If this is your first visit, be sure to
check out the FAQ by clicking the
link above. You may have to register
before you can post: click the register link above to proceed. To start viewing messages,
select the forum that you want to visit from the selection below.
Wrapping is a fairly controversial matter in Australia. Neil Jenman, consumer advocate, is dead set against it because he says that it allows sophisticated investors to prey on "Aussie Battlers". Bad wrap deals have become fairly high profile in Australia, which has tarnished the reputation of investors such as Steve McKnight.
A Current Affair ran an item about wrapping which you can watch by going to http://www.sbs.com.au/insight/index....um=2003-11-13#
I would strongly recommend that anyone considering wrapping go to this site to know about the "other side" of wrapping.
I'm still making up my own mind about wrapping. However, I remain skeptical of a process which targets people who have been rejected by institutional lenders. If the bank rejected a loan of $100,000 at 7% interest for an individual, what are the chances of the wrappee paying off $120,000 at 9%? These are typical of the percentage increases.
I would consider wrapping only if I felt confident that the wrappee had a strong to very strong chance of meeting all financial obligations. After all, I wouldn't want to prey on the Battlers. I'm one myself
Wrapping must be 'doable' in NZ, as there is a John Burley guy by the name of Adrian Oakman that (I think) has done something in the range of 100-200 (maybe more) wrap deals.
If I can find any more details I'll put them here - but I lent my tapeset to a friend, and I'm pretty sure it's on there that he says in detail.
Although, if you read John Burley's latest book (written with his pastor by the name of ...... can't remember - not doing well tonight ) called Powerful Changes it profiles him as going from a dairy farmer to being an investor.....
Having just read the links provided on the topic I have found myself scratching my head wondering about the moral issues surrounding wraps.
The car sales analogy was quite comparable when you think about it. The only thing is that the stakes run much higher in the property field.
If the individual fully understood their obligations concerning the contract and still for what ever reason did not keep up payments the product as in car sales (or most other consumer items for that fact e.g. TV, VCR, DVD, Blender) remains the property of the retailer (i.e. you).
You become the retailer, finance company, and debt collector all in one.
If the conditions have been spelt out clearly and explained in detail, and the purchaser still falls over, does that make you any more immoral than the finance company taking the goods back?
You would be an operating business like any other.
Marking up prices on goods (like the sales price) is common place in every day life e.g. super markets, trades people, shop owners, manufacturers etc. So is on selling at a higher price so unethical?
Would Jenman have us go to the supermarket and buy fresh salmon for what it cost the fisherman to catch that particular fish? Or perhaps have a group of people attend one of his seminars for the price of what it cost him to have it?
I do however think there should be safeguards written into the contract to protect the "wrappee" against any shortfall of the "wrapper."
If there is a way to make it work for both parties, so that both come out with what they want, I would be all for it.
I am not a wrapper, but I don't dispute the concept could provide homes to those who otherwise could not purchase.
Some of the safeguards that I have seen implemented by SOME of the John Burley students are that they have an 'agency' that manages the whole deal for the investor.
They collect the payment from the buyer, then pay the wrapper's loan, forwarding to them whatever is left over. This way the loan is being paid off, and so if the wrapper does get into trouble in some other way, there should be a better opportunity for the wrappee to keep hold of what they have paid for - by either refinancing themselves, or if the 'agency' finds another wrapper who is willing to buy the cashflow provided by this deal - and I guess a little of the gain that is still left.
I think that the wrapper also needs to be fair both with interest rate/markup, and also what happens if the loan goes into default. Too many wrappers out there are more than happy to take everything if one payment is missed, and too bad for the wrappee. I think it's guys (and girls) like that that give the 'industry' a bad name.
Someone I know mentioned this site to me, I was unaware of it until now.
There is a lot of mis-information being circulated about wraps, also there have been many unethical people both here and in Australia doing wraps with only their own best interests in mind. Neil Jenman I know slag them off and is opposed to them, but it is like banning all dogs because some bite, or banning all cars because cars kill people. Personally, I have done over 25 wraps in NZ and have purchased the properties all well below market price and sold them on to new buyers for around market price. Some of these have now been in operation for over 3 years and the new buyers have had significant capital gains from them. About 5 or 6 cashed me out this year and were able to finance again through a traditional lender, all properties had gone up significantly, 3 of them approx $50,000 since they purchased them. I do not like the fact that some investors buyer at the going market price and sell well above what anyone would normally buy them at. When I say well above, I am talking about 20 - 30% above fair market price. All the buyers from the ones I have done are happy with how the it works for them and several have given referrals to me for their friends. Unfortunately, because there are many individuals out there that do not operate ethically, and in some cases just have no idea what they are doing (when it comes to financing etc), most banks will not lend you money to wrap properties in NZ, I think Australia is becoming the same way. In my book 'NZ Real Estate Investors Secrets - How 10 NZers became millionaires and how you can too' I have a section of approx 10 - 15 pages on the workings of wraps, the advantages, disadvantges etc.
Thanks for coming to the forum. I hope that other members can ask you questions regarding wraps and property investment within the forum. I have very limited information on wraps - maybe you could write an article(s) on this subject so we can post it on the site?
We have a very strong community within Pt who enjoy the freedom to post questions without fear of editing or black listing. Our web site is free and independent and will always remain so.
Below is a section from my book on wraps. It is not a strategy for the majority of investors now because of the reasons I outline below, but I have put it here for those investors that are curious as to how they are done, and Marc suggested I write something about the subject.
Wraps
This is my preferred method of Rent to Buy, so I will discuss it here in a little more detail. The main benefit of having wraps is because of the cash flow you will create by doing them. Typically, $50 - $70 per week for each wrap you do is common. As mentioned with the previous example, you will need to purchase a property well below its market price for this to work successfully. The ideal property to look for is a 3 or 4 bedroom home with a garage and (although not essential), preferably, also fenced. If you think of your city as a whole, and all the various areas and streets it is made up of, some areas will be more desirable to live in than other areas. Think of all the different houses and all the different areas around you being on a scale of 1 - 10: a 1 being the worst area and a 10 being the most up-market areas. The best locations to look in, for the wrap properties, are in the 3 - 6 areas on that scale.
If you would not feel safe walking down a particular street at 10 o’clock at night, don’t buy in the street!
The home you buy needs to be purchased well below market price, so only offer on properties where the owner is highly motivated and needs to sell.
Once you have purchased a property, you’ll want to find a new buyer to buy the house from you. This is normally the easiest part of doing wraps. In many cases, you will have to choose someone from all the people wanting to buy from you.
I have found from experience that it is best to collect a minimum deposit of $2000 from your purchasers before they move into the house. If you live in an area where house prices are more expensive, such as in Auckland, you may be able to collect a deposit of between $5000 - $7000.
With any wrap mortgage, you will hold title to the property over the full term of the loan. Only when the purchaser has paid you in full, will title be transferred over to them. You will have a loan against the property through your own bank while, at the same time, the new purchasers will be paying off their loan to you on the same property, at a slightly higher interest rate, but over the same term. In other words, you need to be able to give the purchasers title to their property when they have paid you in full. For this reason, it is imperative that you arrange all your loans for the same amount of time that the purchasers are paying you. You may realise by now that your loan will need to be a principle and interest loan, not an interest-only loan. The people buying the property from you will also have a P & I loan being paid to you.
Finding Your First Suitable CashFlow Property
As mentioned earlier, the ideal property you will be looking for is a 3 or a 4 bedroom home with a garage in an average or slightly below average area (preferably less than an hour’s drive from where you live). You may find that you will look at 10 - 20 properties, make offers on 5 - 8 of them, and end up buying just one. It is important to offer only on properties with highly motivated vendors. If you don’t follow this rule, you will be making lots of offers on properties that you will never buy. You will also upset vendors as well as annoy agents, possibly to the point where they won’t want to deal with you. It can take a considerable amount of your time finding good agents to work with, so keep them on your side as much as you can. This does not mean, however, buying a property at a higher price than you originally were intending to pay, just to please the agent (because you haven’t bought a house for a while)!
Once you find a suitable property to offer on, you will need to know how to make your offers and how to construct them.
Making Offers And The Clauses You Will Use
Now it is time for you to make an offer on the property you have found. If you can buy it at the right price, it will make an ideal wrap property. Let’s say that you have seen a property that is on the market for $119,000 and you know from experience (after looking at many properties and knowing what similar properties in the area have recently sold for), its market value is about $115,000. You could pay up to $105,000 for this property, which would therefore give you a contract profit of $10,000. If you can buy it for any less than $105,000, it’s a bonus.
In my experience of making many hundreds of offers on houses, if you have an upper limit that you are prepared to offer, start your contract price between $3000 and $5000 below this limit. If you start lower than this, you drastically increase your chances of the vendor being offended and not countersigning your offer. They may even countersign at a higher price than it was on the market for! In this example, then, you would start at, say, $100,000 and make your offer subject to suitable finance and a satisfactory valuation report and any other relevant clauses that you want to add (other common clauses are an engineers report, LIM report, or title search). Try not to put in too many clauses, though, as this will make your offer less attractive to the vendor.
OK, the vendor has now had time to look at your offer and, being motivated, comes back to you with a counter offer of $110,000. This shows that the vendor is willing to negotiate, and is a potentially good contract to keep negotiations progressing along. You may now decide to increase your offer a couple of thousand dollars to $102,000. You can leave in the same clauses you had in your previous offer, or you could make the offer even more attractive by crossing out and initialling one or more of your clauses.
NB: Before deleting any clause, make sure that you know what you are doing and that you will not need the clause(s) in the contract.
Your offer is once again presented to the vendor, who now countersigns at $106,000. Now you know you are getting close to buying it. This is where it gets interesting; you now have several choices to make with your offer. One choice is to go to your maximum of $105,000 with your same contract conditions. You could also go to $103,000 with the same conditions or, if you were in a position to, make your offer $103,000 cash!
NB: Again, only do this if you are very confident that your finance is approved, you are comfortable with the market price of the property and any other conditions that you originally had in your contract. I would not recommend doing this until you have bought at least 10 properties in the past, otherwise you could get yourself into serious difficulty. So make sure you are totally comfortable, before making any cash offer.
Taking it even a step further, if there are other circumstances—where you suspect another offer is coming in on the same property, for example—you may give your offer a deadline! That is, add a clause to say something like this: ‘This offer will be withdrawn if not accepted by 5pm on the 9th October, 2003.’ Unless you are in a deadline where other offers are being presented at the same time as yours, do not use this clause on your first offer being presented, as this may annoy the vendor. I have used this method to buy several properties. If I had not used it, I would have missed out on buying them.
Some Additional Points When Making Offers On Wraps
1) On the front page of the contract, put in your own name or Nominee.
E.G. Purchaser… Brian Roberts or Nominee.
I use ‘or nominee’ now on all my offers. By doing this, you can have the property either go into your own name, a company or a trust name, or sell the contract on to another investor. You will need to decide whether it is worth you having a trust or a company set up for your investment properties. See the chapter on this by Chris O’Connor.
2) Pay the minimum deposit amount you can get away with. The money is better sitting in your account getting interest (or reducing interest, if you’ve paid the deposit out of a revolving credit account) than in the real estate agents’ trust account. Make your deposit 5% of the maximum price you are prepared to offer on a property, rounded up to the nearest $500. For example, on the offer made on the property just mentioned, we were prepared to pay $105,000 to buy it. So if you work out 5% of $105,000, it comes to $5250, so round it up to $5500. When drawing up offers, many agents will automatically write down a deposit of 10% on the contract, so you will need to instruct the agent as to how much you want your deposit to be. If you do not, they will generally put in 10%, in this case $10,000 - $12,000. I work it out on 5%, as the agents typically charge vendors between 3.5% - 4% + $500 + GST for selling their home. Don’t try and be cheeky and put in only $1000 or $2000 as a deposit—you will really annoy the agents if you do this. They don’t want to wait until the property settles before getting paid for selling it. The real estate agent takes their commission for selling the house out of your deposit money, usually 10 days after you have paid it. (NB: If you are buying a house privately, you can put in a much lower deposit, as the money will be paid to the trust account of the vendor’s lawyer and stay there until settlement occurs.)
3) Make sure the chattels listed on the contract are actually at the property you are purchasing; TV aerials is one to especially be aware of.
4) Make your settlement day on a Tuesday, not on a Friday. The ideal situation when doing wraps is to settle the property on a Tuesday, then have your new purchaser (that you have earlier arranged to buy the property from you) move in on the Friday of that same week. Settlements generally occur on a Friday, so you don’t want your settlement to be on this day, too. There are sometimes unexpected delays, and the settlement may not take place until late Friday afternoon, or even occasionally on the following Monday. If you want your purchasers to move in on the same day, it could get extremely messy. By settling on a Tuesday, you now have a few extra days to iron out any problems that may have prevented the property settling that day. By this time, your purchasers would have paid you a deposit and set up their automatic payments with their bank. If this has all happened and your settlement has taken place, I will often allow the purchasers to pick up the keys from the real estate agent’s office on the Wednesday or the Thursday, and start moving their furniture in from then on.
5) On the ‘Further Terms Of Sale’ page of the Sale & Purchase agreement, always put in the following clause when doing a potential wrap: - ‘The vendor agrees to allow the purchaser access to the above property 3 (three) weeks prior to settlement for the purpose of showing prospective clients/tenants. This clause is inserted for the sole benefit of the purchaser.’ If the property is already vacant, you can ask for access immediately the property becomes unconditional. You should set your settlement date at least four weeks from when you make the offer (and settling on a Tuesday). If it is tenanted, make it at least seven weeks forward. Once a tenanted property has been sold, the tenants are given 6-weeks’ notice to vacate the property by the current landlord.
Special Conditions
With every wrap property that you do, there also needs to be a set of special conditions which start at the point where the standard Sale & Purchase Agreement ends. These special conditions cover all the conditions of the new buyer’s loan to you. Some of the items covered in these pages are:
1) Interest rate (usually 1.5 - 2% above the current bank rate).
2) If the rate is to be a fixed rate or a floating rate. If it is a fixed rate, how long is it for?
3) Term of loan.
4) Rates & insurance payments.
5) What happens in the case of default by the purchaser?
6) Alterations that the purchasers may do.
7) Equity in the property.
Rights to place a caveat and removals of caveat.
9) Credit Contracts Act Disclosure.
These are some of the items covered in the special conditions. You may want to get your lawyer to organise this for you: he/she may charge you around $2000 to do this. The conditions I use are seven pages long, plus another page for the Credit Contracts Act. This contract has been used by at least 50 other investors in NZ, most of them have also had their own lawyer look it over. If you would like to purchase a copy from me at a reduced price, you can e-mail me at [email protected]
Lawyers For Purchasers
Before the purchasers sign the contracts and the attached special conditions, you should have a designated lawyer that you can send the purchasers along to. If you don’t have this arranged for the purchasers, they may go to any lawyer in town and are likely to be talked out of buying the property. At best, a lawyer unfamiliar with the contracts will charge more than is necessary, and may also want to make changes to your contract.
I have personally approached lawyers in Hawkes Bay, Palmerston North and Wellington to explain the special conditions and how the system operates. Once they looked it over, all of them agreed to act for any purchasers that I sent along to them. The fee that the lawyer charges the purchasers should be no more than $300. The lawyer simply explains the contract and the special conditions to the purchasers, and discusses any points that they may need clarity with. At this time, the lawyer will also give the purchasers an option to put a caveat on the title, to protect their interest. This may cost the purchasers another $100 or so if they choose to do this.
Before the purchasers make an appointment to see the lawyer, you will have sent two signed copies of the ‘Sale & Purchase Agreement’ (with you, now, as the vendor) and two signed copies of the special conditions to the lawyer.
You may be someone that prefers to have the purchaser sign all the contracts in your presence, and not use a lawyer at all. I do not recommend this at all. You could get yourself into trouble later on. The purpose of using a lawyer to go through and explain the contract to the purchasers is to protect you, as well as your buyer. The lawyer will witness the purchasers’ signatures when they are signing the contracts, and make sure they know what they are signing.
NB: You do not need a lawyer for this part, as the title to the property will be staying in your / your company / trust name. All you need to do is simply draw up the contracts and the special conditions that the purchasers will later sign at the lawyer’s office.
Advanced Strategies For CashFlow Properties
Doing your first wrap property may indeed be a steep learning curve for you (it was for most of the students I have mentored). If you have ever owned rental properties, buying your first one would have been no doubt the hardest one to do. All the new things you had to learn and also be aware of, you may have thought you had gone back to school again. If you have gone on to buy more rentals since then, you would have found it was easier each time. It is the same with doing wraps—they do get easier each time you do them. For me, now, they are as simple as buying a standard rental property and renting it out.
Remember that if you are going to do any wraps, you’re going to be in the property business for a very long time (I hope you don’t have any plans of moving to Australia in the near future). For this reason, make sure you are willing to make that commitment before trying them out. You are going to be responsible for these properties for the next 20 - 25 years. That is, unless you have a purchaser change their mind about owning the property part way through a loan, or you need to get rid of them for not keeping up with their payments.
Because of this, you need to be sure this is for you. If you think it is not for you, choose some other methods discussed in this book for investing in real estate.
So, for those of you that can see the potential of doing wraps, and are enthusiastic and willing to commit yourself to more, wraps could be an option for you.
There are another two important matters that you will need to be aware of if you are planning on doing more than just a few wrap properties.
These are: -
1) GST; and
2) The amount of equity you use to purchase each property.
1) GST
If you are—or ever have been—a landlord, you would be aware that there is no GST in rental income. You would also be aware that when you buy a property with the purpose of renting it out, you do not claim back the GST on the purchase price. However, if you are buying properties for quick cash—that is buying properties at reduced prices, then selling them on again a short while later—you would be claiming back the GST when you buy. That is, of course, if you are registered for GST for this purpose. When you sell the properties on again, you will be paying back the GST on your sale prices.
I have a separate company set up for the wrap properties and for the trading (quick cash) of properties.
NB: There is also a separate trust which I control, set up for the purpose of holding my long-term rental properties.
When I purchase a property with the intention of doing a quick-cash/wrap/lease option, the property goes into my company name when settlement takes place. I can then claim back the GST portion of the purchase price. For example, if a property is bought for $90,000, the GST portion is 1/9, or $10,000. When my accountant does the next GST return for my company, this $10,000 is claimed back. Let’s say that the property is sold on for $108,000 on a wrap/rent to buy. The GST portion therefore is 1/9 of $108,000, or $12,000. This $12,000 gets paid back over the term of the loan, normally 20 - 25 years. The GST to be paid back is 1/9 of the principle portion (as opposed to the interest amount) being paid back on your loan to the bank. You can see that your accountant will have more work to do with wraps than with standard rental properties. Your accountant should be able to explain how this works in more detail if you need further help. Also, the IRD have not yet given a definite ruling on claiming back the GST, even though many of us have been doing them for more than three years. In the US, where a friend of mine has done hundreds of wraps, they do not have GST to claim back and they still work well. He actually uses investors to put up the money to buy the properties, and he does the rest including the management of them. They split the cash flow 50/50 between them. You can read more about this in his book ‘Money Secrets of the Rich’ by John Burley.
NB: The GST is a bonus to investors doing wraps, definitely not a necessity. The IRD could change the law at any time, so do not take it as a fact that you can claim it when you read this book, or that you will be able to claim it in the future.
2) Equity Used When Purchasing Wraps
After doing around eight wraps, I discovered that if I did too many more, I would soon run out of equity and wouldn’t be able to buy any more. This would mean having to either stop doing them sometime in the near future, or finding an investor, and using their equity. If an investor were to be used to purchase them, the cashflow would be split between us 50/50, as I mentioned above.
One way that I used to overcome this problem of equity being used, was to have two banks. What you can often do is buy a property through one bank and refinance through another bank (once the title has been transferred into your name, or your company/trust name, that is). You can only do this if you are buying properties at 80 - 90% of their market value; otherwise there is no point in doing this. Banks will generally lend you the lower amount of the contract price or a registered valuation when you are purchasing a property. So what I used to do, was first of all buy the property through Bank 1, and have the title transferred into my company name. If you have a line of credit, you may be able to buy the property outright. That is, without Bank 1 having to take any security over it. If you can do it this way, you will save hundreds of dollars in refinancing fees with each property you do. If not, allow for it when you do your calculations. So now that you own the property and the title has been transferred into your name, you now want to re-finance it with Bank 2. You may want to do this one to two months after you have purchased it. You simply go to Bank 2 with your valuation and ask to borrow 80% against this property that you now own. I am always totally open and honest with the banks as to what I am doing here. If you try to mislead them, you may get yourself into difficulty later on, so let them know what you are doing, and why you are doing it.
So, Bank 2 agrees to lend you 80% of a registered valuation (the 80% is based on the valuation excluding chattels).
An easier way to do this is simply say to your bank manager ‘if I can buy a property for 80% of what it’s really worth, how long would I need to hold onto it for, before you would lend me 80% of a registered valuation?’ Often you can get them to do this three to six months later; thereby taking back your equity you used when you first purchased it.
So, in effect, you can easily create a positive cash flow without putting any of your own money, or any of your own equity into these deals—if they are done correctly.
Therefore, the more you can do, the better. You add extra cash flow each time you do one, without using any of your own equity. If you had 10 properties set up this way, you could generate a positive cash flow of $500 - $700p.w. for the next 20 - 25 years! Even if you only managed to do two properties a year this way, in five years’ time, you would have 10 wraps up and running and giving you cash flow each week. Remember that you will have taxes to pay on this—but you would also have tax to pay if you’re earning $700p.w. working 40 hours a week in a job.
The Advantages of Wraps
Easy to manage;
Easy to sell to purchasers;
Immediate contract profit;
Positive Cash Flow for up to 20-25 years;
No repairs;
No maintenance;
Rates & Insurance are paid by the purchasers (in their weekly payments to you);
Can be done with no money down, or no equity used;
Purchasers in general look after the property better than tenants do in rental properties;
Less time to look after;
Doesn’t matter if the market fluctuates;
Purchasers can cash you out early as their equity allows;
GST—if you can claim it back upon the purchase of the property; and
If purchaser leaves, you can re-sell the property to someone else.
The Disadvantages
Purchaser ends up owning the property;
Take backs;
Purchaser gets any capital gains; and
Banks.
Banks
It is now important to put some major perspective on wrapping. Because of the bad publicity in NZ by some investors doing some crazy things in the market place, the majority of banks will not lend you money to do wraps now. That is, unless you have already proven yourself as a high net worth individual with an impeccable track record, or have done many wraps already. Even then, you may not get finance to do them. Personally, from what some of the people in NZ doing wraps have been doing, it really does not surprise me at all. These people are playing financial suicide with their borrowing, and their debt.
These are some of the common mistakes people have been making when doing wraps.
1) Not telling the lender they are doing a wrap—in other words, lying to their bank;
2) Taking out an interest-only type loan;
3) Using a revolving-credit loan;
4) Not having each loan stand by itself; in other words, having several properties under the same loan; or
5) Having their contract special conditions set up so that they can borrow or re-finance more than what the mortgage is to their purchaser; in other words, the loan they have on the property with their bank can be topped up at any stage, and therefore can potentially be at a higher level of debt than what their purchaser owes to them.
Also, another concern some banks have is that, if you ever went bankrupt, the bank may want to evict your purchasers, who have now built up equity in the home. The bank could then be seen as the villains for having to take back the property from the innocent purchasers, who have been until now, reliably paying their loan to you.
It is because of these reasons and maybe some others that most banks are not willing to lend money to people wanting to do wraps.
The other problem I see is when the investor doesn’t buy the property well below market price, and then sells it on again for well above its market price. I have heard of investors paying asking price on properties, adding $40,000 or more and then selling them on as a wrap.
This type of dealing will no doubt get others also appearing on ‘Fair Go’ with similar circumstances to what we have already seen in the past. The people doing crazy things out there in the market place have all but destroyed an incredible opportunity not only for us as investors, but also for our purchasers, who are getting to own their first home. Personally, I am not looking at doing too many more wraps now. The main reason I did them initially was to get some cash flow going to make the banks happier, so they would lend me money for more rentals. Now that I am generating cash flow from my business, I don’t need to work on generating more cash flow from wraps. Also, a big disadvantage with wraps is that you miss out on any capital gains. They have served their purpose well for me, though, providing me with the cash flow when I needed it most. If you are just starting to invest in property, I definitely would not recommend you doing any wraps, even if you could manage to finance them. Also, if you are already doing wraps and planning on doing any less than 10—12 of them in total, again I would not recommend it. There is far more accounting work involved in doing wraps and if you’re doing any less than 10, you will only be getting about $500 - $700 per week income from them. To me, it’s just not worth it for so little cash flow when you compare it to the extra work, the extra effort and the extra accounting costs involved. If you have already done some wraps and are still going, 10 would be the absolute minimum to do, in my opinion.
So, why do I mention wraps at all? Well, like I say, they have been my main strategy to create an excellent hassle-free cash flow for the last three years, and will still provide me with this for a few more years to come. This, in turn, has helped me to buy more rental properties. I have also gone into detail about various aspects of buying wraps, as much of it will apply to you when buying rental properties. Another reason is because there’s been so much mis-information about wraps. Many articles have been written by people that have no idea how wraps work. And of course, they have not done any for themselves. I find this particularly interesting as many of these people are investors or writers that should know better than commenting on subjects they know very little, or nothing about. This too has affected some of the banks’ thoughts and opinions on wraps. There has also been some media exposure which has shown some hair-brain scams that people assume are wraps, and are, in fact, something completely different. And the last reason that I mention wraps is simply to get you to think. To get you to realise that there are more ways to get wealthy in property than just the traditional buy and holds that most investors use. There may even be other creative ways to invest in property that no one has yet thought of, ways that will be the next bandwagon that many investors jump onto. That is, until all the rogues and charlatans get involved, and destroy it for everyone else!
NB: wraps have been around for many, many years, they are not new at all. However it has only been in the last three years or so they have had far greater exposure. They are being done in Australia on a much larger scale than here in NZ, and in the U.S. even more so. I think because NZ is such a small country when you compare it to the others, it only takes a few unethical and immoral investors for everyone to hear about it. This can then destroy an opportunity for the rest of us to help others get into homes that they could not otherwise do. Unfortunately most banks cannot see or distinguish the difference, so everyone loses.
A very interesting article Orion. Thanks heaps for posting it. I think I now know what a wrap is. Personally I think I will staw away from it, but it is good to know what it is all about. We are always learning.
Great post Orion - and really enjoyed your book; very inspiring!
I would agree that wraps are probably not the best way to go these days, however I am sure they have their place in a diversified property portfolio.
What method would you use today to build equity steadily over a 5-7 yearperiod then? i.e. if you set a goal to retire in, say, 7 years how would you go about it in today's market?
Lease options? Positive cashflow in fringe areas? Capital growth near CBD? Renovations? Or a combination of all?
The question you ask is answered to some degree in my chapter on pages 170 - 172, whether it is a new investor (172) or myself now starting again.
How I would go about it is different to how I suggest a person just starting out to go about it.
If it were me, as mentioned, I would find suitable properties below market value to on sell to other investors I know, for approx $5,000 per contract. I would then put deposits into long term buy and hold properties on P & I mortgages of say 15 - 20 years. The deposit would be sufficient to make the property slightly positive cash flow after all expenses, not including depreciation. I would also look at investors putting up money to purchase properties to renovate and sell on and split the profit, ie quick cash until I had the borrowing ability to once again do the same. Lease option would be a possibility, but to me buy & hold is the best long term strategy. Lease options are okay for medium term cash flow. The ideal is if you have a high income, or a business with excellent profits and put surplus money into deposits for long term rentals.
To hope to be a full-time investor when just starting out is not a good idea in my opinion. Like anything it takes time to know what you are doing, although it would be a very quick way of learning. If you have a partner that works and has enough money for you and family to live on, then that would be an exception. Re capital gains in CBD, from the book you hopefully would have realised that I never, ever, ever buy any property because I think it might go up in value. If it does go up, I feel lucky. I have sent an article to Marc that I recently wrote which goes into this a little more as well.
Regards
Graeme Fowler
Great post Orion - and really enjoyed your book; very inspiring!
I would agree that wraps are probably not the best way to go these days, however I am sure they have their place in a diversified property portfolio.
What method would you use today to build equity steadily over a 5-7 yearperiod then? i.e. if you set a goal to retire in, say, 7 years how would you go about it in today's market?
Lease options? Positive cashflow in fringe areas? Capital growth near CBD? Renovations? Or a combination of all?
Is it really true that NZ agents cash their commission in 10 days?
In Aus the agents don't get any money until settlement, so it is a lot easier to get by with a $1000 deposit, although they still push for the higher one (saves them having to chase the seller who is having to chase you if things go belly up I suppose).
Comment