Rent to owns - more information please

[MKBridge]

Hi again!I would like to learn more about rent-to-own properties. Many REIN memebers have said this is a good way to do real estate investments. Interestingly, an email came to me this morning regarding a rent to own from another member so I thought this would be a good time to learn the pro`s and con`s. I have the cash to make a down payment. Of course this is just the first step of my due diligence but I thought I would ask the question to learn more about these types of investments. Thanks MKHere it is:I would like to introduce a client of ours who is a prime candidate for a lease-to-own property.
We are looking for an investor who will purchase this home and lease it back to him for 2 years, at which time he should qualify for a mortgage.

THE HOUSE: XXX has viewed the XXX Road house with our realtor. These single family homes are in a strata community, with strata fees being only $36.25/month. These homes are only 2 years old with home warranty in place. The home is 1249 sq. ft. with a full basement that is partially finished. There is a separate entrance to the walk-out basement, making it possible to suite if desired. All appliances are included. See attached photo.

OUR CLIENT:

XXX is a widower with a X year old son. He has steady income ($55,000+ annually) working for XXX. He has worked 3 years for this company, but has 9 years experience in this field.

He was divorced from his first wife and that`s when the credit tanked. He has since built up his credit from the 400`s to currently just over 600. He is working with a mortgage broker to stay on track, and may only need 18-24 months before he qualifies for a mortgage. He has a down payment ready and can afford payments of up to $1500/month.

He has viewed a 3 bedroom/2 bath home in (north of Kelowna) which he would like to purchase if we are able to find an investor.

The house XXX has looked at is in a strata development on XXX Road. It is only 2 years old and strata fees are $36.25/month. It has a double garage (which appeals to him as he loves to do projects) and says the area feels like a secure place for his young son. It would be great if we could get them into their new home before the new school year begins.

Overview with 10% down:



Length of Term

2 years

Home Purchase Price

$335,000

Total Investment Required

$37,200

Monthly Cash Flow

$194

Total Net Profit

$23,010













RETURN ON INVESTMENT (ANNUAL): 31%



For a detailed Financial Analysis of this opportunity, please contact XXX

 

[Dan_Eisenhauer]

I see you are a REIN member. There is a very good overview of RTOs in an interview Russ Westcott did with Mark Loeffler. You can find it in the Interview with an Expert Series. I suggest that you listen to it, as I think it will answer many of your questions. If you have questions after that, feel free to write me.

I would ask how much his DP is, as that is an important part of the puzzle. Ask for the promoter`s spreadsheet so that you can see if the calculations are accurate and make sense.

Positives: RTOs are excellent cash flow properties, with a known exit stategy. There is no vacancy factor to speak of, no managment issues as the tenants take care of it as if it was theirs. If the Tenant-Buyer does not complete at the end of the term, the property is yours, along with their equity contribution.

Negatives: You pay income tax on the entire gain, not just capital gains. But, so what? You are making a profit. It is a short term (1 - 5 year) deal, and you then have to find a replacement deal.

Hope this helps.

 

[MKBridge]

Thanks for the information Dan. I will listen to that interview for more information and I have also requested the financial analysis of the proposal. Now is the time to learn more!
Thanks MK

 

[markl]

I think you are setting him up for failure. $55k per year correct me if I am wrong but this will not qualify him down the road for a mortgage on a $335k house today let alone at a fixed price in the future.

$1,500 rent for a $335k property is low for a RTO the whole objective is to have them save money to buy the percentage you would have to return to them would take away your profit. I have posted my spread sheet for you so you can work your excel to figure out your true ROI as it has all the numbers you will need in it

With his income and $1,500 a month I would think he should be looking in the $200k range if not a bit less. One of the biggest challenges we face doing deals like this is managing expectations of the tenants. We have to let them know realistically what they are going to be looking at the end of the day.

Oh and the form is for ON so please change the land transfer tax and property taxes for yourself

Email me if you have any other questions mark at homeinvestornow.com

Regards,

 

[RedlineBrett]

Purely from an investment standpoint two questions come to mind immediately

1. What is the agency representing the tenant and trying to sell you the property going to be making if you buy this house and RTO their client.

2. What is the size of the deposit. In my experience the tenant/buyer needs to have at least 2.5% of the purchase price of the property to put down or in this case $8,350.00 from them.

3. Are they running the numbers on a two year financing term for you or five year and do they ensure a smooth transition and payout and are you confident their company won`t be pushing daiseys at closing time.

Now from an ethics point of view in order to sleep at night I need to have the confidence that the tenant/buyer will actually be able to close on this deal in the future. With a gross income of $55k/yr and PIT payments of around $1650/mo (assuming 5% down and 4.4% fixed money for 5 years) the tenant/buyer will have a GDSR (gross debt service ratio) of 0.36. This is over the 0.32 typically required to qualify. I would also need to know where are they going to be coming up with the extra ~$10,000 needed for the 5% down payment.

Sooo... their salary needs to come up a little (to around $60,000) in two years and they have to find away to save the $10,000/24 = $416 per month between now and the future closing date.

If you can get these answers and they seem reasonable and achievable to you this could be a solid investment. If they are too many uncertain questions I would ask them to come back to you with a better deal.

Just my $0.02.





QUOTE (markl @ Jun 21 2009, 08:14 PM) I think you are setting him up for failure. $55k per year correct me if I am wrong but this will not qualify him down the road for a mortgage on a $335k house today let alone at a fixed price in the future.

$1,500 rent for a $335k property is low for a RTO the whole objective is to have them save money to buy the percentage you would have to return to them would take away your profit. I have posted my spread sheet for you so you can work your excel to figure out your true ROI as it has all the numbers you will need in it

With his income and $1,500 a month I would think he should be looking in the $200k range if not a bit less. One of the biggest challenges we face doing deals like this is managing expectations of the tenants. We have to let them know realistically what they are going to be looking at the end of the day.

Oh and the form is for ON so please change the land transfer tax and property taxes for yourself

Email me if you have any other questions mark at homeinvestornow.com

Regards,

 

[hazed]

Hi,
This has started a great discussion with Kathy posting it here. This is an investment opportunity from EZ Properties Ltd. The tenant/buyer makes $55,000+/year - typically extra as he has a full time job and does contract work on the side, so his income has varied over 3 years, but is above the $55,000. He has the $10,000 to pay the investor for security on the property, and with $400/month rent credit he will have a total of $$19,600 available or 5.36% of the purchase price in 2 years. The numbers are based on a 2 year term for the investor. As investors ourselves, we have built into the plan our fee of $7500 to put the deal together. We we will draw up the Lease and Option Agreement between the Investor and the Tenant/Buyer. The client is working with a mortgage broker to steadily improve his score, and with having to pay only $1500/month rent now, he can address some of his other debts and be in a better position.
Thanks for all the posts!

 

[RisingWealth]

QUOTE (markl @ Jun 21 2009, 07:14 PM) I think you are setting him up for failure. $55k per year correct me if I am wrong but this will not qualify him down the road for a mortgage on a $335k house today let alone at a fixed price in the future.

$1,500 rent for a $335k property is low for a RTO the whole objective is to have them save money to buy the percentage you would have to return to them would take away your profit. I have posted my spread sheet for you so you can work your excel to figure out your true ROI as it has all the numbers you will need in it

With his income and $1,500 a month I would think he should be looking in the $200k range if not a bit less. One of the biggest challenges we face doing deals like this is managing expectations of the tenants. We have to let them know realistically what they are going to be looking at the end of the day.

Oh and the form is for ON so please change the land transfer tax and property taxes for yourself

Email me if you have any other questions mark at homeinvestornow.com

Regards,


Hi Mark,

I searched for that spread sheet and could not find it. Is it still available?

much success
Mark

 

[markl]

email me mark at theversatileinvestor.com

and I will send it to you. I guess they took it off because it had deal numbers on it. Or if someone else can post a clean copy that would be okay as well I know some people have modified the spread sheet as well.

 

[PeterKinchMortgageTeam]

QUOTE (markl @ Jun 21 2009, 07:14 PM) I think you are setting him up for failure. $55k per year correct me if I am wrong but this will not qualify him down the road for a mortgage on a $335k house today let alone at a fixed price in the future.

$1,500 rent for a $335k property is low for a RTO the whole objective is to have them save money to buy the percentage you would have to return to them would take away your profit. I have posted my spread sheet for you so you can work your excel to figure out your true ROI as it has all the numbers you will need in it

With his income and $1,500 a month I would think he should be looking in the $200k range if not a bit less. One of the biggest challenges we face doing deals like this is managing expectations of the tenants. We have to let them know realistically what they are going to be looking at the end of the day.

Oh and the form is for ON so please change the land transfer tax and property taxes for yourself

Email me if you have any other questions mark at homeinvestornow.com

Regards,


I have to agree with Mark - it could be a tough one to get done as based on a purchase price of that amount, you`d need CMHC to make an exception on the standard GDS/TDS requirement - which they are typically not too inclined to do when there have been fairly recent credit issues and at 95% LTV. Also keep in mind, that we dont` know what rates will be at the time that he exercises his option - if they`ve gone up quite signifignatly, the ratios will be even higher. The type of income also plays in, in order to use contract income, there are other requirments.

That being said, if he is working with a broker who is experienced with lease to own purchases (as not all lenders will allow them, and some have very specific requirements), as well as with credit repair programs, - I would assume that all of these issues have already been addressed.

If you can increase the lease option or deposit so that he`d have 10% down, you`d have way more options and more flexibility with CMHC - or perhaps a home that is less expensive.

Just a thought....