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use of wraps and lease options as part of overall strategy or not?

Discussion in 'Real Estate' started by jscott, 11th Jan, 2006.

  1. jscott

    jscott Well-Known Member

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    Hello, I'm new to the InvestEd forums so this is my first post...

    I became interested in property (and investing as a whole) only a year ago after reading a Steve McKnight book. Since then I've poured over forums and books and purchased 7 properties using wraps on some and more recently lease-options. I've found that for my last couple I've had to use low-docs but I guess there's no harm in that.
    The deals I've done in the past 12 months are all going smoothly and the tenant/buyers are extremely happy.

    My strategy is to use the income produced from the lease-options and wraps as well as my day job to pay for long-term buy&holds (I still need to read up on Managed Funds etc as have never used them). I'm looking at purchasing my first buy & hold here in perth now (other than ppor that is) that will be paid for out of the cashflow from the wraps/lease-options.

    I guess my question is... do people think that this is a valid way to go, or would I be better off putting my efforts purely into buy&holds and forget about the lease-options/wraps? If I only did buy and holds it would no doubt be a slower process as I'd have less cashflow but much more captial gains in the long-term.

    I was planning on doing another ten lease-option deals this year, but now not sure...

    Jason.
     
  2. Bob

    Bob Well-Known Member

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    JScott,

    I purchased a number of lease options over the last 6 years or so, all in Brisbane. They were 3 year options and all but one has been exercised. They are great in an up market as Brisbane has recently gone through and I used them to offset some neg gearing on properties I intend to hold. Unfortunately, there is that loss of equity issue. I factored in a 5 percent capitalised capital growth into the exercise price which is 3 percent below the historical level. I would LOVE to access that lost equity for the Navra share fund/s. Saying that, I can't complain because I made money but not as much as I could have.


    Bob
     
  3. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Jason,

    I looked at doing wraps about four years ago, but decided they weren't for me. The question I'd be asking myself if I was you is 'Is this strategy working for me currently?' If it is, great! If not, then maybe look at alternatives.

    Mark
     
  4. jscott

    jscott Well-Known Member

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    Hi Mark and Bob, Yes the strategy is working for me well now and I have a never ending line of people wanting me to find them houses.
    I guess people are right in saying that I'm potentially throwing away equity, but it provides a great cashflow to both allow me to take more time off from the day job (as we've recently had a baby) as well as put it into other buy and hold properties.
    I guess I was trying to determine if I would be better off using things like the Navra fund or just buy and hold proeprties only for the longer term.
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi J

    Welcome to InvestEd. Sounds like you've got a good business going with your wrapping/lease optioning. The question for you is:

    a) do you concentrate on the business, reinvest your profits and grow it to create an ongoing revenue stream? If so is it scaleable, could you eventually employ people to do what you do (or at least do the boring back office stuff :D )

    b) do you keep doing the wrapping but start investing in some buy and holds and or shares/managed fundsetc?

    c) do you abandon the wrapping business and invest purely in buy and holds, shares/managed funds etc?

    I reckon one way to help you answer it is to sit down and do some forecasts of where each option will take you financially. As your doing wraps you must be familiar with Excel surely? ;) I'd sit down and project forward some reasonable assumptions about the number of wraps you might do over a few years, inflation, capital growth for houses and shares, interest rates, yield for managed funds if used for income etc and then project that forward and see where you end up.

    Whatever gets you the biggest prize with the least effort wins :D Just kidding, lifestyle factors (such as spending more time with the new bub) are pretty important too.

    Specifically with regard to wraps etc, it seemed to me when I investigated it that you were giving away the REAL prize which is capital growth. But if you're running it with a business mindset rather than as a form of investing then it doesn't matter if the "stock" eventually increases in value after you've sold it :p

    Hope that gives you some food for thought.

    Cheers
    N.
     
  6. jscott

    jscott Well-Known Member

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    Thanks for that post Nigel.

    Yes - I do consider the wraps/lo's purely as a business and I'm already looking to outsource the backend functions.
    The whole idea is to bring in income to supplement the day job and pay for long-term investments and maybe start living of some equity down the track. At this stage those long term investments would be property but am also interested in managed funds such as the navrta fund - learning all about it from this site and the somersoft site.

    I guess I will have to sit down and project a plan on excel for this model as opposd to purely buy&holds and/or MF's.

    * Slightly off-topic question - With MF's or shares can you normally only lend up to a 50% LVR. Lots of people talking on this forum about 50% margin loans...
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No - margin lenders will lend up to 75% on certain blue chip shares or high quality managed funds, less for shares/funds considered more volatile (or newer and unproven).

    Many people suggest that you limit yourself to 50% LVR though - to minimise the risk of a margin call should the market drop suddenly.
     
  8. Tzaki

    Tzaki Well-Known Member

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    We have a couple of wraps in Rocky, however we will not be doing more, as the equity loss is too great for the cash return (these are JV wraps with partner doing the day to day stuff).

    Instead we have switched our strategy to using the Navra fund for cash production and cap growth properties continuing our collateral gathering, with a pumping of excess cash into the fund and revaluing for equity release (again into the fund or annother property).

    Good luck with the options, it was the next step I was looking at before finding the fund.
     
  9. jscott

    jscott Well-Known Member

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    Hi Tzaki,

    When your doing JV wraps the returns are only going to be half what they would be if you were doing them yourself so I could defintely see it not adding up in your case...

    I guess the answer is whether or not the wrapping or lo'ing business provides a better return to be used in buying cap growth properties than does putting the money into an MF such as Navra...
    Also factoring in that the wraps business can take quite a bit of work, whereas with an MF you don't have to do anything but probably more susceptible to market forces.
    Hmm... the jury is still out for me, I need to put together a spreadsheet.
     
  10. Jacque

    Jacque Team InvestEd

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    Hi Jason
    If wraps and LO's are working for you so far as an income producing business, and you are comfortable with them, then I don't see why you shouldn't continue to do what you know best :)
    Are you getting your wrappees to refinance after a 12-24 mth period (a la Otton style) or holding out for the length of the loan (McKnight method)?

    The reason I ask is that, if you aren't getting clients to refinance, then your lending capacity is indeed going to be somewhat limited at some stage (as I'm sure you're already aware) and you may hit brick walls when it comes to getting some money to purchase property/shares etc.
     
  11. jscott

    jscott Well-Known Member

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    I've been doing a combination of both really... With the long term ones you've got cashflow so wouldn't that help with getting additional finance?
     
  12. Jacque

    Jacque Team InvestEd

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    It will, to a point. However, because of the way wraps work, you would know that the title of the property is still in your name until the purchasers refinance, so according to the banks you have borrowed for seven properties.....
    A big tying up of your capital can be a problem. And, naturally, you can't use the increasing capital growth to draw down upon (as it's not yours).
    Another reason the use of wraps appears to be capital intensive is because the equity you put in by the form of cash deposits cannot be put to work elsewhere to create more wealth. It lies dormant until the property is re-financed to allow the tenant/buyer to take a first mortgage. Yes, some wrappees will put in a sizable deposit (especially if they also have access to first home owner grants) but it still often falls short of the entire amount required.
    I guess time will tell when you approach your lender for another loan, Jason. Keep us posted as to how it all goes- I will be interested to see how it works out. There's always a solution somewhere- sometimes you've just got to be creative to know the "how" :)
     
  13. jscott

    jscott Well-Known Member

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    Thanks Jacque, a combination is probably the best way to go. After reading about Living off Equity, its like turned a light on inside... Shame Steve N. doesn't run his courses in Perth. Eagerly awaiting further installments to the LOE materials on this site.

    Steve if your listening - how many attendees would it require to get you over here?
     
  14. jscott

    jscott Well-Known Member

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    Following on from the contents of this forum topic, what is the best way to compare different types of investment. I'm comparing the returns from completing wraps/lease-options with investing in a fund such as the Navra retail fund.

    From my understanding using the IRR will produce a % figure that you can essentially compare to what you would earn today in a bank account. But... there are so many other ways to look a percentages - total percentage over a number of years, Cash on cash return each year, etc. etc.

    As an example using IRR in a spreadsheet, I've worked out that so long as the Navra fund returned greater the 7% per annum the IRR figure is better for the fund than investing in wraps/lease-options (when the term of the investment ranges from 1 to 10 years)!!!

    Is IRR the right measure I should be using to compare?
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Just to make your job more difficult ... also consider the leverage you could get on funds like NavraInvest ... even modest gearing ratios can dramatically increase the returns over time.
     
  16. jscott

    jscott Well-Known Member

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    yeah I haven't factored that in yet... don't think I need to based on the results already as the fund already looks better without using leverage. The relevance of using a measure such as IRR is what I'm querying...
     
  17. Rick Otton

    Rick Otton Member

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