How well do houses with suites rent-to-own/lease-to-own

alangoldade

New Forum Member
Registered
Sep 2, 2007
17
0
0
51
Port Coquitlam, BC
#1
Hey:

If any of you have experience with rent-to-own/lease-to-own of houses with suites, I would like to hear how well it worked out for you.

I am considering some houses with suites in the BC lower mainland.

I have heard that tentant-buyers do not prefer houses with suites because they are tired of "living with other people", but I am not certain whether that will apply to my - expensive - market in Greater Vancouver and Fraser Valley.

Thanks,
 

AndyLuchies

Inspired Forum Member
Registered
Sep 14, 2008
392
0
16
Hamilton
#2
Good question. I wonder if you could target young REIN members who are looking to start investing but can`t get financing. I would`ve loved that option right out of school... you could market it as a sandwich lease of sorts for people who want to learn real estate investing. Put your fliers up in universities targeting business majors.
 

alangoldade

New Forum Member
Registered
Sep 2, 2007
17
0
0
51
Port Coquitlam, BC
#3
Update: I have heard from a couple people doing rent-to-own in the Vancouver/Fraser Valley area that basement suites are attractive to rent-to-own tenant-buyers here because it is necessary for them to be able to afford the homes in this unaffordable market.
 

jseib

New Forum Member
Registered
Aug 8, 2009
168
0
0
37
Milton Ontario
#4
I don`t agree with Andy`s statement but I can see how in an unaffordable market it may be viable depending on how you work the numbers.. I just wouldn`t touch it..

RTO`s are NOT good investments for buyers looking to become investors who can`t get financing, as the seller its great, but not for the buyer.. The reason being an RTO is very expensive on monthly and long term basis for a buyer as your usually charging above expected appreciation and a higher monthly fee... Any investor who had to do a sandwhich lease at RTO rates would be far better off simply saving their money for the duration of the RTO contract and buying then... Yes yes the tenant buyer builds equity but that equity almost always comes from the increased payments so it`s still not going to put the buyer ahead.

The only time it makes any sense whatsoever is if you can buy a property with a rental unit for the exact same cost as the same property would cost without the unit, and they will both appreciate equally, so that the cashflow is not built into the RTO price it just makes the payment easier to make.. Then yes as long as the tenant buyer can make the payments without the unit being rented I can see that working.. However there are a number of variables in play that you just can`t control as you don`t know how good your tenant buyers are going to be at being landlords and ultimately your the one whose going to be left holding the bag when something goes wrong.

Plus the monthly payments are usually 20% higher on an RTO so whoever your tenant buyer is has to be a pretty substantial person who doesn`t need a tenant in order to make the payments.. I really can`t see to many people like that wanting a tenant in the basement or upstairs.. I would bet the person who told you about this is dealing with tenant buyers who can`t afford the payments which reminds me to much of trying to fit a square into a circle.. Lots of people out there do RTO`s by simply putting whoever comes along with a cheque into a home knowing full well they will never be able to close on the property... It`s predatory at best and gives this industry a bad name.

If this is the only way you can do RTO`s in your market then I would look into a different market.. Lots of places out there that are affordable and you can actually help people rather then taking advantage of them..

Just my 2 cents..
 

AndyLuchies

Inspired Forum Member
Registered
Sep 14, 2008
392
0
16
Hamilton
#5
Jseib, I agree with the basics of what you`re saying; however, I would still say that RTOing a house IF you are subrenting out the basement/suite will likely be a better financial move than simply straight rent. Ideally, the sub-rent you`re pulling in will help pay down a decent portion of the monthly payment, making it a much better end result that simply throwing away rent money each month, even though an RTO can be more expensive month to month, the opportunity for a student to sub-rent the property to others will make it a profitable deal for them--one they would not otherwise have access to. "I really can`t see to many people like that wanting a tenant in the basement or upstairs.."
Well, then, this strategy is not for them.

"The reason being an RTO is very expensive ....as your usually charging above expected appreciation and a higher monthly fee"
If you`re charging above expected appreciation, I would think you`re either buying in the wrong areas, or simply cheating a tenant. They higher monthly fee, e.g. 20% should be more than covered by renting out 1 half of the duplex, or the suite, or whatever.

"I would bet the person who told you about this is dealing with tenant buyers who can`t afford the payments which reminds me to much of trying to fit a square into a circle.. Lots of people out there do RTO`s by simply putting whoever comes along with a cheque into a home knowing full well they will never be able to close on the property... It`s predatory at best and gives this industry a bad name."
I don`t see anything wrong with depending on rent money (as long as you`re doing it conservatively and wisely) for an RTO payment. I would suggest this is statement is an exaggeration. As the investor structuring the deal, it would be my responsibility to ensure that the RTO tenant isn`t stretching the numbers on the deal to make it work. I wouldn`t label a certain RTO strategy "predatory." Predatory should refer to the motives behind the strategy, not the strategy itself.

QUOTE (jseib @ May 2 2010, 12:06 AM) I don`t agree with Andy`s statement but I can see how in an unaffordable market it may be viable depending on how you work the numbers.. I just wouldn`t touch it..

RTO`s are NOT good investments for buyers looking to become investors who can`t get financing, as the seller its great, but not for the buyer.. The reason being an RTO is very expensive on monthly and long term basis for a buyer as your usually charging above expected appreciation and a higher monthly fee... Any investor who had to do a sandwhich lease at RTO rates would be far better off simply saving their money for the duration of the RTO contract and buying then... Yes yes the tenant buyer builds equity but that equity almost always comes from the increased payments so it`s still not going to put the buyer ahead.

The only time it makes any sense whatsoever is if you can buy a property with a rental unit for the exact same cost as the same property would cost without the unit, and they will both appreciate equally, so that the cashflow is not built into the RTO price it just makes the payment easier to make.. Then yes as long as the tenant buyer can make the payments without the unit being rented I can see that working.. However there are a number of variables in play that you just can`t control as you don`t know how good your tenant buyers are going to be at being landlords and ultimately your the one whose going to be left holding the bag when something goes wrong.

Plus the monthly payments are usually 20% higher on an RTO so whoever your tenant buyer is has to be a pretty substantial person who doesn`t need a tenant in order to make the payments.. I really can`t see to many people like that wanting a tenant in the basement or upstairs.. I would bet the person who told you about this is dealing with tenant buyers who can`t afford the payments which reminds me to much of trying to fit a square into a circle.. Lots of people out there do RTO`s by simply putting whoever comes along with a cheque into a home knowing full well they will never be able to close on the property... It`s predatory at best and gives this industry a bad name.

If this is the only way you can do RTO`s in your market then I would look into a different market.. Lots of places out there that are affordable and you can actually help people rather then taking advantage of them..

Just my 2 cents..
 

jseib

New Forum Member
Registered
Aug 8, 2009
168
0
0
37
Milton Ontario
#6
Andy,If you`re charging above expected appreciation, I would think you`re either buying in the wrong areas, or simply cheating a tenant. They higher monthly fee, e.g. 20% should be more than covered by renting out 1 half of the duplex, or the suite, or whatever.

How many RTO companies do you know of who charge actual expected appreciation? I don`t know of any.. The reason is the appreciation is what creates the cashflow, if you don`t appreciate the home enough then the cash flow is simply the tenant buyer giving you money to hold onto.. If that`s the case you would be better off renting and selling at a later date. My company does 5/4% appreciation on 2 year deals.. I see lots of guys doing 6/5% 2 year deals... The appreciation is forecast to be 3%

Well, then, this strategy is not for them.


Agreed.. Which was my whole point..

I don`t see anything wrong with depending on rent money (as long as you`re doing it conservatively and wisely) for an RTO payment. I would suggest this is statement is an exaggeration. As the investor structuring the deal, it would be my responsibility to ensure that the RTO tenant isn`t stretching the numbers on the deal to make it work. I wouldn`t label a certain RTO strategy "predatory." Predatory should refer to the motives behind the strategy, not the strategy itself.


Your already stretching the numbers to make the deal work just by the nature of what your doing.. If a person can`t afford the property you are putting them into I would call that "predatory".. Especially since your dealing mostly with folks who have money management issues to begin with..

Let`s say your entirely correct and everything I said is completely wrong.. My question is why in the world with all the things that can go wrong in a straight RTO deal (which has a 50-75% success rate depending on who you ask) would you complicate the strategy further by making them dependent on rental income to pay you?

I guess you can.. It`s just not something I or my RTO company would do.
 

JoeRagona

Frequent Forum Member
Registered
Jan 10, 2008
1,033
11
38
Oakville, ON
engagedinvestor.com
#7
A small point is if the appreciation charged is 2 or 3% higher than expected appreciation, it is the cost of doing business for the tenant/buyer. It is basically a private loan for them. We all know private money costs a bit more but it allows you to move forward sooner rather than later.

At least this is what I explain to my clients and they all seem to agree. I don`t hold any information back - they know the investors have to make money and that the house will be appreciated in a way for that to happen. Should the market over-shoot all the better for them. If not, the extra 1 or 2% over-appreciation charge will balance out in a few years for them in the long run.
 

markl

New Forum Member
REIN Member
Oct 1, 2007
1,103
4
0
40
Toronto
#8
Hi Alan,

We have done some of these in the past. The one thing I would caution is the buyer should qualify for the full amount and any cash derived from the rental unit is a bonus. This income cannot be used to qualify unless the property is legal. What if they have a vacancy or a bad tenant you have to ensure that they can make payments still.

We have had people use a basement suite to lower their monthly costs but at the end of the day if there was no renter they could still afford the property.

If these are your first RTO deals I would try to avoid this as it just adds another level of complexity to the deal.

Regards,