How does Rent-To-Own work from MY End (as the Purchaser/Investor)?

[lwelke]

Hi All. I get how Rent-To-Own works for the person/renter who wants to buy the property, but how does it work for ME and my investors?

Do I have to qualify for and purchase the house first, having to place a down payment of 20% or more on a house that might cost $400,000? Or do I make the offer on the house first, then find a money partner who can qualify, be on title, and put the 20% down?

How do I/We make money upfront, since the Tenant Purchaser will only have probably $10-$20k to put down and we`ve put down a significant amount more than that?

I realize how we would make monthly cashflow by charging market rents which should more than cover the costs of the mortgage, taxes, etc, but should this also cover insurance, maintenance, vacancy and management fees as well, as per the standard REIN formula?

And I realize how we would make a profit by re-selling it to the tenants at market prices 3-5 years down the road...

Maybe I`m living in dreamland... is there ANY way to profit upfront? Or is this strategy pretty much exactly like the joint venture process?

I look forward to your replies...

Respectfully,
Leanne Welke
P: 403-452-4010

 

[kboughen]

QUOTE (lwelke @ Sep 5 2008, 01:30 PM) Do I have to qualify for and purchase the house first, having to place a down payment of 20% or more on a house that might cost $400,000?

Hi Leanne,


There are many ways for you the investor to approach this strategy. You should consult all the members of your investment team (Mortgage Broker, Accountant, Lawyer and Realtor) to decide on the best strategy for you.


One way to proceed is for you the investor to purchase the property as you would any other investment property (anywhere from 0% down to 100% down). Sign a lease with the Tenant as you would with any other Tenant and sign a contract with the Tenant giving them the exclusive right to purchase the property from you at the end of a specific period under specific terms.

As you point out, unless the client is giving you a significant down payment that covers much more than all your upfront costs, you will not make your profit on day one. Profit comes in the form of monthly cash flow and final sale price.

 

[GarthChapman]

And remember that the profit on the property, once sold, will NOT be treated as a Capital Gain, as your intent was to sell the property and not to hold it.

 

[lwelke]

Thanks so much, Kevin. Another question: with respect to the monthly cash-flow, is that number calculated exactly like a revenue property where one includes the costs of mortgage, taxes, vacancy rate, maintenance, etc? And whatever is left over is the cash-flow, or is there another "fee" tacked on to those costs as well to make it cash-flow even more?



QUOTE (kboughen @ Sep 6 2008, 09:25 AM) Hi Leanne,


There are many ways for you the investor to approach this strategy. You should consult all the members of your investment team (Mortgage Broker, Accountant, Lawyer and Realtor) to decide on the best strategy for you.


One way to proceed is for you the investor to purchase the property as you would any other investment property (anywhere from 0% down to 100% down). Sign a lease with the Tenant as you would with any other Tenant and sign a contract with the Tenant giving them the exclusive right to purchase the property from you at the end of a specific period under specific terms.

As you point out, unless the client is giving you a significant down payment that covers much more than all your upfront costs, you will not make your profit on day one. Profit comes in the form of monthly cash flow and final sale price.

 

[CargrenInvestments]

QUOTE (lwelke @ Sep 8 2008, 11:06 AM) Thanks so much, Kevin. Another question: with respect to the monthly cash-flow, is that number calculated exactly like a revenue property where one includes the costs of mortgage, taxes, vacancy rate, maintenance, etc? And whatever is left over is the cash-flow, or is there another "fee" tacked on to those costs as well to make it cash-flow even more?

Hi Leane,

I thought I`d put in my two cents worth. As with any RE investment there is no one rigid formula or format that one must follow. The answer is whatever creates a win/win/win situation for you, your money partner, and the tenant.

The tenant needs to understand that the goal of this option is not to obtain cheap rent but to build equity in a "real property" investment. As such they may be paying a little more than the going market rent, but a portion of their rent is going towards the future down payment/equity in the home.

Everyone has their own way of establishing the rent and the amount to credit back, but just for example purposes I can tell you that I`ve seen the rent range between 0.0060 and 0.0085 of the value of the home. So on a $300000 home the rent could range from $1800 to $2550. Then I`ve seen the monthly credit range from 10% to 25% of the rent amount. So often the net rent (rent less the credit given at the end of the term) is actually less than the market rent.

The sale price of the home to the tenant can be the appraised value at the end of the lease term or an established price adding in a set annual appreciation.

As already mentioned your return will be through good cashflow during the lease (this can be VERY good) and the markup at the sale of the home to your tenants. I have never seen where your profit is made up front. If you find out how let me know and I`ll be "in" likity split.

Hope this helps,
Rob

 

[kboughen]

QUOTE (lwelke @ Sep 8 2008, 02:06 PM) Thanks so much, Kevin. Another question: with respect to the monthly cash-flow, is that number calculated exactly like a revenue property where one includes the costs of mortgage, taxes, vacancy rate, maintenance, etc? And whatever is left over is the cash-flow, or is there another "fee" tacked on to those costs as well to make it cash-flow even more?
Hi Leanne,


There are different ways to deal with the extra "monthly fee". One way is to make the monthly rent in the Lease agreement inclusive of an extra fee. For example, if the market rent is $1000 (this should cover all costs and contingencies and provide a positive cash flow), your rent may be $1200.


The extra $200 per month is above what you would expect from the same property in a typical rental agreement. In the separate "Exclusive right to purchase agreement" you may agree to return to the tenant the $200 collected each month in the form of a down payment contribution as long as the transaction completes. If the tenant changes their mind during the term and the purchase never happen, then you keep the extra $200 as it was rent.

 

[brad]

I find this an extremely interesting topic. I too am considering a lease to own for one of my next properties. I understand the tax implications of income vs. capital gains, but that monthly cash flow is enticing.

Brad Hamilton