Here's the scenario,

Say you had a few grand up your sleeve and wanted to make a few small scale investments for say 5 or so years down the track.

How would you go about using this money? Wine, gold, term deposits, art (probably not for me)

This is more a hypothetical one, just triggered my thoughts looking through the brownlow odds thinking I should just put my house on gaz.

Cheers

Do a VENDOR LEASE on a property. Here's how it works.

You buy a basic house for, say, $300K, and borrow the money from the bank (7%). You then advertise for someone who the banks will not lend money to. You then set up a LEASE PURCHASE contract with them, and sell the house to them for $350K at 9%.

In effect you they are paying you 9% on a $350K loan, and you then pay the bank 7% on a $300K loan. After about six years, they have enough equity in the house to get a 7% loan from the bank, so they pay out the contract they have with you.

At first it sounds risky, but when you compare it to shares, it's actually a lot better than it sounds. You need to buy a basic property for two reasons. First, it won't fall in value too much if there is a property crash, and second, the people you are marketing to can only afford the arrangement on a basic property. If they default, then the property remains in your ownership, and you just advertise for someone else.

All you need to do this is a steady modest income and small deposit to get your initial loan from the bank.

Vendor Lease (or maybe it is flipping) isn't legal in all Aussie States. I understand the concept, but my concern would be if the 'other party' defaults, how long will it take, and how much will it cost to evict (squatters rights) them.

Buy some die cast models that are becoming increasingly rare....like a Power Loader from the movie Alien........and advertise on ebay until a collector decides they need to fulfill their obsessive compulsion to collect such a rare item.

Worked for me with some Star Wars Micro Machines. I'm such a nerd at times I made a tidy margin on a very rare Death Star and on some mint condition Captain Scarlett Vehicles in mint condition boxes (however these cost quite a lot to begin with and took ages to find and procure). The next really collectable items will be contemporary Lego sets kept in mint condition

Or else buy gold.....but that is kind of boring.


You can always buy an investment property....pay a real estate agent to provide documentation that supports that you don't live at either address (that the property is rented to a third party) then claim both your residential property and investment property against your taxable income and pay the real estate agent a cough-commission-cough for service above and beyond what is normally provided. Unethical and illegal but too many people are getting away with this arrangement so it has some merit. I wouldn't do it personally nor do I condone this behaviour but it has become an alarmingly widespread practice.

Harrow said..

Do a VENDOR LEASE on a property. Here's how it works.

Have you tried this Harrow? I have. Our first purchaser defaulted and was foreclosed on... after SIX months of no income. The second one was ok and we ended up making our margin.

BUT...

What you forget is the time and effort that goes into managing the contract. It is a lot of work.

Add to that, if you want to be the "bank" for a Vendor Finance you now have to be a paid up member in an Eligible Dispute Resolution Scheme. Scheme being a slightly incorrect word here. It should be Scam. You basically pay to be a member so that if the buyer doesn't like something and you can't resolve it between you they get to take it to the EDR who then rule in their favour. So you pay to get potentially shafted. And that is after the cost of being in a scam like that takes away ALL your annual profit so you have to rely on the back-end gain (which is taxed as Capital Gains) to make any headway.

Far easier to find a less labour intensive form of investing (and for the record I still have one Vendor finance running along with a couple of rentals and some funds invested in the Share Market. Give me shares any day...)

Mahanumah said..

Harrow said..

Do a VENDOR LEASE on a property. Here's how it works.

Have you tried this Harrow? I have. Our first purchaser defaulted and was foreclosed on... after SIX months of no income. The second one was ok and we ended up making our margin.

BUT...

What you forget is the time and effort that goes into managing the contract. It is a lot of work.

I have a friend who has 15 properties going. He has had 2 run to completion, and 2 default. He is at his limit of how many properties the bank will elt him own, so now he's after people that want to come in. They provide the finance, and does all the leg work. His wife does all the book work at home minding their young kids.

Harrow said..

I have a friend who has 15 properties going. He has had 2 run to completion, and 2 default. He is at his limit of how many properties the bank will elt him own, so now he's after people that want to come in. They provide the finance, and does all the leg work. His wife does all the book work at home minding their young kids.

Interesting thread.

I am not aware of any retail fund manager involved in residential property. There could be a message in that.

Harrow said..

Mahanumah said..

Harrow said..

Do a VENDOR LEASE on a property. Here's how it works.

Have you tried this Harrow? I have. Our first purchaser defaulted and was foreclosed on... after SIX months of no income. The second one was ok and we ended up making our margin.

BUT...

What you forget is the time and effort that goes into managing the contract. It is a lot of work.

I have a friend who has 15 properties going. He has had 2 run to completion, and 2 default. He is at his limit of how many properties the bank will elt him own, so now he's after people that want to come in. They provide the finance, and does all the leg work. His wife does all the book work at home minding their young kids.

Might be worth running it past a lawyer before giving your mate any cash........

By "a few grand" do you mean <$10K, <$100K or a wealthy person's definition

What is your appetite for risk? This is a significant factor in how you invest.

If you can't afford to lose any of your capital, go safe. Rewards will be relatively lower but you'll sleep better.

If it's play money, and your kids won't go hungry, then you might want to take some risk.

It's a spectrum, understand your risk and take an approach that's consistent with that.

For me, low risk is important but simplicity is the most important thing, I have two young kids, I earn ok, so I want simplicity as my priority. So my $ just goes to mortgage payments and at tax time it's super easy. No stress, no risk, no effort. Not for everyone but works for me and mine.

[

Mahanumah said..

Harrow said..



Do a VENDOR LEASE on a property. Here's how it works.

Have you tried this Harrow? I have. Our first purchaser defaulted and was foreclosed on... after SIX months of no income. The second one was ok and we ended up making our margin.

BUT...

What you forget is the time and effort that goes into managing the contract. It is a lot of work.

Add to that, if you want to be the "bank" for a Vendor Finance you now have to be a paid up member in an Eligible Dispute Resolution Scheme. Scheme being a slightly incorrect word here. It should be Scam. You basically pay to be a member so that if the buyer doesn't like something and you can't resolve it between you they get to take it to the EDR who then rule in their favour. So you pay to get potentially shafted. And that is after the cost of being in a scam like that takes away ALL your annual profit so you have to rely on the back-end gain (which is taxed as Capital Gains) to make any headway.

Far easier to find a less labour intensive form of investing (and for the record I still have one Vendor finance running along with a couple of rentals and some funds invested in the Share Market. Give me shares any day...)

Fk me, it must suck to be rich enough to be able to do that.
I'd love to get a house by being the purchaser in that sort of arrangement.... anyone...?

Rudebeef said...

Certainly not in for the big money, was more thinking of a sit and wait sorta forced savings for later.

If your talking about that sort of money, put it into your mortgage.

If you want forced savings because your a spendthrift and don't have a mortgage. Try this from left field. Tell your employer (on your tfn declaration) that you have a HECS debt and student loan (HELP?). You will be forced to save by the ATO, who will give you a nice fat tax refund every twelve months. Creates capital for greater things.

Good plan for shopaholics and impulsive types with no self control.

Rudebeef said..
Here's the scenario,

Say you had a few grand up your sleeve and wanted to make a few small scale investments for say 5 or so years down the track.

Cheers

If you have a mortgage, put it on that. If you don't, then think about salary sacrifice into super. Neither sounds terribly sexy, but they are the simplest tax effective strategies around. Start thinking like this when you are young, and the greatest force in the universe (compound interest) will be your best friend.

Harrow said...

No, he has no free labour. It is his wife's job. She could not do this and do another at the same time. She works for the $90K, but it is entirely flexible for her looking after the young family.

And now we get to the real truth. It IS a full time job to manage that many properties. Not something that can be achieved when both partners are working...
So to achieve it one partner needs to quit their job which reduces your income and by extension, your borrowing capacity. Getting to a $90k return on these needs a pretty big investment. Based on your figures earlier your mate must have invested roughly $4million to get where he is now. Tough ask on one income because after starting two of these the management of them starts to take a lot of time. Second income is gone before you get to the big return

Mahanumah said..
And now we get to the real truth. It IS a full time job to manage that many properties. Not something that can be achieved when both partners are working...
So to achieve it one partner needs to quit their job which reduces your income and by extension, your borrowing capacity. Getting to a $90k return on these needs a pretty big investment. Based on your figures earlier your mate must have invested roughly $4million to get where he is now. Tough ask on one income because after starting two of these the management of them starts to take a lot of time. Second income is gone before you get to the big return

He has had to put up very little of his own cash, and he certainly doesn't earn mega bucks from his day job. That is why he chose this strategy. He only needed to come up with the deposit for the first $300K house, say $30,000. After that, the rest is positive cash flow from day one. Each year he has added one more house, using the income from the first house in first year for the deposit on the second house the second year. He managed it in his spare time on the first house, but of course the time required has grown over time, as has the income. But that was always the idea, for his wife to able to stay home and have total control over her work hours. Not sure what your arrangement was, but somehow his were a lot of work for setting each one up, but pretty breezy after that. It's a sweet deal, who else will pay you $90K to stay at home and mind your kids, squeezing a few work hours in here and there? It's no get rich quick scheme, it's a considered investment strategy over a long period of time. But you are right, he is at his borrowing capacity, which is why he is now starting joint ventures. He's got a web-based app that allows the whole thing to be run from anywhere over the internet, including automatic deduction of rent from his customers bank accounts, etc. The overhead of each new property is minimal now that he has all his automatic accounting systems runnning. Would you give up your day job to do it? Probably not, but if you wanted to quit work to look after kids, it works for them. I appreciate all your earlier comments. I always thought the same when he kept inviting me to get involved over the years, but somehow he has made it all work. Over time he seems to have developed a knack for choosing the right properties and screening for the right clients.

But then, that is where the joint venture comes in. You provide the income to secure the loan, and he does all the work for you. All you need to do is sign a piece of paper, and you get a cash positive investment, and someone to do all the work.

The funny thing about it though is his attitude. It all seems so easy to him. Here is an example....we were at his place for dinner a little while ago on a Friday night. His wife is flicking through the real estate section and says to him, "Here's a good one, go and buy this tomorrow." So he drives down to Wollongong the next day and buys the house. A couple of weeks later he has it listed on his web-site as a "Rent to own" property, and then a few weeks after that has someone signed up and is automatically debiting their account each week for the income. Now his wife just has to add it to the accounting books. I would have agonised over that decision for months, and then worried myself sick I would not be able to find some one to sign up.

^^^i understand this but this risk for return is not worth it at all. If all of a sudden he has 4-5 go into default, he is in the poo, the repayments still revert to him, what if he cant get them out for 6/9/12 months. All good when everyone is paying. What you have to remember is, he is giving loans to people at a higher rate than the banks and to people who cant get a loan=higher chance of default+risky, for $90k a year, no way mate, not worth it at all. Dont get involved.
Long term nothing is growing the vendor loan just runs out client owns the house, the margins on this are seriously low, they take a wage, so what. With any investment, the word investment is the key, so you invest in the /your future and you have something at the end of it.
People love to tell you the good news and keep the bad news to themselves generally, just like crew who bet on the horses.

There are much easier safer ways to make money.

myusernam said..vendor finance, also known as a wrap. not without it's risks (as is anything worth making money) from what I understand you have to be pretty ruthless if the people default. Could get very messy. Basically they are paying your mortgage for you at a higher rate with no title to the property. Not all that ethical... If interest rates go up you could have headaches. There's a reason why the banks won't touch them. Still I wish I had gone that way instead of mistakes I have made. For more info check out john burlinson I think. Plenty of people out there doing it. See lots of signs and newspaper ads around here for them

Yeah, you need to kick them out if they don't pay, but what does a bank do if you don't pay? Same thing. Ethical? Well, they can't get a loan any other way, and you are giving them a chance that they have a choice to take if they want. If they default, subtract costs and return any equity left over to them. Seems fair. Risk, yes, but diversify with several properties. I've lost a lot more on shares at times than the lower end of the property market is going to fall. Why won't the bank touch them? Usually income that can't be proven, or just too undisciplined to save a deposit. Secret is to screen for the right client.

the gibbo said..If all of a sudden he has 4-5 go into default, he is in the poo, the repayments still revert to him, what if he cant get them out for 6/9/12 months.

What if 4 or 5 default? If he had started all 15 last year, he would be deep in the poo. But he starts 1 or 2 each year. After 1 or 2 years, depending on the clients initial deposit, he is above break-even for a default on a property, so even if all his properties defaulted now, he would still be above water over all. (Which is a lot better than I did on the share market crash a couple of years ago. Six figures backwards. ) Their not renting, they are on a purchase contract. He's had to kick two out, and seemed to have no trouble getting them out in a few weeks. (After sitting down with them first too see if there was any way he could help them budget to stay in.)