analyse the numbers on deal?

[mitchmakhan]

Hey people,

I wish to do my first lease option and I have done some figures, can you analyse the deal to see if there is anything i've missed.

My purchase price $62,250
My loan repayments p & i @ 6.2% = $4684 pa
Outgoings (Rates, Insurance etc) = $1700 pa

Potential Tenant/Buyer Purchase Price = $72,250
Option period = 5 years
Tenant Buyer pays = Option fee = $4000
Licence fee = $133 per week
Outgoings = $32 per week
Total per week = $165

Tenant Buyer will recieve a 50% Credit of the Licence Fee toward the purchase price of the property, as well the full amount of the Option fee.

Are you guys using financial calculators or something cause this took me a while to work and it's still probably wrong (ha ha).

I was thinking of a P&I so that both my postion and the tenant buyer improves.

I am unsure whether to add the extra interest rate ie I sell to them at 2.5% higher or whether I should use the fixed payment method.

I keep thinking i've missed something, oh well if you dont ask you never learn..

Mitch

 

[Tony]

Hi Mitch,
I think that the half the licence fee is too much to give the tenant & i also think that your end sale price is way to low. I would look for an end sale price of roughly $87,250 (at least) & maybe only count 30% to 40% of the licence fee as a deposit as opposed to your 50%.

Hope this helps

Regards Tony

 

[mitchmakhan]

Tony, thanks for the feedback.

I should add the the median price range for property in that area is $81,000 and the ave rent is @ 130 p/w.

Can you give me your reasons why you would do the deal differently ie more purchase price and less credits, feel free to break down your analyse of the deal.

I haven't missed the point that it is more beneficial for myself!

I would like to see how you are crunching the numbers, use an example of your own if you like.

Mitch

 

[Tony]

Mitch,
Why go into any deal when the returns aren't fantastic? If you put your $62,250 in the bank, you could easily get over at 5% if you locked it in to a 5yr term (same term as the lease option).
So $62,250 by 5% capital growth per annum is roughly $87,250.

Therefore it would be much simpler to put you dough in the bank & not have to worry about any hassles.

If current rentals are roughly $130 per week, why would you allow someone else to pay rent of $66.50? (the other $66.50 is deposit).

You would be much better off to purchase this property & simply Buy & Hold & forget about trying to lease option the property. Actually you are doing yourself a disservice to yourself if you lease option it with the figures you supplied. You could rent it for more than $66.50 & you have the opportunity to get greater capital growth than you have proposed under the terms of your lease option.

Remember too, that every deal you get into today, may mean you are unable to do a more attractive deal tomorrow.


Regards Tony

 

[Jacque]

Hey Mitch- why not wrap it?
It sounds like a great property to do so, as the repayments would be able to be met by most tenants in that price bracket.
With a wrap, you are forecasting the cg by incorporating that into the sale price, you charge a higher interest rate and you should be able to get your wrappee refinanced out in a few years. Shorter than a L/O and less maintenance- as the buyers pay for all costs, including rates and water.
Just another option to consider anyway

 

[Tony]

Hi Mitch,
I also think that this property would be good for a WRAP, but saying that a lease option with revised profit figures would work equally as well.

Good luck & hope we have been of some assistance

Regards Tony

 

[mitchmakhan]

Thank you for your replies.

Yes they definately have been helpful, a massive learning curve really. I will revise the figures for the Lease Option and pursue that path.

I considered wrapping it however the one Solicitor I did see was very cost prohibitive in regards to this option as his charges alone were in the many thousands, I understand you have to pay for good advice, but i think he was a little expensive.

Upon looking for another solicitor I happened upon the Lease Option and this deal actually had a better up front profit in it.

I would like to work it out and post it back when i can, more on the lines of your calculation Tony, however I am busy sorting thru all of my purchase due dilligence at the moment.

Mitch

 

[Tony]

Mitch,
Cool mate & interested to see your revised figures when you get around to it.

Tony.

 

[handyandy]

Hi Mitch

One reason the solicitor may have wanted to charge a lot is to prepare a full installment contract.

What you can do is buy one through Rick Otton (about $1000) and then take this to your solicitor. In my case with this approach I certainly will save in solicitor costs.

Cheers

 

[mitchmakhan]

Ok guys try this...

Tenant / Buyer
Purchases for $82,250
Pays option fee to get in deal

Rent = $165 p/week

With $40 p/week to go to purchase price

My cost are $107 p/week P.I.R.I.

Therefore I get 58 p/week cash flow (although $40 comes off purchase price)

What do you guys think?

Anthony

 

[tonyd]

[mental note, don't use TAB key]
Let's try again...

OK,

No details for purchase price or option period

Purchase Price 60000
Purchase Costs: 8000
- 10% deposit 6000
- Stamp Duty & Legal 2000
Strike price 82250
Non-refundable Option Fee 4000

Weekly Rent 165 Annual Rent 8580
Weekly Rent Credit 40 Annual Rent Credit 2080
Weekly Expenses 107 Annual Expenses 5564
Cashflows:

Option Period:IRR Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
1 year 140% -8000 19186
2 years 66% -8000 3016 17106
3 years 48% -8000 3016 3016 15026
4 years 41% -8000 3016 3016 3016 12946
5 years 38% -8000 3016 3016 3016 3016 10866
6 years 36% -8000 3016 3016 3016 3016 3016 8786


Last number =(Annual Rent-Annual Expenses) + (Strike price - Purchase price) - (Option Fee+ Number of Years*Annual Rent credit)

Did I miss something?

 

[tonyd]

Yes I did miss something.

The option fee is a positive cashflow term which decreases your inital outlay.

This increases your IRR considerably.

I also ignored capital gains tax as well, which decreases IRR.

Tony

 

[Tony]

Hey Mitch,
These numbers look much better, i see you have pushed up the original purchase price & only allowing $40 off the purchase price instead of half the licence fee. I would charge current market rent & then charge extra fee which comes off the purchase price (so $130 in rent & $35 off purchase price. Is $165 the maximum amount the tenant can pay? I think that they should contribute a little more, so they can really pay the maximum amount of principal back. So if they paid $100 per week as deposit instead of the $40, they would have saved roughly $25,000 (over 5 yrs) & it would be easier to get a loan at the end of the lease term (5 yrs). Keep on playing around with the figures until you get a figure that both you & the tenant buyer are comfortable with.

By the way Tony & tonyd are not the same person.

Regards Tony.

 

[tonyd]

Tony,

Do you simply analyse these deals in your head?
How many have you done?

I cannot see if a deal makes financial sense without doing some kind of cashflow analysis like I attempted above.

I guess it comes down to experience.

cheers, Tony

 

[XBenX]

ooooer, a tony v tony flaming war !

there can be only one

 

[Tony]

Hi Tonyd,
It isn't that difficult really. The most important point for me is the resale value, need to determine what is a fair capital growth for you & something that is also agreeable for the tenant/buyer. 4% or 5% capital growth compounding per annum is usually a reasonable amount & really anything under that i reckon that it's not really worth it. If in a high capital growth rate & you buy under market value, then maybe you can get away with charging more.

In this example i would still would sell the property for fair market value, so let say $80,000, plus 4% or 5% capital growth per annum. So resale value in 5 yrs time would be approx $102,000, less any deposit paid to the landlord. So in 5 yrs time the tenant has saved $10,400 ($40 weekly x 5yrs) + the $4000 (initial deposit), so the amount required to buy the property out is still roughly $87,500 (which is still roughly today's market value). Now if the tenant was to pay a bigger deposit say an extra $40 per week ($10,400 over 5 yrs), then they would owe under market value at the end of the lease period.

In my opinion the tenant is still getting a good deal (as the end price is still to low).

Btw i have done these sort of deals before.

Regards Tony

 

[tonyd]

Hi Tony,

Thanks for your comments.
I'm sure you've done a number of these deals.
I was just impressed that you can look at the numbers and evaluate the deal without doing a Kevmeister-like analysis like I attempted. Now I know the secret.

That's the first time I've actually tried to work out the return on a L/O and the returns look excellent - assuming I haven't stuffed up the cashflow analysis.

XBenX:
Highlander is one of my fav movies , and my baby son is called Conor, so I'm prepared for the Quickening!

cheers, Tony

 

[Tony]

Hi Tonyd,
To be quite honest i don't usually understand the Kev like analysis. If a post is excessively long, i tend to gloss over it & skim read it. If it is kept simpler, it usually is an easier sell to tenant/ buyers too.

My guidelines for L/O
Sell at market rate + 4% or 5% capital growth per annum compunding.
Total payment per week is current market rent or 6% or 7% yield (use whichever is greater) + deposit component usually an extra 30% of total payment (i.e. if total weekly payment is $200, $140 classed as rent & $60 classed as deposit).
Also collect some sort of deposit (in this case $4000), it shows the tenant is committed.

Also i would include some clause whereby, tenant loses any deposit, if they leave before the lease period, but they can cash out when it suits them. Also i would charge them the full 5 yr capital growth rate upfront ($102,000 in my previous example) less any deposits paid. Therefore the property is at it's cheapest at the end of the lease because the tenant has made the maximum deposits.

Simple really

Regards Tony

 

[Tony]

Hey XBenX,
No flaming war with Tonyd, how could i argue with anyone with a name like Tony? Wonder if he is from italian extraction like myself? Was just trying to make the distinction between the 2 of us, especially since i had made comments earlier on in the piece.

Regards to one & all (yes even Tonyd)

Tony

 

[XBenX]

Originally posted by tonyd
Hi Tony,

Thanks for your comments.
I'm sure you've done a number of these deals.
I was just impressed that you can look at the numbers and evaluate the deal without doing a Kevmeister-like analysis like I attempted. Now I know the secret.

That's the first time I've actually tried to work out the return on a L/O and the returns look excellent - assuming I haven't stuffed up the cashflow analysis.

XBenX:
Highlander is one of my fav movies , and my baby son is called Conor, so I'm prepared for the Quickening!

cheers, Tony

hehehe