but wouldnt it be crazy to wrap in Sydney and give away all that cap. growth?

As opposed to doing it in regional centres where the growth is pretty lame.

Anticipating your correction

 

[Kevmeister]

I might be wrong, but wouldnt it be crazy to wrap in Sydney and give away all that cap. growth?

I guess that depends on the deal you forge in the first place. The second point is that most Sydney property will be negatively geared, but a wrapped property should be be positive cashflow. If you can't afford to negatively gear the property with a tenant yielding 4%, wrapping it in a cashflow positive manner might be "better than nothing", even if you do forego the growth.

 

[brains]

Why is it "better than nothing"? Is "nothing" the alternative to wrapping in Sydney?

Wouldnt it be better to wrap elsewhere, somewhere where the +ve cashflow is better than Sydney and the lack of growth doesnt matter. Sounds crazy to me.

 

[Kevmeister]

Why is it "better than nothing"? Is "nothing" the alternative to wrapping in Sydney?

Did I say "nothing" is the alternative to wrapping in Sydney? No.

"Nothing" is not doing *anything*. No property investment at all.

Consider this - you might pick UpperKumbuktaWest to wrap because it's cheap (and people who buy under wrap terms usually buy cheap properties - yes *not always*). And in 10 years it might be worth almost the same. Some buyers might not like that idea.

Compare that to wrapping in Sydney - it *may* actually be a better proposition for the buyer because there *is* the prospect of growth - they might buy because they might *believe* the property will be worth a lot more in years to come, etc.

I'm just hypothesising here on what might be advantages of wrapping in Sydney compared to other areas...

Wrappers wrap for cashflow - they lose out on capital growth because that is how the deals are usually structured. Simple as that. If you're gonna lose out on capital growth regardless of where you wrap, why does it matter where you wrap?

 

[brains]

k...fair enough, but sounds crazy to me why anyone would wrap in Sydney. If someone can point out the advantages of wrapping in Sydney rather than the bush, im all ears.

 

[Bear924]

Brains,

A couple of positive thoughts about wrapping in Sydney?

1. Because Syd. is more expensive I'd imagine there would be a larger group who are unable to obtain a bank loan and also less people wrapping because of the required capital. Therefore it may be that higher quality wrappees (compared to a smaller city) are able to be attracted.

2. Smaller cities may be more prone to real estate prices falling if a large employer moved out of the area. I know of people who purchased property in the late 80'2 early 90's in larger bush cities who still can not sell their property for what they purchased it for. In Syd. if a wrappee pulls out of their contract because the price of houses had fallen at least you know that eventually you will obtain capital growth on that property.

3. If a buyer stated that they would be able to purchase a similar house for less money then the one you were flogging in Syd. you can claim that by the time the wrappee was ready to refinance the property would be worth more then that amount. In a smaller bush city the growth rate may flat line and the wrappee may be unable to refinance out.

4. It seems to me that the larger the city the more information available for the investor. Eg. It is quite easy to find articles about how Syd. may perform in the next x years compared to many smaller country towns. Obviously Syd. has many submarkets and perhaps this statement isn't correct however I do know that getting a idea of what the market it doing in my small town can be very challenging.

Feel free to burn this thoughts down as I've only been to Syd. so I might be speaking out my Ar**.

 

[paulzag]

Bear924 is right on all points.

Folks, this conference is called Innovative Techniques. Think outside the square a little.

I have wrapped in Sydney. I still think Sydney represents good wrapping potential. Mainly because it scares off all the small thinkers. The only reason I'm not wrapping more Sydney property is I'm growing a business that consumes my life at the moment.

Excess returns are made away from commodity markets. There is always someone willing to take a smaller profit than you. So find a market where you add value other than low cost. Become expert in that market and make money.

The thread opened with Lesley's asking what the big secret is. IMHO wraps are a business where you provide a solution to people's needs, therefore you do not compete on price.

That doesn't mean the deals are bad for the buyers either. Do a tour of some Meriton OTP sales offices one weekend and see how they structure their deals.

Regards

Paul Zag
Dreamspinner

 

[paulzag]

Oh and I forgot to answer specific questions.

1) There are better wrap-only forums as Mike listed. This area is hopefully broader than just wraps.

2) If you are explaining how a wrap works to your banker you are doing it wrong. Does the bank need to know how you make hamburgers if you want a hamburger business loan? No. Almost all newbies try to explain it to their personal banker/branch credit officer. These people have NO AUTHORITY within the bank. So don't bother explaining it to them. It will only scare them (they think they may lose their jobs), so they will refer it to the credit department - who will then say it's not allowed.

Yes I did disclose my intentions to wrap to the bank. No I did not let them view ANY intellectual property of the business (including explaining how this stuff works).

Regards

Paul Zag
Dreamspinner