Basically, a rent to own program is the same thing as a lease that provides you with the option to buy the property. You and the tenant are joining into an agreement which allows the tenant to rent the home for a set period of time in which they have the option to purchase the property for an agreed upon amount at any point throughout the agreement period.
This does not mean that your property is sold once the agreement has been signed; the tenant has the option to choose whether they want to buy the property still. On the other hand, you do not have an option once the agreement is signed. If the tenant chooses to buy the property then you must sell it to them at the agreed upon price as long as it is within the time period agreed upon. Basically, you are obligated to sell yet the tenant is not obligated to buy; this is the easiest way to explain a rent to own program.
If you are considering a rent to own program there are a few terms that you should be familiar with. The first is the buyout sales price. This is the price that you are offering the property up for sale to the tenant for at any time during the lease agreement. The amount of monthly rent is the price which the tenant is responsible for paying you each moth throughout your agreement until the property has been purchased.
Monthly credits are another frequently used term in a rent to own agreement which refers to the amount of credit that is applied to the sales price of the property if your tenant chooses to purchase it. The average amount of monthly credits range from $100 – $400+.
An upfront option payment is another common part of a rent to own program which refers to a fee charged to the tenant for providing them with the option to buy. This fee is paid upfront by the tenant and is non-refundable unless the tenant chooses to buy the home then it should be applied to the buyout sales price of your home at the time of sale.
One house in Rent To Own program create 5 profit sources
1. Appreciation -This is the increase of the property value of your home that banks up over time as the tenant continues to pay on the mortgage and decrease the amount still owed on the home.
2. Cash Flow – Another way that you will profit from a rent to buy program is the amount of cash flow that the home produces. This is the amount that is left over once the mortgage payment has been paid each month.
3. Equity Built Up – As your tenant pays rent each month this also increases the amount of equity build up that you have in the home. As the tenant pays off your loan, the amount that you own free and clear is decreased.
4. Tax Savings – You will also experience some tax savings due to the decrease in tax liability at the end of the year.
5. Option Down Payment – This large upfront payment is charged to the tenant for providing them with the opportunity to buy. If they purchase the property this amount is applied towards their down payment. However, if they do not choose to purchase the property at the end of the lease then this is profit in your pocket.
Lets take example of my last deal for Rent To Own house in Barrie
I am usually doing rent to own in Barrie. Very often I am doing rent to own investment in Hamilton. Also good cities for rent to own are Cambridge, Kitchener, Oshawa and etc.
I found Fully Detached house for sale in Barrie with 2-car garage and finished basement. Asking price was $309,900. I succeed to buy this house for $296,000.
Lets see numbers:
Down payment 20% – $59,200
Closing cost – $5,000
Deposit from tenant – $7,000
Price after 3 years – $352,060
Credit to tenant – $14,400
Mortgage – $942
Tax – $280
Insurance – $60
Total expenses – $1,282
Rent – $1790
Cash Flow – $508
Mortgage down after 3 years – $21,000
Profit – $57,660
Total = Profit + cash flow = $75,950
I bought house in Barrie for $296,000 and the tenant-buyer will buy this house for $352,060. Buyer put down $59,200 and closing cost was $5000. Profit calculated by subtracting credit to tenant ($14,400), deposit ($7000) and purchase price ($296,000) from final price $352,060.
ROI —-> 54%
2. Cash Flow
Assuming that house was fully rented for 3 years then $508×36= $18,288. Investor put $64,200.
ROI ——> 28.5%
3. Equity Built Up
Mortgage paid down approximate $21,000.
ROI ——> 32.7%
4. Tax Savings
Estimation with depreciation, mortgage inters, insurance, maintenance, property tax and etc can save your around $30,000. Tax loss calculated at 30% therefore $9000 in tax savings
ROI ——> 14%
5. Option Down Payment
Down payment from tenant $7000.
ROI ——> 11%
TOTAL ROI in this case is 140.2% or 46.7% per year for your money