Thursday, November 23, 2017

Cash Flow Problem? Use Rent-to-Own (RTO) to Boost to $600+ per month

Invest With Great Returns and for a Great Cause
I attended a very helpful educational Real Estate MeetUp earlier this week. One of the topics covered was on Rent-to-Owns (RTO).

How Rent To Own Works


Investor and home buyer/tenant are the key parties in a rent to own deal. Here are their primary responsibilities:

Investor


Someone who buys a house as a temporary home owner with the intention to re-sell it to home buyer/tenant at a pre-agreed upon price at the end of the rent-to-own term. Investor's name goes on title at purchase. Investor qualifies for a mortgage and is responsible for financing and closing costs. 


Home buyer / Tenant


Someone who moves into the house with the intention to buy it from the investor at a pre-agreed upon price at the end of the rent-to-own term, usually 3-5 years. Home buyer treats the property as his own from the get go and uses the time to build up credit rating and down payment to qualify for a mortgage, buy the house from the investor and become the permanent home owner. Tenant / home buyer is responsible for all aspects of the buy-out at the end of the term.

Benefits For Investor


Rent to Own strategy can be a great way of investing for the following reasons:

  • Great Cash Flow when compared to traditional hold & rent strategy
  • No landlord head aches - home buyer / tenant assumes all home owner responsibilities and addresses all maintenance issues and repairs. Investor doesn't get calls or complaints.
  • No repairs / maintenance - no need to budget for and worry about any unexpected home-ownership related problems, since home buyer / tenant covers them.
  • Pre-determined Returns and Cash Flow - no guessing; the return on investment (ROI) is known ahead of time since the future sale price and length of term are part of the contract. 
  • Helping a family realize their home ownership dreams and become home owners. 

Benefits For Home Buyer / Tenant



Home For You and Your Loved Ones
From home buyer / tenant perspective, rent to own strategy can be a great way to become a home owner for the following reasons:

  • Own a home faster - choose a home and enjoy it before you can qualify for a mortgage
  • Equity - build equity in your house before you even buy it
  • Down payment - start with a 4-5% down payment, then gradually build up to the required 10% 
  • Mortgage Assistance - use time to work with a mortgage professional to strengthen your credit rating and eliminate the risk of not being able to qualify for a mortgage at the end of the term.

Numbers 


Here are the numbers from a case study we reviewed at the meet up based on a recent Rent To Own property in GTA. This deal had a 3 year term with 4.4% annual appreciation used to determine the future purchase price.

Purchase Price: $394,900

Homebuyer Deposit: $16,000

Initial Investment: $78,780 (includes down payment remainder and all closing costs & broker fees)

Future Purchase Price: $450,354

Return from Sale: $43,728 (includes mortgage paydown and credits)

Monthly Cash Flow: $646

Profit from Cash Flow: $23,256

TOTAL RETURN: $66,984 = 28% annually over 3 years.


I hope this post gives you a good initial overview of what rent to own investing strategy does and how it can boost your cash flow. If you have any questions or would like to discuss in more depth, please post a comment in the comments section below.

PS Don't forget there are always cons and risks to any strategy! It might be a good idea to start with a reputable rent-to-own turn key provider if you are new to investing.