RTO feedback needed

[clone477]

Hello everyone,
I have been browsing around for a couple months now and am happy I did, its a great site with real investor with real knowledge. I currently am drawing up a RTO with our 3 year tenants because they would like to buy by do not qualify for a traditional mortgage. I am very new to rent to now, have had a close friend say how great it was, and then from reading Marks Loeffler postings about it, and finally buying and reading his book on it. It all seems like a really good system, I`m am just having a hard time seeing how the tenant can afford these large monthly payments. I have put together a profit analysis on excel, and what someone with some experience with RTO to maybe look it over if they had time.

Couple questions I had...

1. What happens with monthly credits?? Are they held in a trucy account?? Do we have to pay interest to the tenant after the term?

2. What percentage of the monthly payments from the tenants should be put towards option credits?? Just enough to cover a a 5%-10% downpayment at the end of the term??

This is a little breakdown of the property

Current Rent $1250/Month, Covers mortgage and all our expenses
Cash Flow $150/Month


The property has appreciated 3.3% every year for the last five years which equals $580/Month.
Current Selling $210,000 (not including appreciation)
Current Rent $1250/Month
3.3% Appreciation $ 580/Month
Option Credits $250/Month Assuming tenant has $5000 downpayment
Cash flow $730/Month
Tenant Payment $2080/Month

This would give th tenant just over 5% downpayment at the end of their term for a traditional mortgage. Does this layout sound reasonable from the tenants standpoint for those who don`t want to see the detailed excel sheet?

Reason I am so concerned is because our tenants were working with a large real estate agent in Hamilton that was going to do lease to own with them, I want to be comparable when I propose this to them.

Thanks for any help guys, very much appreciated.

 

[GaryMcGowan]

1. What happens with monthly credits?? Are they held in a trucy account?? Do we have to pay interest to the tenant after the term?
We do hold in it a trust account. We look at this as if it where monthly cash flow.

2. What percentage of the monthly payments from the tenants should be put towards option credits?? Just enough to cover a a 5%-10% downpayment at the end of the term??
This is different from a case to case. Your main goal is to create a scenario that allows the tenants to purchase the home from you. We target a 6-7% down payment. Sometimes we may have to be willing to leave our money in the deal if it means that the tenant/buyers can get the mortgage. ie: Vendor Take Bake Mortgage. Do not set up the payments that will see the tenants fail.

For a FMV price of 210k lease payments of $2080 maybe a little steep in todays market. If they can afford that per month be willing to give them more as monthly credit. Right now you are giving them just over 12% a month as a credit. To me this is very low. We like to aim for around 20%. Again every case is different.

Maybe these numbers would work
Todays Price 210k
Deposit 6k
Lease Payment 1,785 (0.0085*210k)
Monthly Credit 357 (0.20*1785)

3yr Price 4% per yr. 236k
Total down payment 14,568k (6.1% down)

Again the goal is to create win win situations where the tenant/buyer succeeds.

Although your first step should be to have a mortgage broker that is familiar with RTO review there financials and tell you that they are good candidates for a program like this. He may tell you they need much longer or shorter time frame. Once they are on board with the idea send them to the broker.
The brokers opinion is very important here.

 

[markl]

Hi,

Have you agreed to that amount of monthly payment? If so I would give them a hefty monthly option payment. I try to get them below what the typical market rent would be in the area to entice them to save.

As Gary mentioned 4% appreciation we are currently using 5 - 6% in the hamilton market. Where is the property in Hamilton?

We do not hold the money in a trust account I would say you might need the money available to put with the lawyer to close the property so you should have it available on a LOC.

Sounds like you are well on your way to your first RTO. One thing you didn`t mention is why can your tenants not qualify? Is it a credit issue or an income issue? If it is an income issue your better off continuing to rent as they most likely will not succeed in a RTO.

Regards,