Sandwich Lease Option - Risk Mitigation

[Cliffy]

I am looking to put together a SLO deal on a property like this:

My purchase price: $445K
Two year lease @ $460pw

I will look to lease/purchase to a tenant buyer at:
purchase price: $480K
rent: $600pw
rent credit: $100pw
deposit: to be negotiated, hopefully at least $10K

Now, because this is a more expensive property my concern is if the tenant/buyer defaults I could be stuck with the outgoings.

Does having a fixed term tenancy the same term (2yr) as the lease mitigate this risk?

[JohnL]

There was an article in the latest Property Investors mag about the different tenancy types. I can't remember the detail but I think the fixed term wasn't bullet proof. May be worth a read.

When I looked at lease optioning, the tax treatment looked a bit grey. I couldn't see how you could get around the trading problem easily as it would be hard to defend an arguement that you didn't purchase it with the intention to sell. Is it the same with a SLO. How do you handle the tax and GST issues?

John

[Cliffy]

How do you handle the tax and GST issues?

By paying it :-)

I'm quite happy to pay tax when making a profit.

[Houghie]

Hi Cliffy

Im not totally sure on this one but I guess the way you might mitigate against this risk, to a certain extent, is increase the required non-refundable deposit from your tenant.

If the agreement falls over then you get the chance to start the whole process again, with hopefully limited downtime, a new non-refundable deposit, potentially a higher selling price and higher weekly payment.

Obviously SLO's can raise some ethical questions about investors setting up tenant/buyers to fail in order to make this increased financial gain so, from my perspective, I think we have to ensure we are very careful in this area for a number of reasons.

With the SLO setup I think that the contract with the tenant for the rent is virtually the same as a normal fixed tenancy contract (and another contract for the option to buy isnt it?) so I would gather that it is about as tight as the normal Fixed Term Contract. Im a bit hazy on these contracts to be honest.

Hope that helps in some way. Be interested to hear how it all comes together Cliffy. Havent done a SLO yet but plan to in the future.

Cheers

Arnie

[Cliffy]

Hi Arnie,

I agree with your points.

I don't think it is ethical to create a SLO hoping it will fail, to collect another deposit. I will endeavour to ensure the tenant/buyer can afford the payments.

My only concern is being a higher priced dwelling, it may be more difficult to find another tenant/buyer - ie may be some down time if it does fail.

Hopefully it will work out OK.

Grant

[Dean@Massiveaction]

The numbers don't work Grant, forget it. I've just done an SLO on a property for 415K with tenant buyer paying $741 a week rent only and that only just is worth doing. Your return on your numbers is less than 6%, don't do it mate, it doesn't work!!

[donna]

Cliffy,

You may be interested in having a chat to Graeme Fowler regarding a seminar he is holding for property traders....sounds like something you'd be interested in.

The seminar is on 8th Nov 05 so if you're interested best to contact him soon.

Cheers,

Donna

[Oopsick]

Could anyone please give a link to the seminar details?

[Dean@Massiveaction]

For sandwich lease seminar http://www.globalbusinessideas.com/i...s/Page1408.htm
Don't know anything about Graeme's. Is it advertised at PT anywhere??

[Cliffy]

The numbers don't work Grant, forget it. I've just done an SLO on a property for 415K with tenant buyer paying $741 a week rent only and that only just is worth doing. Your return on your numbers is less than 6%, don't do it mate, it doesn't work!!

I don't agree Dean.

This is a SANDWICH lease option (not straight lease option), I pay the vendor a straight rent ($460pw) - he makes up any shortfall in carrying costs (mortgage, rates, insurance etc.) and then I charge tenant/buyer $600pw (with $100pw rent credit) giving me $140pw +ve cashflow.

If the deal goes full 2 yrs, on sale of $480K to tenant/buyer less purchase from vendor of $445K less 2x52x100($10,400) rent credit, I get $24,600. (Not counting any deposit here).


As this thread was alluding to, my only concern would be can a tenant be held liable to the full cost of fixed term tenancy if they default and another tenant can't be found?

I would be interested to see your logic of how the numbers don't work (maybe I'm missing something?)

You may be interested in having a chat to Graeme Fowler regarding a seminar he is holding for property traders....sounds like something you'd be interested in.

I would definitely be interested in this. Haven't seen it mentioned anywhere. Do you have any other details?

Grant

[Dean@Massiveaction]

Sorry Grant, didn't see the SANDWICH!!

[Cliffy]

PHEW! You had me worried I was missing something!