Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Using Rent to Own as an Alternative Investment Strategy

475 views

Published on

Do you have a property that just doesn't cashflow and you're looking for an alternative strategy? Perhaps you're looking for a shorter term investment with a more defined exit strategy?

Rent to Own (or Lease Options) could be a solution...

This month we will discuss some of the pros and cons of this type of investing along with some examples of how the numbers can work to produce some great deals!

There has been some negative press recently on this type of investment deal - which in some cases was totally justifiable. But done well and with integrity rent-to-own can truly produce some great opportunities for EVERYONE involved in a well-structured deal.

Learn how to do it the RIGHT way!

  • Be the first to comment

  • Be the first to like this

Using Rent to Own as an Alternative Investment Strategy

  1. 1. Surrey Real Estate Investment Club Welcome! “Don't judge each day by the harvest your reap, but by the seeds that you plant.” ~Robert Louis Stevenson
  2. 2. Sponsors Welcome to the Surrey Real Estate Investors Club!
  3. 3. Future Plans 1. Strategy & Getting Started 2. The RE Cycle / Selecting An Area 3. Property Selection and Cashflow 4. Funding Your Deals 5. Multi-Family Investing Property Management 6. Using Rent to Own 7. Due Diligence
  4. 4. Review of Last Meeting www.AspireRealEstate.ca/blog
  5. 5. Tonight‟s Agenda • What is Rent to Own (RTO) • Advantages and Disadvantages • How to Structure a Deal • Exit Strategies • Some Examples
  6. 6. The Legal Stuff… The information contained herein (the “Information”) is intended for general informational purposes only and should not be relied upon by recipients hereof. Although the Information is believed to be correct, its accuracy, correctness or completeness cannot be guaranteed and has not been verified by either Aspire Holdings or any of its affiliates. Views expressed in this presentation are based on research materials available from sources that Aspire Holdings (d.b.a. “Aspire Real Estate”) considers reliable but neither guarantees, warrants nor assumes any responsibility or liability of any kind with respect to the accuracy, correctness, completeness, or suitability of, or decisions based upon or in connection with, the Information. All real estate opportunities come with varying degrees of risk and past performance is not an indicator or guarantee of future results. Prices can go up or down and current performance may be lower or higher than any performance data quoted for comparisons.
  7. 7. Opinions on RTO….
  8. 8. A Basic Overview of RTO •RTO is…a situation where a tenant rents a property with the intention (which is an option but not an obligation) to buy it at a pre-determined price in the future. • A good RTO arrangement sets up the tenant-buyer (TB) for success!
  9. 9. Jargon… Cashflow = Income – Expenses ROI % = [($ gain-$ invested) $ invested x 100] Term = number of years the TB is in the RTO program before purchasing the property Option Fee = $ paid by the TB to hold the legal option to buy the property at end of term Rent Credit = $ amount of monthly rent returned as a credit to the TB at end of term
  10. 10. How does it work? Find a GREAT property A QUALIFIED tenant is selected Payment program and property purchase price is set and agreed upon. Contracts signed. Tenant pays option fee ~2-4% of property value Tenant moves in and pays rent + rent creditsTenant gets ready to qualify for mortgage Tenant buys property Investor makes money! Happy homeowner!
  11. 11. Rental vs. RTO Example Rental • Tenant pays security deposit, first month‟s rent ($1600) and moves in • During occupancy (24 months), the landlord is responsible for all repairs and maintenance • At the end of the rental period, tenant moves out and security deposit returned
  12. 12. Rental vs. RTO Example RTO • Tenant pays security deposit + option fee ($9,000) + first month‟s rent ($2,000) and moves in • During occupancy (24 months), the TB is responsible for minor maintenance • At the end of the rental period, TB buys property and is given a credit (option fee + rent credits = $19,800)
  13. 13. Types of RTO • Tenant First • Find a good TB and let them choose a property • Property First • Find a good property and fill it with a good RTO TB – you are in control! • Sandwich Leases •You‟re a „deal maker‟ in a long-term flip
  14. 14. Why Use the RTO Strategy? • A significant market of people who don‟t qualify for traditional financing • Creates great monthly cash flow • Easier property management • Better tenants • Built in exit strategy and profit
  15. 15. Who Makes a Good RTO Tenant? • Hard-working people with good, stable incomes but are missing something… • Poor credit or credit glitches • Self-employed (provable income) • Low down-payment • New immigrants Why would they do this? Where are they?!
  16. 16. What Makes a Good RTO Deal • Starter family homes that can be purchased below FMV in great areas • Relatively new and in good condition • Buying at the correct time in the RE cycle • Has multiple exit strategies
  17. 17. Setting Up The Deal With The End In Mind… Aims • TB has credits of 5-7% of the purchase price at end of term and qualifies for financing i.e setting up the TB for success • Monthly payment is close to today‟s actual ownership costs • Fix the final purchase price at deal set-up and base it on market knowledge
  18. 18. Example 1 : Deal Setup Original Purchase Price $280,000 Fair Market Value $300,000 Initial Capital Invested $65,000 (23%) Option Fee $12,000 (4%) Monthly Rent $2,000 Monthly Expenses $1,500 Cashflow per month $500 Rent Credit per month $475 (24%) Term 2 Years
  19. 19. Example 1 : Deal Close Income Expenses Cashflow $12,000 Rent Credits $11,400 Option Fee $12,000 Option Fee $12,000 Mortgage PPD $8,000 Closing Costs $600 Sales Spread (3% app) $38,000 Total $70,000 Total $24,000 Net Profit $46,000 ROI 70% / 35% p.a.
  20. 20. An Alternative Exit Strategy
  21. 21. Example 2 : Disillusioned Homeowner! Original „Purchase‟ Price $330,000 Fair Market Value $340,000 Initial Capital Invested $1,500 Option Fee $6,000 Monthly Rent $1,650 Monthly Expenses $1,000 Cashflow per month $650 Rent Credit per month $350 (21%) Term 3 Years
  22. 22. Example 2 : Deal Close Income Expenses Cashflow $23,000 Rent Credits $12,600 Option Fee $6,000 Option Fee $6,000 Mortgage PPD $18,000 Closing Costs $600 Sales Spread (3% app) $38,000 Total $85,000 Total $19,200 Net Profit $65,800 ROI
  23. 23. Exit Strategies • Ideally, the deal closes as planned! • Contract can be extended (under certain circumstances!) • Property converted to a buy and hold with current tenant (or another), or sold • New RTO tenant (Company retains option fee & rent credits)…
  24. 24. What‟s the Downside? • Property turnover • Not a long-term wealth creator • Can be lots of moving parts – you need to be a good project manager! • More work & marketing finding a good tenant prospect, then educating them
  25. 25. Summary • A great strategy for creating or improving cashflow or as an exit strategy for a current property. Lots of demand. • It requires good project management, marketing and tenant education • It is not a long-term wealth creator • It doesn‟t work in all market cycles
  26. 26. Feedback, Prizes and Action plan! Questions or comments? Please let us know! Next meeting Wed. July 31st @7pm Summary: www.AspireRealEstate.ca/blog/ • Find a new person in the group and tell them what you are going to do in the next month to achieve your goal! • Follow up at next SREIC meeting.

×