As an investor, how did I use vendor finance?
Starting out as a property investor I was very much aware of the importance of cash flow. I knew that it would be an integral part of my investment strategy
to build and maintain a strong cash flow position. It was a strong focus of mine from the outset, particularly given my financial position at the time I was building my portfolio – limited capital and a very modest income.
My personal property investment strategy was quite heavily weighted on purchasing properties that were generating good income, in part given my personal circumstances, but also because it just made a lot of sense to me to purchase assets that produced income over and above the costs associated with holding that asset. This wasn’t always achievable with the properties I was buying and I was finding I needed to contribute funds to the portfolio to support it on a monthly basis.
Despite having some properties that were making money each month, albeit only by a hand fall of dollars, it only took some small unanticipated expenses to be in negative cash flow territory. I was also finding the more properties I was buying, the more exaggerated the issue became. If I was going to continue to grow and expand my property portfolio I needed to find a solid cash flow solution that would turn this situation around.
I was introduced to vendor financing around 2006 and became very interested in the concept immediately. I tried to find out as much as I could about how it worked and search for people who could help me implement it. My initial experiences were less than ideal and the people I entrusted to help me had a lot of fundamental issues with their implementation of the strategy. A key aspect to a successful terms contract agreement is have a credible purchaser and this was the area that the people I engaged to help got it horribly wrong.
As my first 3 properties I purchased specifically to use a terms contract strategy on slowly started to unravel, it became clear to me that the purchasers I had been advised to sell my properties to were unsuitable for this type of transaction. Failings in two key areas became apparent, lack of deposit put down by the purchaser as well as very unstable employment history in conjunction with the use of government benefits to demonstrate capacity to service debt. Looking back now, those first 3 attempts at making this strategy work were destined to fail from the outset.
Believing in the concept, and accepting my failed attempts to make this strategy work were due to getting the fundamentals wrong, I set out to better educate myself and find the right people to help me execute this correctly. It wasn’t long before I was surrounded by experienced people who were having success with the strategy. With their help and guidance, I was able to turn a quite unsuccessful moment in my property investing journey into a very successful and important one for my growth going forward.
At one point I had just over 10 of these deals in place making anywhere from $600 - $1000 a month positive cash flow after all expenses. This couldn’t have come at a better time as unbeknown to us at the time, we were heading for the GFC and interest rates were rising putting my portfolio under its most extreme cash flow pressure I had experienced. This surplus cash flow I had created not only ensured I survived the GFC well, but strengthened my portfolio to enable me to expand it at the rate I wanted to.
7 years on from when I first came across the terms contract concept, I am now able to reflect back on how this strategy has played out and how do the agreements reach a conclusion. I’ve had a number of purchasers fall behind with their financial obligations of the agreement and I have been required to move them on from the property. On the surface this may not appear to be a desired outcome but it’s actually not as bad as it sounds. Some people will fall behind, it happens on conventional contracts as well, and they need to take responsibility for that situation. In this instance, the purchaser moves out of the property and no longer has any entitlement to the property. If there is equity that has been built up over the time the purchaser has been there then that is theirs, and as a vendor I am obligated, and do, pay that to them. I can then enter into another terms contract agreement, rent the property out or sell it.
In my experience, most purchasers will meet their obligations under the agreement and the terms contract works well for both parties. Most of the terms contracts I have entered into are still in place and working well for both myself and the purchaser. The longest has been going for around 5 years and I say it won’t be many more years now before there has been adequate growth in the properties for the purchasers to seriously consider refinancing and completing the agreement. I look forward to these coming to successful conclusions where both parties have achieved their objectives and benefitted accordingly.
Deciding on what to do with a property when I take back full control of it will depend on what my property portfolio needs at the time. If it needs additional cash flow then I will on sell it again on a terms contract. If the cash flow position of the portfolio is sound then I will most likely rent the property out which really is a fabulous outcome for the vendor/investor. If my portfolio is in this strong cash flow position I can now change strategy with the property and benefit from the capital growth in the future.
For me personally, terms contracts played a significant role in allowing me to build a reasonably large property portfolio and manage the cash flow in a way that required very little input financially from me personally. This was a very strategic decision I made as I didn’t want to be a slave to my investments and truly wanted them to work for me. For some, terms contracts are the primary investment strategy delivering great cash flow which results in financial flexibility by providing an alternative to working a regular job. For me, it added strength and diversity to my portfolio, and looking back now even after a rocky start, was one of the best decisions that I would repeat again if starting over.
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Back in 2000, Garry Harvey was a 26-year-old Victorian looking to buy his first home. Now, still shy of his 40th birthday, YIP’s runner-up for Investor of the Year 2012 has amassed a diverse portfolio of 39 properties that return more than $500,000 a year in rental income and have given him $2.75million in equity to work with. Garry is a fan of buying in bulk, and he has made the most of a strategy centred on subdividing blocks of units.
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