ve Melbourne suburbs and wraps
Reply: 3.1.1.1.1.2
From: Michael G
MC,
Gee thanks MC
I'll have you know Yuch and I always ensure we point out its a business like you say.
Ok, answering your question...
At the moment, one reason why wraps become the "fad" was because of the FHOG. With this money it was sometimes possible to secure a property (very cheap one mind you) where the grant money would cover all your up front expenses (deposit, fees, stamp duty etc). Or at least be structured in such a way that you would get your money back within the year.
I've had some major hiccups with some deals in the beginning that set me back, so my turn-over has been considerably slower than some out there.
Based on this alone, it was an attactive way of either doing no-money down deals, or ones with a high cash-on-cash return (COC), based on 1st year returns.
Now expanding on this theory, if the properties are marked-up, and the wrapper is getting cashed out quickly, then the theory is, the wrapper is getting their expected profits (markup price) back very quickly with little money down.
This enables them to reinvest the funds into the business.
Its a case of "how quickly do I get my money back". I some cases, 1 month, sometimes 12 months or more.
The idea here being turnover.
Now here's an interesting theory. Say one were to wrap in an up market. They leverage their funds to be able to "control" more property (due to whatever means, grant money, investor funds, etc). And are able to turn over this money frequently (lets say every 12mths).
Now assume at the end of the boom, the wrapper is cashed out of all their deals (because rising equity has allowed the wrappees to refinance). The wrapper is then left with a pool of cash, with falling property prices (we assume here its now the bust cycle).
Ok, what happens if there is no bust?
Ok, the wrapper then (in theory) has a means of generating cashflow, they could, instead of putting the cashflow back into the business (yes its a business), into renos or developments (we're talking about a decent cashflow here).
What if they make a mistake with a reno, or a development costs overrun?, then they tap into more cashflow to fix those problems.
It's like owning a restaraunt, or some other business. Develop the system, the hold those funds in something else (other businesses or buy/hold deals).
I think thats about it...
Michael G