With rent to own, the tenant rents your house and has an option of buying it. They actually move into the house intending to purchase it from you sometime in the future. You determine the buying price at the start and they pay you a fee just in case they consider buying it in the future. A certain portion of the rent they pay serves as a credit that builds up with time towards their future purchase. Since the tenants pay a relatively higher than the basic market rental rate, this kind of arrangement generates more cash flow in addition to the fact that the tenant takes responsibility for basic maintenance. Typically, there is also no need for property management since the tenant will handle any necessary repairs up to a specified dollar amount.
What I have realized is that through rent to own strategy, we are really helping people in a major way. Most of the rent to own tenants whom we have dealt with always give us some big hugs, make us beautiful handmade appreciation cards, invite us over for dinner and invest a lot in fixing the homes up. One of the tenants actually painted the exterior and interior, fenced the back yard and built a garage, something that you can’t see among regular tenants. A typical rent to own tenant comprise of new folks to Canada who are yet to establish a credit, those going through divorce and have their assets tied up, those who have ruined their credit due to health reasons and people who don’t have adequate savings to pay a full down payment. Such people need some help as they can’t be financed by the bank and other financing options available to them don’t make much sense to them either.
Tenant vs. Property
Most real estate investors contend with the reasoning that creating more cash flow is a great addition to your investment portfolio. However, the main argument as far as rent to own is concerned is what really comes first. Is it the property or the tenant? Regardless of which approach you decide to use, it is always of paramount importance that you screen your tenant. Besides the usual screening of tenant which includes reference checks, credit score review and employment verification, you should ensure that the level of income of the client qualifies them for future financing.
Also, the debt load of the tenant should be reviewed as well to ascertain that the bank won’t have a problem dealing with them if necessary in the future. If they have any issue, you must plan how it will be corrected and ensure that they are aware of the plans they need to follow to qualifying for bank financing. Investors who overlook this step end up abusing the rent to own arrangement and give it a bad reputation. Some are lazy to do all these, others aren’t aware of how it works and some do it intentionally.
This refers to when an investor has pre-screened the tenant and made them go through a rigorous screen process and they have passed, they have the deposit and the income and are ready to shop for a house. Together with your realtor, you will send them to search for the house they want and the realtor knows what and where you will buy. Since they picked the house, it is expected that they will show full commitment to the house and will honor the agreement.
With property first, the investor finds and buys a property and then finds a rent to own tenant for the property. Property first has a share of challenges especially when it comes to finding a tenant quickly. It can take you a month or even two before you fill the property and you might even find yourself converting it into a regular rental when it fails to attract a tenant buyer. Both of these two approaches have their share of pros and cons and risks and rewards and this is something that an investor must always keep in mind before choosing either of the two approaches.
Rent To Own house in Barrie (example)
|Property first||Tenant first|
|House price $309,900||$296,000||$309,900|
|Cash required (20% down)||$59,200||$67,000|
|Monthly mortgage payment||$935||$980|
|Total monthly expenses||$1235||$1280|
|Rent To Own||$1800||$1800|
|3 years contract||$364,500||$364,500|
|Profit per year||50%||36%|