So, why would a renter choose to do this option rather than just saving and buying later or even buying now? Several reasons:

  1 - They may not have a large enough down payment today to qualify for the mortgage

  2 - Their credit may be damaged and so they need some time to correct it to ensure they can get the best rates and terms available (why pay 10% interest with bad credit today when you can build up down payment credits in a RTO, improve your credit and obtain 5% interest tomorrow?)

  3 - They want to get into the home ownership market today because they think houses will be too expensive for them a year or two from now but again, they may not quite have the down payment, credit, or even income to obtain ideal financing today

  4 - They may want to "test" being a homeowner. Perhaps the renter has never bought their own home and doesn't know how much work/costs/time being a homeowner can consume versus being a renter. The RTO strategy gives them a feel for being a homeowner, without having to come up with a ton of cash (for the down payment and closing costs) to buy today.

Now, why would you, the real estate investor choose to use the rent to own strategy?

  1 - Helps create positive cashflow on single family homes because you can charge higher than market rents

  2 - Essentially locks-in your return should the Tenant-Buyer exercise their option to buy

  3 - Little property management required as your TB effectively is the homeowner

  4 - Few extra expenses as your TB pays for regular maintenance costs and any upgrades they choose to add to the home

  5 - If the TB purchases the home within 1, 2, or 3 years (the standard option to buy term length), you get your capital back and can turn around and invest in something else

  6 - Get all the perks of a standard rental property (tax write-offs, principal paydown by your tenants, cashflow) but you also get a built-in appreciation factor (something a standard rental does not have)

  7 - If the TB chooses not (or is unable) to buy the property, you retain all the rent credits and their Option fee (they are non-refundable) and your return on investment essentially doubles. You can then turn around and do another RTO with a new TB

  8 - Get an immediate return on your cash through obtaining the Option Fee which can often be as much as 50% of the cash you put in

  9 - Potential less worry about what the tenants are "doing" to your property as your TB are essentially the homeowners

  10 - If you buy smart, little to no work is required to shape-up the house...it's already in great condition

  11 - Feels good to help individuals "get into" the homeownership market

A Look at Real Numbers: Why we chose the rent to own strategy on the home we recently purchased in Kelowna.

Purchase Price: $351,500
Appraised Value: $355,000
2 Year Option Agreement Price: $383,000
Option Fee from the Tenant Buyer: $7,500
Monthly Rent: $2,000
Monthly Expenses: $1,350 (this includes P&I, taxes, and insurance)
Positive Cashflow: $650 per month

So, over the 2 year period, we'll have earned $23,100 from the Option Fee and the monthly cashflow. In simple numbers, this is a 26% return on our down payment AND it doesn't include the appreciation built in nor any principal paydown.
 
Not a bad investment at all, especially considering there will be little we have to do along the way.
 

<< Previous    1  [2]  3    Next >>