wraps

I understand that wraps are a strategy to sacrifice future capital growth for immediate cashflow, right? How do wraps compare to investing in high yield, low growth properties? Or, investing in high growth properties and doing the cashbond thing? Pros and cons?

Also, if I were to wrap in NSW, what areas would be wrap-friendly?

Thank you.
 
Hi,

Let me see if I can answer your questions (from experience, and the observation of others)...

Wraps or "wrap-around mortgages" is the term given to a form of property investment where the vendor (owner) secures a profit by offering for sale a property over a fixed term with a finance option that may appeal to those who may not normally qualify for standard finance. The profit of which is a combination of a higher than normal sale price and a margin above their own first mortgage rate. Hence the term vendor-finance.

"Wrapping" a high yield low growth property usually results in a long term wrap. This normally is due to a slow build up of equity from natural market forces preventing a "wrappee" from refinancing sooner. Though "sweat-equity" via improvements is always available to the wrappee and may be a better alternative (for stablilty) for long term renters, for wrappers this means a stable long term cashflow stream. This method is promoted by Steve McKnight.

"Wrapping" a high growth property may tend to result in a short term wrap. This is often due to a quick build up of equity from market forces. This can result in the wrappee refinancing earlier and the wrapper obtaining a capital gain.

Personally I find Pros and Cons are all relative and often depend on people's comfort zone. So let me just say both options work and both should be know and applied where appropriate.

The answer to your question in regards to where to wrap is actually answered in the paragraph above. For example;

1) You place an ad in Sydney metro - you get calls from people wanting to buy via vendor financing, they have enough of a deposit to cover all your purchase costs. Would you do it?

2) You place an ad in NSW rural - you get calls from people who have less of a deposit, but the deals provide steady cashflow that you beleive would support medium-term high yield Sydney-metro buy and holds. Would you do it?

You use some of your own $$$ to build up experience and a system, and develop a professional system that you believe investors would be interested in. You speak to people and they are willing to give you enough OPM (other peoples money) that location is no longer an issue. Would you do it?

It may not be the answer you wanted, but the best answers come from experience.

Just a thought
Michael Gruber
President
Vendor Finance (WRAPS) Association
www.financewraps.asn.au
 
Superman,

It's not an either/or thing...you can do wraps AND buy rental property. However I would say that wrapping requires more commitment to building a business as you are becoming a financier.



Wraps deliver a good passive cashflow...get 50 properties delivering you $50 per week each and you're earning $2,500 per week.

However, your clients are buying the properties, so you don't get the capital growth AND the cashflow ends when your clients make their last payment (in 25 years or so)...So you need to find more properties to wrap...

Buying rental property you get the rental = cashflow, though possibly not as good as a wrap income & you don't get a juicy deposit upfront (essentially your investment back) so your sunk costs are higher. You do get the capital growth & in essence are building an equity portfolio which you own for life.

Both have their place, depends on what your goals are and how you prefer to work.

I personally haven't done any wraps at this time - are heavily into renos of rental properties, but watch this space :)

Cheers,

Aceyducey
 
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