Rent to Own

[zorant]

I couldn't find the answer I was looking for in the previous post and was hoping someone could answer the following on RTO.



Can someone put together an example with the numbers of a rent to own property, I am reading Mark Loeffler book, however I am still confused and little sceptical if it will work.



If you don't mind please include the numbers to a theoretical purchase price say 250,000 like what type of dp do you put down for the RTO tenant, how much do you expect as a dp from them, who pays utilities, how much of the monthly rent is reserved to their future dp, how do you agree on a price for the house that they are buying at the end of their 3 or 5 year term... Any info of this sort would be great



Cheers

 

[markl]

Here is a deal we just did in Hamilton, ON



http://www.theversatileinvestor.com/images/deals/rushdale.pdf



We got the property undervalued so we started the tenant at $269,000 for a purchase price and we used 4.5% appreciation on the year.



You need to work out your own numbers and work out what return you are looking for there is a copy of the spreadsheet on my website and I would suggest going and plugging the numbers in and going through it until you understand them.

 

[LondonHomes]

I have never understood the rent to own concept. I look at it and think if I want to sell a home why not just sell it today? And if I'm going to hold it why commit to selling at today's prices 3 or 5 years from now?



Is the idea to look at it as a rental property that you can charge more rent for and get the renters to take better care of it?

 

[zorant]

Wow, thanks. That's actually pretty rare that the author of the book will reply to that message. haha



However since I have your attention in this specific example I have a few questions (again..) if you don't mind answering.



1) Does the property go under your name or under the tenant?



2) Is the RTO market strong in Hamilton?



3) Who pays the utilities



4) In the example in states the lease rental is $1900/month and above it mentioned a monthly credit of $400 per month going towards the eventual dp of the future price of the house. Does that mean that the property was bringing in actuall $2300/month or does the $1900 not have the deducted $400 which is a hold back?



Thanks again Mark apprecieate it.

 

[GaryMcGowan]

[quote user=LondonHomes]

Is the idea to look at it as a rental property that you can charge more rent for and get the renters to take better care of it?



Short answer. Yes,



With RTO you can earn strong cash flow with little managing of the property. On the flip side there is managing of the tenant/buyers with regards to improving their credit so they are in a position to purchase the home at the end of the term. You also create an exit plan when you purchase the home. In most cases the cash flow is what attracts investors. Money today is better than money tomorrow in this case.

 

[Jbrowning]

I'll take a stab at answering your questions. I too, just bought Mark's book at the ACRE weekend in Toronto and read it instantly. I 'think' I have a handle on what the book states.



Mark, hope I stated everything correctly...i'm sure if i'm off base...Mark will correct me.





1) Does the property go under your name or under the tenant?

Property goes under your name...tenant is simply just a tenant unless and until they BUY the house from you at the predetermined time (e.g. 2 years down the road)



2) Is the RTO market strong in Hamilton?

Not living in Hamilton presently but grew up there, I'd say a resounding YES! My opinion is that the RTO strategy is a good concept in any market and any city. Good quality tenant/buyers are the key.



3) Who pays the utilities

Tenant pays the utilities. That's preferable in any rental situation, but especially in RTO. It also contributes to the tenant/buyer's 'feeling' of home ownership....you want them to feel like it's their house and treat/respect it accordingly.



4) In the example in states the lease rental is $1900/month and above it
mentioned a monthly credit of $400 per month going towards the eventual
dp of the future price of the house. Does that mean that the property
was bringing in actuall $2300/month or does the $1900 not have the
deducted $400 which is a hold back?

The rent is 1900, not 2300. The $400 (should actually be $380...based on 20% of 1900) is the hypothetical rent credit, that will be taken off the purchase price when the tenant buys the house from you. The concept is more positive monthly cash flow presently and during the term of the agreement, less in equity appreciation/resale value at the end.



Hope this helps a little,



Jason

 

[markl]

@Jason I don't think I could have said it better myself.



Except just to make a small correction or should I point something out. All the numbers in the book I use change and they are just guidelines. I typically will move things around to get the desired outcome for myself, for my investors and of course for the tenant.



20% is a guideline not a hard and fast rule you can use whatever makes sense in reason you cannot give back 100% as obviously this raises red flags. Just thought I would provide that input



Regards,

 

[zorant]

So I went through the spreadsheets that Mark posted and need a few final clarifications to made.



In the example of the Hamilton house for sale at $269,000.00 it is stated that the tenant put down a security of $10,000.00 from day one. Then over the 3 year term they saved $14,400.00 altogether being $24,400.00 invested into the property. So is the intention of this combination of the Security deposit and Down Payment to be used to qualify for a mortgage, because if so then mortgage the tenant is seeking will be for ($306,973.00 (future value) - $24,400.00) = $282,573.00



If the confusing above statement is true than there is an error in the "Gain from monthly cash flow" section Mark posted because the lease amount which is $1900 monthly (doesn't have deducted the $400 which is going towards the down payment) so really it should be $1500 which means the profit from Cash flow is ($22,991-$14,400).



I hope that I have made an error, but if anyone can clarify it that would be great.

 

[GaryMcGowan]

There are many different ways to look at the monthly cash flow and what the break down is,



At the end of the day the $400 is monthly cash flow and it is not a credited to the tenant/buyer until they exercise their option. The $400 is also the equity being paid out to you every month. You would of received a payment $14,400 when you would of sold the property in 3 years time if we did not include the $400 per month. However with this RTO scenario we are able to receive the equity on a monthly basis which improves the cash flow immensely. Cash today is better than cash tomorrow.



Note: As Rent To Own Investors we do not accept Security Deposits we collect Option Deposits

 

[Mecheng]

This is the confusion that makes so many people sceptical of the RTO strategy.

The initial deposit and rent premium that you collect are never meant to be keep by you the investor in a true win-win deal which is the corner stone of selling the RTO strategy.

To use these in your ROI calculation, in my opinion, is incorrect.

If the initial deposit is to be subtracted from your initial investment then it should also be subtracted from your profit since it will never be cash in hand for you to keep.

The rent premium, although is cash in hand during the holding period of the property it also will not be included in your final take home profit after the deal closes.

The only way you get additional cash flow from rent premium is if you keep a percentage. Say you charge 25-30% but only 20% goes to the tenant. In which case you did collect 5-10% premium but not the 20-30 claimed.

Again, this is only my opinion but using these values in your ROI calculation is incorrect as you are only fooling yourself into thinking you will have a higher ROI then you actually will walk away from the deal with or your strategy is relying on a win-lose scenario where the tenant cannot purchase.

 

[Thomas Beyer]

[quote user=Mecheng]confusion that makes so many people sceptical of the RTO strategy.

The initial deposit and rent premium that you collect are never meant to be keep by you the investor in a true win-win deal


I think you are confused, too !



Of course these deposits are meant to be kept in both scenarios: Tenant-Buyer (TB) walks or TB buys.



If TB buys he buys from you, and the initial and ongoing deposit gets credited to him, but you keep it. Think of this as "Christmas came early this year". You get paid your gain early ! What's wrong with that ?



Example: you buy for $250,000 .. and get a $10,000 initial deposit from TB. Your mortgage might be $200,000 which is 80%, i.e. you put down $40,000 plus his $10,000. You lease for $1500/month with $1200 being rent and $300 being deposit. You and TB agree to buy house for $280,000 in 4 years or less. TB buys at the end of year 3 as he now can qualify for a new mortgage in our example.



It is now 3 years later: You have collected $10,000 + 36*$300 = $20,800.



TB buys house for $280,000 with a new 95% mortgage, so he pays you $280,000 - 20,800 = $259,200 !



His mortgage is $266,000 as he put down $14,000 (5%) .. namely the $20,800 accumulated .. plus he keeps $6,800 from the new mortgage !



You pay your mortgage from the $259,200 you get from TB. Your mortgage has been paid down a hair, say to $190,000 .. so you walk away with an additional $69,200 in addition to the $10,000 and the 36*300 !!



Total return in 3 years: $40,000 in .. and $69,200+$10,800 out .. for a total of $80,000 .. a 100% gain in 3 years .. wow !! Can you get this in the stock market ? Maybe .. likely not !

 

[GaryMcGowan]

I had a response very similar to Thomas's. He is dead on. Rent To Own is an investment vehicle which allows for stronger cash flow but less on the equity gain because in a sense we have already received it.

 

[Thomas Beyer]

[quote user=GaryMcGowan]equity gain because in a sense we have already received it.


Christmas came early .. a good strategy .. if executed well !

 

[Mecheng]

[quote user=ThomasBeyer]

It is now 3 years later: You have collected $10,000 + 36*$300 = $20,800.



TB buys house for $280,000 with a new 95% mortgage, so he pays you $280,000 - 20,800 = $259,200 !



His mortgage is $266,000 as he put down $14,000 (5%) .. namely the $20,800 accumulated .. plus he keeps $6,800 from the new mortgage !



You pay your mortgage from the $259,200 you get from TB. Your mortgage has been paid down a hair, say to $190,000 .. so you walk away with an additional $69,200 in addition to the $10,000 and the 36*300 !!



Total return in 3 years: $40,000 in .. and $69,200+$10,800 out .. for a total of $80,000 .. a 100% gain in 3 years .. wow !! Can you get this in the stock market ? Maybe .. likely not !




The confusion seems to be in what I was claiming.

I stated the deposit and rent premium are not keep but given back to the tenant at closing.

In your example you confirm this for me "$280,000 - 20,800 = $259,200" which is where you give the $10K deposit and $10800 rent premiums back to the tenant so they can buy the property.

That $20800 is not an additional part of your profit, like I have seen some RTO ROI calculations claim.

You can chose to look at this any way you want the bottom line is the equivalent dollar of the tenants deposit and rent premiums is not part of your profit but given to them at closing.



I never said RTO was a bad investment strategy, I said I have seen the ROI calculations for it done incorrectly. Where it was assumed that this money was keep as part of the investors profit.

 

[Thomas Beyer]

Think of the initial deposit and option credit as a prepayment on future profits.

It is part of your overall profit .. Received early and kept if TB buys or defaults !

 

[markl]

100% bang on Thomas. I am going to use that line this weekend at the BCall day I will credit you with it though.



I get paid my profit on sale of the property a portion at the begiinning the option deposit and I get paid a little more of that equity every month in the form of credits building for the tenant.



Essentially I am getting my profit today instead of in a couple of years and a dollar today is more valuable than a dollar tomorrow.



If you look at the spreadsheet you will notice that in fact the client receives the credits on the sale of the property. Can you post something to show how you would record this?



Regards,