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What obstacles are there to building a large scale tenant first rent to own business?

TangoWhiskey

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I have developed a system using mortgage brokers to pre-screen qualified rent to own candidates for a tenant first model, and a realtor to work with the candidates to find houses. There are 3 qualified candidates at this point. So far I have only done property first rent to own and had 2 exits/sales last year but the challenge we found with the property first model for RTO is finding the RTO buyer, with a closing ratio as little as 1/60- to 1/70 contacts.
There are some larger rent to own operators on myreinspace. We are looking to invest approx 300K in capital, and doing 6-7 rent to owns focusing on starter homes using the tenant first model with the broker pre-qualifying the candidates and then the realtor touring them around to find houses is one of our options vs finding a single larger multi-family deal.
What are the major challenges in building a significant rent to own business? The big issues seem to be length of time invested in each small deal versus a single larger deal plus the access to financing ie banks want large deals, not multiple small deals.
Is rent to own a strategy mostly suitable for small operators looking to jump to the next level or is it a good choice to build a business placing significant capital like you can with larger multi-family? I like the cash returns of RTO but it seems such a management intensive operation I'd like to hear how the other larger RTO operators are doing it.
Thanks in advance for input!
Tris
 

TangoWhiskey

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I should add that the financing I have in mind is commercial financing at 75 % LTV, as a self employed investor I can't get residential financing at higher LTV's anymore. Input on what others do is helpful, financing is a major challenge for these smaller assets as the banks don't want small deals on the commercial side where they are forcing me to go.
 

Sherilynn

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One of the biggest challenges of a tenant-first business model is it is largely dependent on the market. It works great when markets are rising, so you can charge the 5 and 6% per year mark-ups required to get excellent ROI when paying full market value for properties. It won't work in a flat or falling market. So one has a very small window in which to find TB's, get a bunch of deals going, and make sure they are successfully sold to the TB's before the market flattens or falls. Difficult to scale a business so cyclical and market-dependent.

And if you do get a ton of deals in the works and the market shifts unexpectedly (read: oil slump 2015), you could be in for a rocky ride. Multiple tenant defaults and difficulty finding replacements for anywhere close to the anticipated sale price. We did okay because all of our RTO's were in Edmonton at that time, and we didn't have the extreme ups and downs some other centers experienced. I was incredibly thankful we had already sold our RTO's in other centers.
 

Sherilynn

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Mark's book is great and I recommend it, but it doesn't go into much operational detail. Donna McGuire teamed with Mark to create an RTO workbook containing a lot of detail and sample contracts, etc.
 

Wayne Hillier

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Ha that's funny I just heard about it through a podcast earlier today.

Thanks guys!
 

Matt Crowley

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Big problem with scaling up the rent to own business model is interest usury as between the no refund option deposit and appreciation the tenants are buying a house on worse rates than a credit card. Rent to own is an endangered species and one day will go extinct.

The high estimates of overall industry "success" for tenants is 60%. That is just terrible. Far, far, far better expected payoff for tenant by putting the money on red at the roulette table in Vegas after buying a plane ticket and staying for the weekend. Generally just a terrible product for customers. When a consumer group takes some interest in calculating the true interest cost based on the common penalties imposed by R2O companies and % success in the industry it will get shut down. NDP in Alberta tightened the reins on the cash-mart money business and this is a business under the exact same umbrella.
 

Sherilynn

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Big problem with scaling up the rent to own business model is interest usury as between the no refund option deposit and appreciation the tenants are buying a house on worse rates than a credit card. Rent to own is an endangered species and one day will go extinct.

The high estimates of overall industry "success" for tenants is 60%. That is just terrible. Far, far, far better expected payoff for tenant by putting the money on red at the roulette table in Vegas after buying a plane ticket and staying for the weekend. Generally just a terrible product for customers. When a consumer group takes some interest in calculating the true interest cost based on the common penalties imposed by R2O companies and % success in the industry it will get shut down. NDP in Alberta tightened the reins on the cash-mart money business and this is a business under the exact same umbrella.

I couldn't disagree more.

First, a responsible RTO company who only accepts tenants with a good possibility of getting mortgages within the next 2 - 3 years should have a much higher success rate. (Companies praying on people with no hope to qualify should absolutely "go extinct.")

Second, RTO tenants are renting regardless of whether they rent a property they can buy or a property they can't. There is no interest involved and certainly no "interest usury." Yes, a reasonable portion of option payments is non-refundable, but that usually doesn't cover the costs to the RTO company to repair and market the property to a new buyer if the tenant defaults. There is risk on both sides.

Third, RTO properties with conservative annual price increases can be a fantastic opportunity for tenants. We have had many tenants whose houses appraised for substantially higher than the agreed price. So they were able to live in their "forever homes" even before they could qualify for mortgages, they had the stability of knowing they wouldn't need to move their families again, and they got a good deal on the property rather than renting a regular rental and throwing the dice in the open market when they were finally able to qualify (to use your gambling analogy).

Fourth, if the appraisal doesn't quite work, a responsible and ethical RTO company will work with the tenant to determine a solution fair to both sides. After all, this is meant to be a fair business transaction and most RTO companies are not the vultures you seem to make them out to be.

And finally, government intervention in business in Alberta is usually unwelcome. The NDP flag shouldn't fly anywhere, IMHO.
 

TangoWhiskey

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I would agree with Sherilynn that most negative comments about RTO preying on people are written by people without first hand knowledge of RTO. As an RTO operator, we had to reduce price to make our exits work, and we worked with the tenants in place to make it work for everyone, even moving from being the owner to being the lender in 1 case and writing a 92 % LTV mortgage because they didn't get their ### togethor resulting in their having been in a situation we could have put them out and kept everything. But I don't work like that so we found an out for them. At the end of the day RTO deals with people who can't keep a good financial history for poor financial or poor choice of life partner reasons or whatever the story is. The rate of return needs to be way higher to compensate. The problem IMHO is the non-ethical operators who get all the press.
 

Victoria11860

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Mark's book is great and I recommend it, but it doesn't go into much operational detail. Donna McGuire teamed with Mark to create an RTO workbook containing a lot of detail and sample contracts, etc.
Hi Sherilynn, is the workbook by Donna McGuire and Mark Loeffler different than the RTO Success Program in the REIN store? I found Mark's book Investing in Rent-to-Own good and website resources good but I like to be prepared.
 

Sherilynn

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The "Rent-to-Own Success! in Canada" program is the one I meant.
 
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