Reply: 1.1.1.2.1.2.2.1.1.1.1.1.1.1
From: Mike .
Thanks Dale & Michael,
I know enough about Wraps to be dangerous
but I came unglued with that one. I've just spent a few harrowing hours doing some number crunching to try and better understand the financial structure of it. Eventually, the penny dropped and then I reread both your posts as well as my own.
As far as my earlier comments regarding Scenario 3 is concerned I can now see that my head was in a fog at the time. I now understand that there must be two components to get the required ROI (20+%). There is the Income component which is called the "spread". The spread is the difference between the interest rate that the wrapper pays and the interest rate that the tenant buyer pays (usually 2-3% extra). The Capital component which is called the "margin" is the difference between the Wrapper's purchase price and his/her sale price to the tenant buyer (20+% above purchase price).
My earlier assumption was that Wraps was an exchange of capital gain for cashflow and that if extra instalments were received on top of the margin it was because the property hadn't put on enough capital gain for the tenant buyer to cash out the Wrapper and secure an 80% loan. It appears though that the Wrapper is in no hurry to have the balance of the margin paid back to him/her. In Dale's Scenario 2 and 3, the tenant buyer has paid 50% ($10,000) of the margin up front but is paying the other 50% ($10,000) over a 25 year loan term as the principal component of the spread component of the instalment payment.
I had incorrectly assumed that the entire spread component was paying down the outstanding 50% of the margin. Now I understand that only a portion (ie the principal component) of the spread is paying down the remaining $10,000. The size of that portion in the early years, as Michael pointed out, is negligible. Which is why most of it would remain to be repaid to the Wrapper when he is eventually cashed out by the tenant buyer. Based on that, Dale's Senario 3 now makes perfect sense.
To help me better understand the process I did some calculations to compare Steve McKnight's long term strategy with Rick Otton's short term, refinance strategy and according to my results the tenant buyer pays a truckload more interest over 25 years if he doesn't refinance. If the tenant buyer refinances after, say, six years, then he/she is on a lesser interest rate for the next 19 years and is able to save tens of thousands of dollars.
Since this amount is quite large the ethical Wrapper should not prevent the buyer tenant from refinancing at the earliest opportunity. IMHO it would be a good PR exercise to inform the TB they have the option to do so.
To refinance obviously entails more work for the Wrapper to find more deals but the yield on his investment goes up dramatically if he pulls the margin out early. Not surprisingly, his happy clients, who are now happy homeowners present a great advertisement for his business.
Thanks again Dale and Michael for your excellent posts in this thread.
Regards, Mike
From: Mike .
Thanks Dale & Michael,
I know enough about Wraps to be dangerous
but I came unglued with that one. I've just spent a few harrowing hours doing some number crunching to try and better understand the financial structure of it. Eventually, the penny dropped and then I reread both your posts as well as my own.As far as my earlier comments regarding Scenario 3 is concerned I can now see that my head was in a fog at the time. I now understand that there must be two components to get the required ROI (20+%). There is the Income component which is called the "spread". The spread is the difference between the interest rate that the wrapper pays and the interest rate that the tenant buyer pays (usually 2-3% extra). The Capital component which is called the "margin" is the difference between the Wrapper's purchase price and his/her sale price to the tenant buyer (20+% above purchase price).
My earlier assumption was that Wraps was an exchange of capital gain for cashflow and that if extra instalments were received on top of the margin it was because the property hadn't put on enough capital gain for the tenant buyer to cash out the Wrapper and secure an 80% loan. It appears though that the Wrapper is in no hurry to have the balance of the margin paid back to him/her. In Dale's Scenario 2 and 3, the tenant buyer has paid 50% ($10,000) of the margin up front but is paying the other 50% ($10,000) over a 25 year loan term as the principal component of the spread component of the instalment payment.
I had incorrectly assumed that the entire spread component was paying down the outstanding 50% of the margin. Now I understand that only a portion (ie the principal component) of the spread is paying down the remaining $10,000. The size of that portion in the early years, as Michael pointed out, is negligible. Which is why most of it would remain to be repaid to the Wrapper when he is eventually cashed out by the tenant buyer. Based on that, Dale's Senario 3 now makes perfect sense.
To help me better understand the process I did some calculations to compare Steve McKnight's long term strategy with Rick Otton's short term, refinance strategy and according to my results the tenant buyer pays a truckload more interest over 25 years if he doesn't refinance. If the tenant buyer refinances after, say, six years, then he/she is on a lesser interest rate for the next 19 years and is able to save tens of thousands of dollars.
Since this amount is quite large the ethical Wrapper should not prevent the buyer tenant from refinancing at the earliest opportunity. IMHO it would be a good PR exercise to inform the TB they have the option to do so.
To refinance obviously entails more work for the Wrapper to find more deals but the yield on his investment goes up dramatically if he pulls the margin out early. Not surprisingly, his happy clients, who are now happy homeowners present a great advertisement for his business.
Thanks again Dale and Michael for your excellent posts in this thread.
Regards, Mike
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