What are Investment Wraps?

mortgage_finance_investment

The term wrap refers to a property investor who buys a property, using a mortgage and then on-sells the property to someone else and then providing vendor finance to the new buyer.

Sound confusing?

It might at first, but it’s not that complex of a strategy.  You see, some people out there want to buy a property to live in but for whatever reason, cannot secure finance for themselves.  They might be a former bankrupt or just have not saved enough deposit.  The reason isn’t too important.

What’s the Purpose?

The purpose of this type of strategy for an investor is to provide a service to those who want to buy a home and at the same time, earn significantly higher cash flows compared to a normal investment property.

Immediate, positive cash flow is always a great goal when it comes to property investing, because it means you are receiving income straight away instead of hanging around waiting for capital growth (which isn’t accessible as cash anyway until you sell or re-finance).

For a potential purchaser of one of these properties, there is the opportunity to get into buying a home although with a slightly higher interest rate compared to what the banks offer.  However in this situation it is a moot point, because the buyer would only go for this if they cannot secure finance in the traditional way.

This strategy is also known as “rent to buy” or “vendor financing”.

How does it Work?

Say you buy an investment property for $300,000 at an interest rate of 6.5%.

Your interest payments are $1625 per month on average.

You find a buyer for the property who is keen to get into owning their own home, but they have had no luck with traditional lenders.  Of course, you will need to verify their income and set up a financial agreement to determine what they owe you and how they pay you back.

You will probably want to get a solicitor to help with this part to make sure it is all legal and above board in your part of the world (this is definitely a legal technique in most parts of the world).

So the buyer is willing to pay a higher interest rate, just so that they can get into a home sooner, rather than possibly wait another couple of years and see property prices get even higher.

You get a deposit from the buyer and finance them at 8% per annum.

Their repayments to you are roughly $2000 per month which is $375 per month more than what you pay to your bank for the original loan.

An important thing to note here is that you still control the property.  The new buyers are still technically renting off you but with the option to fully purchase the property at the agreed value at some time in the future and with all payments being credited towards their loan.

So, you’ve just created for yourself a $375/month positive cash income from doing this deal.  The new owners also pay the council rates, insurances and all maintenance of the property as they are purchasing the property off you.  This is the same as if you are purchasing a property and the bank technically owns it, yet you still have to pay all the outgoings yourself.

In this example, $375/month of positive cash flow has been created, however this is just the tip of the iceberg and assumes that you paid market value of the property and on-sold it at market value.

You could easily double or triple this return by knowing how to buy the appropriate property below market value and then on-selling it at a slightly higher market value.  Not only does this substantially increase your cash flow, but it also guarantees a capital gain when the property is moved into the buyers hands further down the track.

Word of Caution

I have just scratched the surface on what is possible with this strategy; however I will say that this is not for everyone.  If you are a very passive investor and like to just buy, hold and watch your properties go up in value, this may not be for you.

However, if you are motivated and more of an active investor, this strategy can help you make leaps and bound towards owning a high positive cash flow property portfolio.

It is possible with this strategy to have enough positive cash flow to retire from your job in just a few years.

Further Information

I learned most of what I know about Wraps by reading Keith Mason’s EBook which is a great resource for knowing how to get started with this strategy and everything in between.  I have written a review which you can read here or you can visit his website directly by clicking here.

 



3 Responses to What are Investment Wraps?

  1. Angel says:

    Hi Darren, wrapping is not for me but I understand what it is for the first time. I’ve heard people refer to it but never knew how it worked. Thanks for your post.

    Angel
    Angel recently posted..Feature walls that POP – Part 1My Profile

  2. Wow, I never had any idea money could be made like this! Very enlightening information.
    [email protected] To Manage Stress recently posted..The Essentials for Stress ReliefMy Profile

  3. This is a great idea if you want to earn more money. I want to try this kind of business also. Thanks for the info.!

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