RTO lease rate question...

Tyson

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Mar 17, 2011
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#1
Greetings:

I have been trying to get my head wrapped around all of the calculations used on investment analyses of RTO deals. One calculation I can`t figure out is the lease payment`. some RTO deals use a rate of .007`.Is there a formula for how this is calculated. I have read most of the posts regarding RTO`s as well as Mark Loefflers book. On page 122 of the book, he speaks of the lease rate. He says he uses a lease rate in the range of 0.8%-0.95%. Why pick these numbers?


This question has been asked before but I can`t seem to find a satisfactory answer. I am thinking there has to be some mathematical explanation for this calculation. Please help.


Thank You,

Tyson
 

GaryMcGowan

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#2
Mark's book is a guideline, pick the rate that is most reasonable to you and the tenant.

You may want to pick the fair market rent and add 20% for the the option credit.
 

Sherilynn

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#3
Keep in mind that the lease rate multiple is largely dependent on your
costs. Once mortgage rates start to rise, the multiple will need to
rise with them. At the time Mark's book was published, higher mortgage
rates could have necessitated a multiple of .0085.



When prospective clients ask about payments, I currently give a multiple of .006 as a "rough idea of rent." (This figure does not include option deposits.) I also explain that the larger the initial option deposit, the more flexible we can be with rent and/or final price.



I just placed two new clients in similarly priced homes, but the monthly payment varies by $500 because one had a much larger deposit so I could reduce his rent a bit and he doesn't need to pay additional monthly deposits.
 
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markl

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#4
Gary and Sherilynn are right on the money.



The only thing I would add is figure out the return you are looking for and work back from that. This can be a constantly moving number.



Regards,
 

Sherilynn

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#5
[quote user=markl]



The only thing I would add is figure out the return you are looking for and work back from that. This can be a constantly moving number.



Regards,




Agreed. I have a target ROI in mind for my investors plus I try to tailor the lease and option to the needs of the client, so I just play with my spreadsheet until I find a suitable option(s) to present to the client.
 

Tyson

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Mar 17, 2011
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#6
Thanks everyone. I am still a little vague on what the number actually represents but I will play with the spreadsheet and numbers and see if I can get a feel for it.



Tyson
 

neill

Airdrie, AB
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Oct 22, 2007
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#7
One of the best pieces of advice that we received when first starting out in RTO that works for us is:



There is no formula.





Every situation stands on its own. That said, we use the following guidelines:



1) Our selling is based on market rent + option credit, and the market decides both of these.

2) We typically want the tenant buyer to have a min of 5% in total credits at end of term to assist them in qualifying

3) There had better be a compelling reason to do any deal for <$500/mo cash flow. (eg. large up-front option deposit, large equity today in the property that we are acquiring, and (to a lesser extent, large back end profit - tomorrow does not always come))



We have never calculated a percentage of price for the actual monthly payments. We DO look at the what the deal represents in terms of payday now, payday monthly and payday at the end and compare that with the tenant profile.



Hope this helps...
 

ryanlake

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#8
I was wondering where I could get a spread sheet from exactly. Just working with some numbers right now and would love a spread sheet to play around with. Any tips would be greatly appreciated!
 

Dan 7612

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#9
Lots of response here - let me add my own

It really depends on the market. I try my best to get 1% of the purchase price per month. However, it really depends are where you are

1% of the purchase price for Brampton would make the rent >4,000/month for a $400,000 house. Then you have to add tax and insurance making the total close to $4,500/month. For Brampton, it might be closer to 0.005% of the purchase price or lower.

Where I have my 14 RTO properties, I try to be on the low side of the going rental rate for the area. I am trying to make it a win win for both the client and myself. I have seen a few different methods in my area.

1% of purchase price + tax, insurance and deposit
0.0062% of purchase price + tax, insurance and deposit
5 year unreduced mortgage rate of purchase price + tax, insurance and deposit

London and Windsor, Ontario I get between 0.0085 and 0.0095 of the purchase price + tax, insurance and deposit
Sarnia and Kitchener, I get 0.0055 and 0.0065 of purchase price + tax, insurance and deposit

Hope this helps!
 
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Sherilynn

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#10
I can't think of a market in Alberta that would tolerate rent of 1% of the purchase price, at any point in the real estate cycle. I think all of the other advice given previously is more realistic.

If your figure of 1% includes a large option payment, then that could be potentially feasible. However most people requiring an RTO also must pay down debt; in fact, that is often a bigger priority than amassing a huge down payment.
 

Dan 7612

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#11
Hi Sherilynn,

As I stated, it is best to determine fair market rents for where you are. I agreed to my 15 RTO today in a little more than a year. House is $95,000 (yes you can still buy a nice place in Canada for <$100,000), client is also covering closing costs. Rent is $900/month plus tax and insurance. Client will also add $200 / month towards lease option fee.

My main challenge is getting a $85,000 mortgage. Lenders don't like lending below $100,000. Not worth the effort.
 
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