Rent-to-own as an investment strategy

[surfermoe]

I`ve been hearing a lot about rent-to-own deals lately, and regularly receive those hilarious emails from Home Owner Soon (whoever writes those has personality to burn).

My wife and I are following a strategy of buying duplexes in a good part of our city, with the intention of renting and holding for the long term. But we`re intrigued by the cashflow that rent to own deals appear to have.

Is anyone investing in rent to owns as their primary investment strategy, and can you share the downsides of doing so?

Thanks a lot,

Moe

 

[Nir]

Hi Moe, can you share 2 examples of good cash flow deals you got from them? not the address of the property or something, just numbers so we have an example/idea. Thanks.

 

[surfermoe]

Here`s a typical one:

Overview with 10% Down...

Length of Term: 2 years
Home Purchase Price: $170,000
Total Investment Required: $16,905
Monthly Cash Flow: $639
Total Net Profit: $14,438
Return on Investment/Annum: 35%


And another:

Overview with 10% Down...

Length of Term: 2 years
Home Purchase Price: $198,000
Total Investment Required: $21,855
Monthly Cash Flow: $682
Total Net Profit: $13,958
Return on Investment/Annum: 32%


Moe

 

[BenSanderson]

Hey surfermoe,

There are typically two main downsides that get mentioned a lot regarding RTO investments:

1. CRA considers all income from the investment, including the final sale of the property, as business income, hence you will be taxed on all 100% of your profits. Some people think you can claim the sale of an RTO property as a capital gain in order to be taxed on only 50% of the profit, but CRA looks at your original intention, which is always to sell the property at the end of the term. At this time, I don`t believe there is a way around this if you want to be honest with CRA (and you DO!)

2. You have to constantly update your inventory. RTO terms typically last only about 2 or 3 years, and when the house sells, you have to get to work again to find another.

However, having said that, there are so many advantages to using the RTO strategy that offset these downsides, three of the biggest, in my opinion, being the increased cashflow, the more `hands-off` nature of property management, and perhaps the most important, the win/win relationship you build with your tenant/buyer!

Hope that helps!

 

[Dan_Eisenhauer]

At this time, I am using RTO exclusively, both as an acquisition strategy, and as an exit strategy.

As an acquisition strategy, one can build a large portfolio with little money coming out of your own pocket, other than covering a couple months rent as you find an offsetting Tenant-Buyer for the property.

As for lease term, don`t be fixated on the 2 - 3 year deal. One of my mentors did a two year deal on a "piece of junk" that turned into an 8 year cash flow bonanza. The TB kept asking for two year extensions, which he got at higher rent and higher purchase price. The TB finally decided to buy at the end of the 8 years.

Yes, our primary goal is to get the TB into their own house. BUT, we are also in this business to put money in our pockets over the long term. If some wants to RTO from you for longer, why not do it? I am not suggesting that we be unscrupulous here, as the courts will frown on putting someone into a home they obviously will never be able to buy.

But, sometimes we need to think out of the box.

An example... We have a minimum Option Fee requirement of about 1.5% of the purchase price. Should we pass on someone with good income, but without the full Option Fee in hand? We recently did a deal with a TB in this situation where she is paying us a little extra for ten months to make up the full Option Fee. Perhaps the TB has a vehicle, boat, or jewelry which you accept as partial payment.

Don`t limit your thinking to given formulas.

 

[tonypeters]

Moe,Like most things in life, there are always things that do not go quite as planned. However, the key to minimizing your disconnects is how you go about doing business and structuring your deals in the first place.Here are some of the BIG advantages of Lease To Own;1. SUPERIOR (monthly) cash flow. I generate a "minimum" of $500 (per month/per door) in passive income, and I typically generate a LOT more than that!
2. I receive a BIG chunk of my "back-end" profit right up-front!
3. I create a more "PREDICTABLE" and "shorter term" exit strategy!
4. I fix repair and maintain NOTHING!
5. I get to help individuals and families "realize the ultimate dream of owning their own home"!
6. EVERYBODY WINS!

Hope this helps?


QUOTE (surfermoe @ Oct 20 2009, 08:54 PM) I`ve been hearing a lot about rent-to-own deals lately, and regularly receive those hilarious emails from Home Owner Soon (whoever writes those has personality to burn).

My wife and I are following a strategy of buying duplexes in a good part of our city, with the intention of renting and holding for the long term. But we`re intrigued by the cashflow that rent to own deals appear to have.

Is anyone investing in rent to owns as their primary investment strategy, and can you share the downsides of doing so?

Thanks a lot,

Moe

 

[hanwellboy]

QUOTE (Dan_Eisenhauer @ Oct 21 2009, 02:31 PM) At this time, I am using RTO exclusively, both as an acquisition strategy, and as an exit strategy.

As an acquisition strategy, one can build a large portfolio with little money coming out of your own pocket, other than covering a couple months rent as you find an offsetting Tenant-Buyer for the property.

As for lease term, don`t be fixated on the 2 - 3 year deal. One of my mentors did a two year deal on a "piece of junk" that turned into an 8 year cash flow bonanza. The TB kept asking for two year extensions, which he got at higher rent and higher purchase price. The TB finally decided to buy at the end of the 8 years.

Yes, our primary goal is to get the TB into their own house. BUT, we are also in this business to put money in our pockets over the long term. If some wants to RTO from you for longer, why not do it? I am not suggesting that we be unscrupulous here, as the courts will frown on putting someone into a home they obviously will never be able to buy.

But, sometimes we need to think out of the box.



An example... We have a minimum Option Fee requirement of about 1.5% of the purchase price. Should we pass on someone with good income, but without the full Option Fee in hand? We recently did a deal with a TB in this situation where she is paying us a little extra for ten months to make up the full Option Fee. Perhaps the TB has a vehicle, boat, or jewelry which you accept as partial payment.

Don`t limit your thinking to given formulas.

Dan,
I am looking at RTO`s as an investment strategy as well. Do you contact sellers to see if they will do a lease to own - basically a sandwich lease, or do you buy the homes that your TB`s like? I find it would be easier to let the TB go shopping as it were, and then I purchase the home. But that means I can only do so many of them until the bank says whoa! slow down, no more mortgages for you. On the other hand, I`m thinking that there would be alot of cold calling and leg work involved in trying to find a seller who would agree to a lease option. I`m just wondering what you find successful, and what would be the best strategy for me.
Thanks.

Aaron

 

[Dan_Eisenhauer]

Aaron, send me your email address... [email protected].

Glad to see other Maritimers on here.

Dan

 

[JoeRagona]

Hi Aaron,

I did have a lengthier reply, but the system did not save it so I will try an summarize what I said initially.

There is much information on this site regarding RTO strategies with many experts having their unique systems and procedures all trying to achieve the same result.

Dan is also correct imo when he says you do not have to rely solely on formulas (although I start with one) because there are a few other factors to consider when assessing a client. More importantly, you have to set up what works for your investment goals because RTO has it`s own caveats.

Now I`m not saying it`s a bad strategy at all, in fact it is how I began my real estate investing career within REIN. I was also helped by many of the people that are replying to yours and many other`s posts about this great cash flow strategy.

I have though, developed my own comfort zone and procedures about who and what i invest in. I am extremely careful with my capital and even more with my JV partner`s capital.

Through our filtering/qualification system I reject more applicants than actually take on, but that`s just me. I`ve found that looking only at the `bottom number` does not work for me and I have to be more due diligent on my clients. This in turn helps everyone involved because I`m creating a true win-win-win relationship.

I usually employ the Tenant Finding their Home technique because they feel more involved with the process and I`m less likely to have someone default on a property they truly love.

I`m not sure if you are yet a REIN member, but if you are not, consider joining a full network of people with information that will be invaluable to your serious investing career.

(As Don would say..."I get nothing for saying this, I only believe in the cause" or something like that)

 

[hanwellboy]

QUOTE (JDRInvestments @ Oct 21 2009, 04:48 PM) Hi Aaron,

I did have a lengthier reply, but the system did not save it so I will try an summarize what I said initially.

There is much information on this site regarding RTO strategies with many experts having their unique systems and procedures all trying to achieve the same result.

Dan is also correct imo when he says you do not have to rely solely on formulas (although I start with one) because there are a few other factors to consider when assessing a client. More importantly, you have to set up what works for your investment goals because RTO has it`s own caveats.

Now I`m not saying it`s a bad strategy at all, in fact it is how I began my real estate investing career within REIN. I was also helped by many of the people that are replying to yours and many other`s posts about this great cash flow strategy.

I have though, developed my own comfort zone and procedures about who and what i invest in. I am extremely careful with my capital and even more with my JV partner`s capital.

Through our filtering/qualification system I reject more applicants than actually take on, but that`s just me. I`ve found that looking only at the `bottom number` does not work for me and I have to be more due diligent on my clients. This in turn helps everyone involved because I`m creating a true win-win-win relationship.

I usually employ the Tenant Finding their Home technique because they feel more involved with the process and I`m less likely to have someone default on a property they truly love.

I`m not sure if you are yet a REIN member, but if you are not, consider joining a full network of people with information that will be invaluable to your serious investing career.

(As Don would say..."I get nothing for saying this, I only believe in the cause" or something like that)

Thanks for your input Joey. I too am of the mind to let the TB choose the house they would like to one day live in. But, as I`ve said before, this requires capital, and I`m not sure how many homes I would be able to buy before the banks said enough is enough.
I`ve thought of options and cooperative assignments. I`ve also looked into buying subject to. I guess I have to come to a conclusion and get started. It seems that I have "paralasis by analysis".
I appreciate all the help that the members of this board offer, and yes, I am in the process of forming a circle of knowledgeable people who can aid me in my quest for "employer independance". It`s very true what they say: You become who you associate with.
Thanks.
Aaron

 

[Dan_Eisenhauer]

There is NO question that we kiss a lot of frogs when sifting RTO prospects. You will be lucky if you get one successful applicant out of ten.

It is amazing how many people think they can rent a $500,000 home for $500 a month, with no money down, on a $15,000 annual income. One part of an RTO strategy is educating your prospects about the process.

 

[tbarcier]

Wow Dan I glad I`m not the only one getting those apps! I thought maybe it was just people in my town who are that crazy. I had one with Income around 9500, was going to buy a 300,000 home with no money down. Anyone offering 95 yr amo zero interest??

 

[surfermoe]

Thanks to everyone for your advice. Dan, I`ll contact you by email, if you don`t mind.

Moe

 

[cgilbert]

Hi Tony,



When you say you generate 500$ per month / per door , do you means after all expenses for that property is paid ?



Can you send me a break down of the income and expense for a month ?



I hope to understand better how rent-to-own generate such a cash-flow !



thanks!

 

[JBagorio]

Hi Joey, Long time no online talk and chat my friend! As I have said in the past, many times I do relate to your ways of thinking! I totally agree that RTO has its negative and most of all positive side vs. the traditional rent and hold (practically all mentioned above). In my fist year of incorporating rent-to-own in my RE business, with about 15 to 20 applicants so far I have only qualified 1. What I found in this type of business, when it is DONE RIGHT with good intentions, to attain an equal win/win/win for all parties involved...you have truely filter and narrow your target market. You will quickly realize that not all potential TB that come to the door can get up to par to what you are looking for!

Jason

 

[hwillm1977]

I've rented-to-own my last two houses... but I did it quite differently. I found homes that I could pay off in entirety within 2-5 years, then offered the sellers a rent-to-own agreement.



Our first home was a mobile home, I paid $9000 for it and paid it off within 2 years... made it look pretty and sold it for $14,000.



We found our second home by looking at abandoned properties in the country, finding out who owned them, offering a rent-to-own. We bought our 3 bed-2bath farmhouse on 6 acres for $25,000... there was no plumbing or electricity when we moved in. We paid it off in 4 years, at 5% interest to the previous owner. We've greatly improved the house and will now sell for $100,000 to start our real estate investing careers with some income properties.



We looked at lots of rent-to-own properties through the more traditional deals like you guys are talking about, and they just were NOT good deals for us... it may have taken us longer, but I feel like it's working out for us.



One example that we looked at was a 4 bed farmhouse on 60 acres of land... asking price $80,000.



The rent-to-own company for that one wanted $8000 down, and $1500/month... only $200 of that $1500 went toward our purchase of the property. The remaining $1300 covered his 'expenses'... we would have to do all maintenance, the only expenses he was covering would be the mortgage, and property taxes ($450/year). Which would result in quite a good monthly profit for him.



Now that I'm about to start property investing, I'd like to consider doing the rent-to-own deals that would favour me the way the previous example benefited the rent-to-own company we had talked to.



How do you find good tenants/purchasers?