Reply: 1.1.1.1.1.1.1
From: J Parker
I'd like to add to the above comments regarding wraps. I have done a lot of research into this area and recently came very close to onselling a couple of houses using this technique. In the end, however, we decided to keep the properties as rentals for a number of reasons.
I like the concept of wraps. The technique definitely has merit and, for those who have done it successfully, it certainly provides good cashflow. You only need to look at people like Steve McKnight and Rick Otton to see that wraps can be made into a very profitable business. Both are astute businessmen who have seen a niche in the market and have taken it by the horns. I admire their drive and success.
Jeremy is right, however, when he states that they are a lot of work. We have spent many trips to our favoured country town, searching for the right houses, returning for pre-settlement inspections and, of late, house showings. Being over two hours drive away, it has taken up quite a few weekend days, and with three young children to lug along as well, it hasn't been smooth sailing. The picturesque trip to the Hunter gets a bit tiring after doing it a few weekends in a row!
Lewis is also spot on when he points to finance as being a major hurdle. Because the wraps industry requires a lot of borrowing (because let's face it, it's hardly worth doing wraps for a couple of properties) you will eventually hit a brick wall with lenders. It is then that wrappers need to look further afield, using private investors in joint venture partnerships etc.
Disclosure is also another grey area, as lenders will generally not lend money if your intention to wrap is disclosed when you are seeking the loan.
We found with advertising that it was easy to get the phone to ring. People find the words LOW DEPOSIT NO BANK QUALIFYING very tempting indeed. However, out of some 20 odd calls, less than half of those qualified for a wrap. Admittedly, my husband and I set a minimum deposit but you need to do this to make the whole thing profitable. We sent out application forms to those who we pre-qualified over the phone and out of these, a paltry 4 returned them. First lesson we learnt was that most of these callers suffer from apathy. You really do need to help them fill in the form over the phone, or meet them in person to go over each section. Again, due to our geographical location, we were not prepared to waste more time so most questions were answered over the phone.
Rick Otton's philosophy is that the people must REALLY love the house. The importance of this cannot be understated. After locating who we thought was a sure winner buyer they looked at the interior of the house, only to reject it. Nothing prepares you for the emotional letdown of this happening. It was very sobering indeed. My advice to people who are considering doing wraps is to get the buyers to look at the house FIRST. We made the mistake of pre-qualifying the buyers and then letting only the good prospects see the house. Perhaps if we'd opened the houses to everyone who called, we may have had better success. Who knows?
In the end, we decided that, for now, we'll rent the houses out and see what happens. As the leases near their end (and depending on the market) we may again attempt to onsell via a wrap. We have the system set up, the contacts, the paperwork. All we need are the right buyers!!
Another important thing to remember is to always have an exit strategy. Ours was to rent these houses out, as the town has a small supply of rentals and the returns are quite good at 9-11%. We will now sit on these and wait. I would have been very concerned if I'd bought, purely relying on wrapping these properties. Always have a plan B!
Property prices have been hotting up for a while now and we found that to buy anything around the $80-$100K mark (wraps work best at this price range)was getting increasingly difficult. Especially being a Sydneysider, the closest available houses in this price range were getting further and further away! This wouldn't be such a problem if you lived in other capital cities but be prepared to travel if you live in Sydney!
I don't wish to put a dampener on anyone wishing to pursue the wraps business. Just because it didn't work on my latest purchases doesn't mean it won't work for you. I have just posted a few thoughts and personal experiences that may or may not be of benefit to those considering wraps. We went into this with every intention of making it work. We weren't relying on the income from it at all, so we basically had nothing to lose by giving it a go. I certainly have no regrets putting in the time so far, as it has proved to be a terrific learning experience.
Everyone is different and that's what makes us so interesting, I suppose! Please note that we have not given up on wraps. We have just put them aside for the time being.
Our next project is a renovation and I'm planning it with great enthusiasm. Nothing like variety in investing!
Cheers, Jacque
