Rent to Own real estate is a safe, low risk investment for earning passive income. Typical renters, such as those renting through a Buy and Hold investment model, may do careless damage to your property or request frequent repairs. However, with rent to own real estate, the renters take excellent care of the property. They care for the home as if it were their own, because it is; they have an agreement to purchase it within 1-2 years and are paying a portion each month to you.
Security in Calculating Profits Upfront
The tenant puts down a 5-15% non-refundable deposit towards their down payment that you’re entitled to if they decline to buy the property at the end of the lease. This way, you’ll rest easy with a minimized investment risk.
With rent-to-own, you’ll determine your profits upfront. You can calculate your positive cash flow, know the closing amount you’ll sell for at the end of the 1-2 year lease, and both parties agree upfront to the purchase price.
You generate passive income through the positive cash flow from rent each month. If the mortgage on the house you bought is $500 a month, and you charge $800 a month for rent-to-own tenants, you’ll make a profit of $300 a month. Since this passive income stream is less likely to go towards maintenance repairs, you’ll be making more than with the Buy-Hold-Rent model. Do this with several properties, and you can generate an effective extra income source.
Since the property price is agreed upon immediately, you don’t have to worry about fluctuations in the housing market reducing the value of your property in a year or two. The tenants will can the property with a fixed appreciation model, or you can sell at current market rates, secure in your profits no matter whether the market rises or falls.
Rent to Own tenants are also more likely to pay their rent on time than traditional renters, as they have no desire to lose their deposit or the right to buy the property! Also, because the tenant will maintain their own repairs, you save thousands of dollars a year.
The tenants pay a premium in addition to their monthly rent that is credited to their down payment. For example, Christopher Pascale says,
“The deal goes like this: the tenant who is currently paying $900 a month in rent will agree to pay $1,000 for two years. If a payment is late in any given month, then the rent goes back down to $900, and the deal is void. However, if the tenant makes all of the payments, he is the owner of 10% of all future appreciation and appreciated rental income. This means that if the home goes up from $110,000 to $120,000, then the new partial owner’s share is $1,000, or 10% of the appreciated amount since he has been involved.”
The best part is that you still hold the title of the property for the entirety of the lease agreement, which means you’re as eligible as other home owners for profitable tax advantages. In addition to this, you can claim the business expenses from your rent-to-own real estate business on your taxes.
Components of a Zen Rent 2 Own Agreement
- Lease Agreement – includes the amount for rental payments each month, tenant responsibilities for maintenance, what percentage of rent will be allocated towards rent credit, and more.
- A Purchase Option Agreement – this includes the tenant’s option to purchase the property at a predetermined price and date.
How the Process Works
Screened, pre-approved tenants are matched with investors through a rent-to-own company. As many as 40% of Canadians don’t qualify for conventional mortgage for a range of reasons, and these companies meet this need. The investor purchases the home for them, and they agree to pay for it within 1-2 years. As the tenants are not qualified for conventional mortgages or else cannot put the full down payment on a home, they follow criteria put forth by the bank to meet the mortgage conditions they agreed to. This helps the tenant:
- rebuild their credit
- settle into their new home in as little as three weeks
- pay monthly.
Example: First-time Homebuyer Condo in Mercier/Hochelage (Montreal)
For example, with one of my completed investment deals, the already approved tenants, Jacob and Irene, were matched up with a 2 bedroom condo in Montreal. The deal was:
- 2 years lease option, with
- initial purchase price of $229,000
- and initial cash investment of $60,380
They chose the home and it met the unique needs of a young family with a new baby on the way. With their income of $85,000 a year, they were able to meet the requirements of the rent-to-own program, though they couldn’t qualify for a conventional mortgage, as they lacked payments on hand to meet the bank’s requirement of a 20% down payment.
Here were the exit options on the property:
- Sell home to the tenant buyer through pre-signed option contract
- In event of tenant buyer defaulting, sell property and pay out investment
- In event of tenant buyer defaulting, lease option to new tenant buyer
Jacob and Irene are responsible for all repairs under $500, and will be subject to quarterly inspections of their property by the competent management team. Because of this, they are highly motivated to care for their home and make payments on time.
So Why Invest in Rent to Own Real Estate Now?
Let’s talk about the recession for a moment. As an investor, you’re likely looking for ways to smartly invest during a recession – and rent to own is an effective one. Rent to own properties can help you, and your tenants, succeed in the recession in three steps:
- Investor purchases foreclosed or currently foreclosing properties.
- Investor rents out the properties with fixed price agreement in place.
- As the price the tenant pays is higher than the price you paid for the foreclosed home, the investor makes a profit.
There’s an added benefit for families facing foreclosure of their homes because they can’t make monthly payments at their current mortgage rate. If you buy the home during its foreclosure and rent it out to these tenants, you can negotiate a lower price with them. Here are the benefits:
- The tenant can stay in their home.
- They can reduce their monthly rent.
- If they cannot make rent in the future, you can negotiate.
- You make a profit!
- You can resell their home to them in 1-2 years once they’ve recovered financially.
This way, not only are you making a smart investment with positive cash flow and predictable monthly income, you’re also helping a family in need maintain a stable life in the house they call home.