Apartment selling as per a retirement village arrangement

[Oopsiedaisies]

Looking at a newly listed property, looking like a very good buy but then this.....from vendor (actually I think he is on this forum?):
The sum of the contract is that the incoming purchaser will pay $490,000 with a minimum equity investment of $60,000 and the balance financed by the seller on which the purchaser will repay with interest, just like a bank loan. This will give the purchaser full rights to occupancy and subletting. When the purchaser eventually sells, they will receive back their initial $490,000 investment guaranteed, less any debt repayments.

The seller keeps the risk (and reward) of capital gains while the purchaser gets a property for 70% of its value so that rent yield is over 40% higher and, hence, a higher return on equity. For a first homebuyer, it allows a more affordable option to live in a property valued higher than what they could otherwise afford.

It is different, but a time-tested contract in the very successful retirement village industry that is now making its way into the mainstream markets.

Is this coming in now? Sounds crap.

[Davo36]

Never seen it in the general market, only in retirement villages as you say. They normally deduct any redecorating costs too.

Kinda interesting if it is indeed going to be offered by vendors...

[Beano]

Looking at a newly listed property, looking like a very good buy but then this.....from vendor (actually I think he is on this forum?):
The sum of the contract is that the incoming purchaser will pay $490,000 with a minimum equity investment of $60,000 and the balance financed by the seller on which the purchaser will repay with interest, just like a bank loan. This will give the purchaser full rights to occupancy and subletting. When the purchaser eventually sells, they will receive back their initial $490,000 investment guaranteed, less any debt repayments.

The seller keeps the risk (and reward) of capital gains while the purchaser gets a property for 70% of its value so that rent yield is over 40% higher and, hence, a higher return on equity. For a first homebuyer, it allows a more affordable option to live in a property valued higher than what they could otherwise afford.

It is different, but a time-tested contract in the very successful retirement village industry that is now making its way into the mainstream markets.

Is this coming in now? Sounds crap.

Not read the lease but at first glance it looks pretty good to the purchasers and crap to vendor.
Not certain how the seller makes his money ?

[Davo36]

Not read the lease but at first glance it looks pretty good to the purchasers and crap to vendor.
Not certain how the seller makes his money ?

Well in retirement villages they make their money by getting a unit back from the owner who has passed away. It's now worth say $750,000, and this is what they sell it to the next person at.

And also they deduct for redecoration and so on as well.

With the above, there'd need to be some limit on the timeframe of the lease I'd think.

[Beano]

It looks a bit like a leasehold.With house having a guarantee resale price , no ground rent , no rates , no insurance.
At first glance it looks pretty attractive to the purchaser.

[BigWal_v2]

... With house having ... no ground rent , no rates , no insurance.

Ummm - where did any of the previous posts say that?

At first glance it looks pretty attractive to the purchaser.

Actually, I disagree.

In simple terms, looking at gross returns, in Scenario B you are investing a bit less money, but foregoing the chance to make capital gains on it.

So generally* your rents need to inflate faster than house price inflation for you to compensate for the lack of capital gain.

And bear in mind that's only taking gross returns into account!. If you have any sort of expenses (maintenance / management fees for example), they will be proportionately higher for the second scenario, so your rent inflation rate will need to be even bigger than the house price inflation rate to compensate.

* By my modelling, if both house and rent inflation are equal, and about 2% or less, Scenario B wins by a a very little. Anything over 2% for both, and scenario A wins.

---------

As for borrowing the money for each scenario? I haven't bothered trying to model that, as I've got better things to do with my life.

My gut feel is that borrowing makes Scenario A a bit more expensive (you're borrowing more money, so your costs will be higher), so it evens the playing field a bit between the two scenarios.

On the other hand, as long as house prices increase by more than your borrowing rate, Scenario A gives you leverage on the money you've invested You get no leverage in Scenario B, which could rapidly and drastically lower its attractiveness.

----------

In summary - in Scenario B, you're essentially lending 70% of the asset to the vendor for them to make capital gains on.

As compensation you get a higher rental return.

But, like I said, even in the simplest terms (i.e. excluding costs, and assuming you didn't borrow the money)

• If house and rental inflation are equal, and anything over around 2%, Scenario B loses.
• If house inflation is greater than rental inflation, Scenario B loses.

There's a reason why retirement homes have this model. It's to make them money.

If they could get higher returns by just buying properties outright and renting / leasing them they would.

[donna]

I know a couple who have jumped into retirement care as the returns are better than residential investment - plus they can sell up later on for a good chunk of change.

cheers,

Donna

[Beano]

Ummm - where did any of the previous posts say that?



Actually, I disagree.

In simple terms, looking at gross returns, in Scenario B you are investing a bit less money, but foregoing the chance to make capital gains on it.

So generally* your rents need to inflate faster than house price inflation for you to compensate for the lack of capital gain.

And bear in mind that's only taking gross returns into account!. If you have any sort of expenses (maintenance / management fees for example), they will be proportionately higher for the second scenario, so your rent inflation rate will need to be even bigger than the house price inflation rate to compensate.

* By my modelling, if both house and rent inflation are equal, and about 2% or less, Scenario B wins by a a very little. Anything over 2% for both, and scenario A wins.

---------

As for borrowing the money for each scenario? I haven't bothered trying to model that, as I've got better things to do with my life.

My gut feel is that borrowing makes Scenario A a bit more expensive (you're borrowing more money, so your costs will be higher), so it evens the playing field a bit between the two scenarios.

On the other hand, as long as house prices increase by more than your borrowing rate, Scenario A gives you leverage on the money you've invested You get no leverage in Scenario B, which could rapidly and drastically lower its attractiveness.

----------

In summary - in Scenario B, you're essentially lending 70% of the asset to the vendor for them to make capital gains on.

As compensation you get a higher rental return.

But, like I said, even in the simplest terms (i.e. excluding costs, and assuming you didn't borrow the money)

• If house and rental inflation are equal, and anything over around 2%, Scenario B loses.
• If house inflation is greater than rental inflation, Scenario B loses.

There's a reason why retirement homes have this model. It's to make them money.

If they could get higher returns by just buying properties outright and renting / leasing them they would.

If someone would post the full lease then we can make genuine comments.
It's always difficult to give constructive opinion when the full details are not devulged

[ermat]

I know a couple who have jumped into retirement care as the returns are better than residential investment - plus they can sell up later on for a good chunk of change.

cheers,

Donna

Can you elaborate Donna. How does it work.