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..