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What Nobody Talks About: Three Reasons Rent to Own Investing Can Stink

Julie Broad Real Estate InvestorI’m not being dramatic here. Rent to own deals can be really crappy.

I’m not against them. We still do rent to owns. We’ve done a lot of them in the last four years. We have a training program to help our coaching clients learn how to do rent to owns. However, I am against the fact that I hear nothing but great things about rent to own deals in the education sphere and the reality is that there are some things you should understand before you dive in.

There are some really lousy things about rent to own deals, even when you do everything right.

Rent to own is when a tenant rents your property with the option to purchase it. You set their purchase price at the beginning; they pay a fee (which can become part of their down payment) for the option to purchase it in the future; and a portion of their rent is a credit that builds up over time towards their purchase. There are two approaches to rent to own – tenant first and property first (learn more about property first and tenant first here).

Both approaches generate more cash flow because the tenants are paying a higher than market rent for their property in exchange for credits that build up towards their purchase, and they are responsible for basic maintenance. Also, you typically don’t need property management because of the quality of tenants that move in and because they are responsible for taking care of repairs up to a certain dollar amount.

When I quit my job, we evaluated all of the options for cash today. Wholesaling requires constant marketing and funnel management. If you’re not constantly finding sellers and buyers, you aren’t making money. Flipping is stressful and higher risk. It also requires you to be consistently working on a flip or you won’t be filling your cash needs. We felt being a realtor would reduce the focus from our own deals and since we were planning to do a deal every month or so, we knew we’d need a lot of focus for that. And property management is not something we really enjoy, so we didn’t want to create a business around it.

That left us with rent to own as the best solution for us.

By changing a few of our existing rentals to rent to own, and adding just a handful of rent to own properties to our portfolio, we were able to boost our cash – with the option fees and the increased cash flow – to a point where we were comfortable financially from our real estate holdings. We also liked the fact that rent to own helps good people get into home ownership. Our rent to own tenants give us big warm hugs, invite us for dinner, make us handmade thank you cards, and invest in fixing up the homes.

We like rent to own because if we want to take a month off from working on our deals, we still make money. We can’t say that about any of the other strategies I noted above.

However, rent to own is not a perfect strategy, and I’m not a huge advocate anymore. When we started doing them, I was excited. I loved that we were helping people and making a great income doing it. Four years later, I like it as an exit strategy. It’s a great tool for your tool box but I don’t think it’s a great business model. If you only do rent to owns right now, you will want to read this carefully. Maybe it’s working today but it has some serious challenges. Let me explain why.

Three Reasons Why Rent to Own Investing Isn’t Always Great for Your Business

First, you can’t always do rent to owns.

Market Cycles Impact Rent to OwnThe market conditions have to be right. If you are in a very hot market, you will end up selling your property for quite a bit less than you could have made, had you sold it on the market normally. On the other hand, in a market that is flat or heading downwards, pricing a rent to own in a way that is fair to a tenant and that will still make you money is extremely difficult.

And, even if the market in your area is doing okay; if the overall economic sentiment is poor, people will have a hard time believing the house will be worth the same as it is today, let alone slightly more when you sell it to them in 1, 2 or 3 years.

If rent to own is your only strategy in your business, what are you going to do when the market is not good for doing rent to own? And what are you going to do if your cash flow suddenly drops dramatically because of a market shift that makes new rent to owns difficult and existing ones fail?

Second, it really sucks when someone walks away from $15,000 or more!

If you’re a sensitive person who cares about other people, you’ll never find comfort in the fact that you still make a good profit when a rent to own fails. There’s nothing to celebrate when a family leaves hard earned money behind, even when you’ve done everything in your power to make it work.

Our first failed rent to own weighed so heavily on us. It was a couple that I would have bet my own house they were going to buy their rent to own home from us. They were pretty much the ideal rent to own tenant, or so I thought. Less than a year into it, they walked away from $18,000 in deposit and credits. We tried everything to work with them but their minds were made up. It made absolutely no sense to us why they walked away. We still don’t understand. And it weighed on us. Eventually we came to terms with the fact that we’d done everything we could do to make it work and the tenants understood the contract and still chose to walk. But, coming to terms with something is very different than actually feeling good about it.

The market has softened where we invest and we’ve had more people walk (from their rent to own…and all their credits) in the last twelve months than we’ve had close on their deals. It gets a little easier to swallow, but it never feels good. It also makes it harder and harder to want to do more. I’m less excited about the prospect of helping people with a rent to own because I am starting to see that no matter what we do, we’re only going to help half the people we work with.

Plus, while we explain the potential of a failed sale to our investment partners and we always have a plan B of being able to rent it out as a regular rental if we need to, it still feels like we’ve failed our partners when the deal doesn’t go through. They expected to have their investment capital returned to them in 2 years and that doesn’t happen if the tenants walk. Most of our partners understand and realize their return remains strong despite the failed rent to own, but some of our partners are really disappointed when the property doesn’t turn over. Disappointing someone feels terrible too.

Third, there’s minimal wealth creation in rent to own.

http://www.dreamstime.com/stock-images-flying-dollar-bill-image27023354Rent to own adds cash flow to your business, it’s a great way to sell a home without a sales commission and it can generate a solid return for a money partner but you aren’t getting wealthy. I love buy and hold real estate because you make money with mortgage pay down, cash flow and appreciation. You also enjoy great tax benefits. With rent to own you make money mostly from cash flow. The appreciation in the property largely goes straight to the tenant as you credit their rent and recover their deposit when you sell. The mortgage pay down is always minimal at the start of a mortgage so you never really get much benefit from that. And, the tax benefits are reduced by the fact that rent to own is considered an active business and not taxed the same as regular rentals (which is usually taxed as a Capital Gain/Loss when you sell).

I’ve grown tired of the churn required to run a rent to own business. We did a deal every month because we had to keep the deals coming in to continue to fund our business and make up for the cashflow we lost when one would sell. It’s tiring. I love collecting houses. I am a fan of building wealth and knowing my financial future is secure because I have a monopoly board full of little green houses. With rent to own, we’ve bought some really great houses that we no longer own. It was so much work to find those great deals, fix them up, find and educate the tenants, only to sell the property before we really realized all the financial benefits. I am thrilled I helped some really great people buy a wonderful home in a great area but now I can only drive by and say “I used to own that house.”

I am grateful for the cash flow that rent to own’s give us. It also allowed us to transition from my salary to our real estate business in a much shorter time frame and with fewer properties than a buy and hold strategy ever would have. I’m not against rent to own – I am sure we’ll use it again when we’re ready to exit from a property – but I am not going to pretend it’s the greatest business model ever because I don’t think it is. I think it’s an important tool for your real estate investing tool box. I think it can be a great way to sell a property, help a family and give your business a little more cash flow. I just don’t think it should be the only thing you do as an investor.

 

 

1st Image Credit: Julie Broad
2nd Image Credit: © Alain Lacroix | Dreamstime.com
3rd Image Credit: © Nilikha | Dreamstime.com

 

How to Make More Cash with Real Estate

Think Buy and Hold real estate is your ticket to early retirement?

For the odd person with luck and good timing on their side, it can be. For most people, unless you’re talking early retirement in 15 – 20 years, it’s not.

Buy and hold rental property is a critical component to every real estate portfolio. I think it is THE greatest wealth creator over time, but if you want to live off your real estate without waiting to pay off the mortgages or working your butt off to buy 100 houses, then you’ll need to find a way to bring in some cash today.

Besides holding down a job to pay your bills which is a great strategy if you like what you’re doing (it will be MUCH easier to get financing for your deals if you have a job!) most real estate investors create their cash today using one of the following five strategies:

  1. Wholesaling or assignments
  2. Flipping
  3. Becoming a realtor
  4. Creating a property management business
  5. Adding a strategy like rent to own that will increase your cash flow on a monthly basis. (this is what we did when I quit my job four years ago).

So what are each of these strategies?

Wholesaling to Make More Cash with Real Estate

Wholesaling is basically where you do all the leg work to find under market deals and get them under contract. Then you assign them to someone else for a fee.

Traditional wholesale models are where an investor just wants to be assigned a profit producing property. You put in the effort to market, filter and negotiate the great deals and build a network of investors that will buy the deals off of you, and then when you have a good deal you assign it to an investor.

This model is a great way to add thousands of dollars to your pocket ever deal you do. Of course, the challenge with wholesaling is you always have to work your funnel of deals and build your investor network so you have supply and demand for the product. It is a lot of work – but it does help fill your bank account once you get your systems in place.

Flipping to Make More Cash with Real Estate

Most people think they know what it takes to flip a house thanks to all the tv shows on the subject.

Ian Szabo, a guy who knows what it takes to make $50,000 – $150,000 on a flip (he does 2 or 3 like that a year), author of From Renos to Riches, and creator of FlipSchool.ca says he flips houses in two ways:

  1. Buys a derelict house in a great area, fixes it up, and sells it for a juicy profit.
  2. Buys a house that needs work, adds a legal suite, refinances to pull out all his money and some profit, and then rents it out to make cash flow.

Flipping is a high-risk strategy, however, and even Ian doesn’t recommend anyone approach it without a back up strategy in place.

With the right strategy, the right house and the right plan, most flippers starting out can make about $30,000 on a flip, according to Szabo. And that’s about right! One of our VIP Coaching Clients just finished her first flip & made pretty close to that too.

With that kind of profit potential, you’d only need to do one or two a year to really fill in your ‘cash today’ needs.

Becoming a Realtor to Make More Cash with Real Estate

We don’t have an official survey or anything but I’d venture to say this is one of the most common ways real estate investors make their cash today. When you’re an active buyer of real estate, it doesn’t take too many deals where you see your agent make $10,000 in commission for doing minimal work, to begin to see the value in working as a realtor on your own deals. When you also consider that you can help a few of your investor friends and make a bit of commission on their deals too, it can be very appealing for you to become a realtor to satisfy your needs for cash today. Plus you’ll get access to all the MLS data for your area.

That said, it IS a distraction. No matter how little you do as a realtor it takes time and money to have your license. We’ve considered it but ruled it out because we think that it will distract us from our primary business which is buying real estate. There are some other challenges with being a realtor and an investor such as ensuring you follow disclosure and other licensed realtor rules. Further, there can be considerable ongoing brokerage and marketing costs to stay licensed as a realtor.

For many investors though it’s been the ticket to freedom. If you can stay focused on your investment business and build a successful side business as a realtor, this seems like a very popular way many real estate investors make cash today.

Creating a Property Management Business to Make More Cash with Real Estate

At one point, with property all over Canada, we were working with 6 different property management firms. When we quit our jobs and began to spend more time evaluating our cash flow, we began to spot a lot of cash leaks.

To plug some of the holes, we began bringing our property management efforts in house. With the money we saved on property management expenses each month we could afford to hire someone to help us. By doing most of our own property management, we find that we make more money every month and spend less to do it.

Many other investors come to this conclusion as well. And if they do their own property management well, their investor friends take notice and ask for help managing their properties.

But it takes a lot of work and it’s not exactly fast cash. You also should take note that some provinces require a Property Management license to manage properties that are not your own.

Rent to Own to Make More Cash with Real Estate

Rent to own is when a tenant rents your property with the option to purchase it. You set their purchase price at the beginning, they pay a fee for the option to purchase it in the future, and a portion of their rent is a credit which builds up over time towards their purchase.

It generates more cash flow because the tenants are paying a higher than market rent for their property in exchange for credits that build up towards their purchase and they are responsible for basic maintenance. You also don’t typically need property management because of the quality of tenants that move in and because they are responsible for taking care of repairs up to a certain dollar amount ($300 in our case but many other investors have their tenants handle up to $500 or even $1,000).

When I quit my job, we evaluated all of the options for cash today. Wholesaling requires constant marketing and funnel management. If you’re not constantly finding sellers and buyers you aren’t making money. Flipping is stressful and higher risk. It also requires you consistently be working on a flip or you won’t be filling your cash needs.

We felt being a realtor would reduce the focus from our own deals and since we were planning to do a deal every month or so, we knew we’d need a lot of focus for that. And property management is not something we really enjoy, so we didn’t want to create a business around it.

That left us with rent to own as the best solution for us.

By changing a few of our existing rentals to rent to own, and adding just a handful of rent to own properties to our portfolio we were able to boost our cash position with the option fees and the increased cash flow to a point where we felt comfortable financially from our real estate holdings. We also like the fact that rent to own helps good people get into home ownership. Our rent to own tenants give us big warm hugs, invite us for dinner, make us handmade thank you cards and invest in fixing up the homes.

We do have to continue to add properties in order to keep the cash flowing because rent to own deals do turn over every 12 – 24 months after purchasing them. That has largely been the reason we so aggressively added property to our portfolio in the last three years adding 10 – 12 new properties a year. But we like rent to own because if we want to take a month off from working on our deals, we still make money. We can’t say that about any of the other strategies.

And for us, our real estate business has been created so we can live the life we want. For us we wanted to maximize our freedom and minimize the amount of ongoing work that has to be done in order to generate the income we need.

Regardless of how you do it, if you want to become a full time real estate investor, you’ll need to find a cash today strategy that works for you so you don’t have to wait 10 years before you can call it quits.
Image Credit: © Sorin Alb | Dreamstime.com

Rental Property Portfolio ABCs

ABC of Rental Property PortfoliosEver sit down and look at what you own in your rental property portfolio today? Even if you only have two properties and one of them is your own home. Do you ever sit down and think about what you’ve got and whether those assets are moving you closer or further from your goals?

Dave does this on a regular basis. I call it ‘dances with spreadsheets’ as he reviews the cash flow and the values on each of the properties we own. I do it in a less formal way but I still look at what we own and think about whether each asset is properly performing it’s role in our greater plan.

It was during one of my informal reviews that I realized one the properties we’ve held for five years is not doing it’s job. It’s not generating positive cash flow and it’s not part of a greater plan to redevelop. It’s just making us money through the mortgage pay down and it’s slightly increased value.

We bought it by refinancing another property so we have been more forgiving of it. I mean, it didn’t cost us any money out of our own pocket and it’s still building our wealth at a steady pace so it hasn’t been a bad purchase.

BUT this particular property hovers around neutral cash flow on a monthly basis which really means it is costing us money each year because any additional repairs (like the painting we will have to do when the tenants move out or the fence we have to repair because it’s falling apart) come out of our pocket.

Spending a bit of money here and there on this place didn’t bother me in the past because I had a great paying job. The repairs were a tax write off, and the tenants were paying down my mortgage so I was still ahead. This property hadn’t cost us a single penny to buy and we’ve probably only put $5,000 into the property over the five years we’ve owned it, so we’re still making a great profit on this property. And, it’s in a great area that makes it easy to rent out. I was holding it for the long term so I didn’t really worry about it too much as long as it was rented. But, times have changed and we live off the money we make from our rental properties so cash flow is far more important to me today.
Julie at MOMAR thinking About rental property portfoliosAnd refining our portfolio to squeeze out the maximum amount of cash flow and wealth creation possible is my full time job … so I want to do better with every property. This was my focus when I was doing the informal portfolio review. (By the way … I call it an informal review because I usually think hard about things like this while running or walking the dog. When I am done thinking about it I discuss it with Dave who can back up or counter my thoughts with the real numbers and together we’ll make the final decision).

My latest informal review of our portfolio made me think of the advice my friend John Marsh shared with me recently. He said:

Take a look at your portfolio and label each property as either A, B or C. Figure out a way to turn your B’s to A’s and then sell your C’s.”

And when I thought about it in this way, it was clear to me that this property is a solid B.

The home is conveniently located to shopping and good schools. It’s very central to everything in this city. There are always tenants that want to live in the property and the area is stable economically. House prices went down a bit in late 2008 and early 2009, but they’ve recovered and are on their way up again. It creates more wealth for us than it costs us money but overall it’s not putting any cash in our pocket today. It’s not a money pit but it’s also not a cash cow which is why I would call it a solid B property.

John is a real estate investor and businessman in Alabama. He has a restoration company called Historic Possibilities where he specializes in moving and restoring historic buildings to the beautiful state they once were in. He’s really revitalizing his town one house at a time, and he loves what he’s doing! I hear it in his voice every time we speak. And with years and years of real estate investing experience under his belt and some fabulous mentors helping along the way, John has some fabulous stories and wisdom to share.

So John’s advice was running through my mind as I was thinking about our portfolio. I realized that we only have a couple of C’s but we’re keeping those for now as we plan to redevelop the land they are on at some point in the future. Beyond that I would classify all our other properties as A’s except this one.

Turning The B Property into an A+

As of Tuesday that all changed. We have turned our solid B into an A+.

Smiling Rental Property PortfolioOn Tuesday Dave deposited a bank draft for $10,000 and starting in July we’ll begin collecting so much rent from this property that we’ll be banking $700 in cash flow profit each and every month.

So what did we do? Well, basically we decided to turn this property into a rent to own! And we were totally overwhelmed with the response. Like I said, this property is in a great location. It’s a very high demand area. We actually had a wait list of qualified applicants without even showing the property to a single person! We were blown away.

What we uncovered by simply trying to find a way to turn our B property into an A was a crowd of starving people desperate to get into a rent to own program for a home in this specific area. Many of the folks we’ve talked to already rent nearby, work close by and have kids in the schools that are walking distance from this home. They want to live in this area but can’t get financing from a bank to buy. Some of the folks anxiously waiting for a home in this area include:

  • A young couple with a 4 year old son with good jobs but one person in the couple has horrible credit because they cosigned for a loan for a family member and the family member defaulted on the loan;
  • A family from Nigeria that has only been in Canada 9 months and hasn’t established their credit yet;
  • A couple going through divorces with assets tangled up in the divorce and very little cash for a down payment;
  • A single mom with credit issues coming from her divorce.

Now with our B property safely positioned as an A, we can focus on buying more properties in this area! And, while we’re doing that we’ll be carefully reviewing our portfolio every couple of months to make sure the A’s are still A’s.

If you have rental properties today … take a look at your portfolio and figure out where you can improve your holdings. If you’re holding B’s figure out a way to turn them into A’s. If you can’t turn them into A’s you should consider selling them. And if you’re holding C’s consider selling them so you can buy A’s instead.

It’s as simple as ABC … 🙂

ABC Image Credit: ©Limbi007 |Dreamstime.com

Smiling Face Image Credit: ©Kuzmichevdmitry |Dreamstime.com

Published May 27, 2010

Are Rent to Own Deals a Good Idea?

As part of our 12 Months to $1 Million membership program we host two group coaching calls per month. We’ve been receiving fantastic feedback from our members, and quite frankly, we really love to chat with our members and help them out with their biggest questions.

One of thing that keeps coming up is the subject of rent to own deals… we kept touching on them for various reasons until finally one person wrote in and said “Are they a good idea?”. So we spent about 18 minutes carefully explaining them and what the advantages and disadvantages are.

We’ve got that excerpt from the call for you to listen to today!
It’s 18 minutes long.

 

Published on December 16th, 2009

All About Rent to Own Real Estate Deals

In recent years, especially in Western Canada where we live, a lot of real estate investors have found it tough to make the ‘numbers work’ on buy and hold deals. The biggest challenge is finding a deal that you can buy for a price low enough that you can cover all the costs with the rent it will generate.

While home prices sky rocketed over the last 8 years (up to 2008 anyways), rental rates took a slow and steady path upwards.

One of the ways we’ve been able to continue investing in Western Canada and still make money from our investments is to buy properties and then find tenant buyers for the properties. That is, we’ve done a rent to own real estate deal.

rent to own real estate deal in kelownaThe most recent example is from a single family home we purchased in Kelowna, BC.

For our readers that are unfamiliar with how the Rent to Own (RTO) strategy works, here’s a brief summary.

The rent to own strategy is just like how it sounds, a tenant rents your property with the intention (and option) to buy the property at some point in the future (and at a pre-determined price).

To help your tenant prepare for the purchase you charge them a rental rate over and above the market rate with a portion of their rent building up as a rent credit.

For example, if a single family home (3 beds, 2 baths, 2 storeys, good neighbourhood) rents for approx. $1,300 per month as a standard rental unit, in a RTO, the tenant may pay $1,700 per month and $400 of that $1,700 goes towards the purchase of the property (when and if they buy).

Thus, if the renter (known as a Tenant-Buyer) elects to purchase the property after 1 year, they will have $4,800 ($400 times 12 months) towards the purchase of the property. This, coupled with an Option Fee (similar to a down payment) which the Tenant-Buyer (TB) pays to the Landlord at the beginning of the rental period, goes towards the purchase price.

Here’s a quick look:

 Purchase Price for Tenant-Buyer: $350,000
 Option Fee from the TB: $10,000
 Monthly Rental Credits from the TB: $4,800
 Net Cost to TB when they Purchase: $335,200

In essence, the TB no longer has to come up with $350,000 when they buy the property, they now have to come up with only $335,200 (plus standard closing costs). And, if the Tenant-Buyer is able to obtain good financing, they may only need to put down a few more thousand to make-up the difference between the purchase price and the mortgage amount. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it’s like forced savings) instead of having to put aside $500, $600, $700 per month into a crappy (low interest) savings account.

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.

One of the things people always say is “What if the tenant doesn’t buy it?”.

It’s a risk (and you should always be analyzing the risk in your real estate deals). But, it’s worth noting that it’s not really a bad thing if the tenant buyer decides not to buy after the 2 year period. At that point we will probably have a bit of maintenance to do on the property and then we will do another rent to own deal on the property. We will get a new deposit, set the new purchase price based on a new appraised value, and we’ll continue paying the principal down on the property with the rent. At that point our return will jump up considerably.

Now, what are the reasons NOT to choose a RTO strategy?

The opportunity to make single family homes cash flow makes this strategy very appealing but it is not for everyone. There are some reasons that a rent to own strategy might not work for you and your goals. Here’s some reasons why:

1 – Smaller population of Tenant-Buyers than regular renters so it may be more challenging to place good, quality TB’s than in a regular rental unit

2 – It doesn’t make much financial sense to pay a property manager to over see a rent to own property given the limited amount of work involved. However, that choice means that it will involved more of YOUR time

3 – If your target market area is in high demand from competitive owner-occupied buyers, you may have more trouble buying good, high quality properties (because there is so much competition)

4 – You have to remember that someone that makes a good renter is not necessarily the same person you’re looking for as a tenant buyer. Your market includes people with bad credit. It also includes people that have gone through some financial challenges because of divorce, job loss or just bad money management. These are people you might not rent to under normal circumstances but you will be considering them as a tenant buyer. Your main concern here is their ability to make the monthly payments. You aren’t as worried about their credit. You want someone that is going to be likely to take good care of the property and can potentially buy it in a few years. You aren’t looking for the perfect candidate that could buy it right now!

5 – If the TB exercises their option to purchase at the pre-set price and property values have skyrocketed since you agreed on that pre-set price, you won’t obtain that large appreciation

6 – It’s still a rental property and somewhat illiquid (compared to stocks, bonds, and other investments).

The Rent To Own strategy is just another tool for your tool belt. It’s not for everyone, but it does make it possible to generate strong cash flow from properties that would otherwise never stand a chance of covering their costs and putting money in your pocket each month.

And the good news is that Rent to Own is really not that different than a standard buy and hold deal.

The tools required to find, buy, place, and manage a rent to own property are similar to a standard Buy and Hold(and so you can apply the principals from one technique to the other quite easily), but this strategy can also give you that “feel good” emotion that comes with helping a prospective homeowner get into the market (and you can profit from that too!).

Published on October 16, 2009

Article Archives: Property Managers, Real Estate Agents, and Tenants

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Succeed as a landlord

Property Management isn’t for everyone

Tenants, Toilets and Other Rental Property Repairs

Dealing with Late Paying Tenants

8 Ways to Know if You Should Hire a Property Manager

Five Steps to Rent Out Your Property

Real Estate Agents: Whose Side Are They On?

Preventing High Tenant Turnover in New Construction Condos

Five Ways to Protect Yourself from a Bad Property Manager

Playing the Real Estate Insurance Game

We Were Robbed

Manslaughter and a Crack House

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