Structuring a rent to own

[cpkproperties]

Hi all, I am trying to structure a rent to own program for a brand new condo development and am coming across some resisitance from CMHC re: market rent. In a 2008 market report, CMHC showed our current market rent at $670 for a 2 bedroom unit. I would like to use this number when calculating the rent credits and monies held in trust for the tenant/buyer. CMHC is saying that the buyer cannot use these funds because they are not at arm`s length and are tied to the sale of the property.

I know that RTO`s are possible. Is there a formula, CMHC loophole or a different way to structure this program (details below):
1. 100% of security deposit and 1st months rent held in trust;
2. 50% of each month`s rent thereafter added to the trust;
3. Tenant/buyer will have amount equivalent to 5% down in their trust in about 18 months.

Any help would be much appreciated.

 

[Dan_Eisenhauer]

In order for CMHC and the banks to allow a portion of the rent to be contributed to the purchase price, the amount to be contributed must be greater than market rent.

Let`s make some assumptions:

Purchase price today: $100,000 (for easy calculation)
Average Annual Appreciation: 4%
Amount to be paid five years from now: $121,000 (five years @ 4%)
Mortgage obtained 5 years from now: $115,000 ($121,000 X 95%)
Difference between the 2: $6,000

$6,000 accumulated over 5 years = $100.00 per month premium. NB: If the renter contributes an initial DP, then the difference is reduced by that amount.

You may also want to pay yourself something on your originally invested capital. You are, in effect, loaning the renter your money to buy the property, and you deserve a return on that investment. 6 - 7% is certainly fair. But, the rate is up to you. Add that to the rent.

 

[cpkproperties]

Thank you for the formula. I`ll apply it to my example and see if it fits.

I guess my next question is who sets the `market rent`? Is that a fixed number, or one I can deduce from looking at CMHC reports, in newspapers etc?

I guess I just want to be sure that at the end of the lease term, all the money put aside can be used as a down payment and the tenannt will be able to qualify for a mortgage.

Also, what about a tenant who does not opt to purchase the unit? Am I obligated to return the rent credits to them, or can it be deemed rent paid?

Thanks again.

 

[Dan_Eisenhauer]

You need to do research on your own to find the current market rent. The CMHC reports are out of date the moment they are published, but they will give you an idea.
Here is another suggestion: Create an Excel worksheet. Look for ads in your paper, or online for comparable properties. Use as many criteria as you can find... geographic area, # of rooms, rental rate, local amenities. Your goal is to mark the rents from competing properties up or down for each criteria to make it as if it is yours.

eg. You find a competing property rents at $1,000. It has a location that is not as attractive as your... subtract $50 (you need to define what that difference really is). Do this for each criteria, and for each property. Total your changes. Then calculate the average of all your data. That will give you a pretty good idea of the current market rent.

Realtors do this every time they list a property. It is known as a Comparative Market Analysis (CMA). Yes, it takes time to prepare, but this is your living.

BUT, if there are many similar rentals in your area, and they are all in the same price range, then that is your current market rent.

Most Rent-To-Own agreements call for the renter to loose any premium paid if they fail to complete the purchase. It becomes income to you. There is another recent thread here on this topic. Check it out, too. You need the proper agreements to ensure you get to keep that premium on default of the tenant.