Rent To Own - An investment strategy
In this strategy we acquire an asset when our goal is to maximize profit from the sale by selling to tenants who will undertake to buy the property within X years.
What are the advantages of such a deal for tenants?
Many families are in a low credit review situation because of a particular problem they have had in the past, whether it is an economic problem or low salaries for which the bank will not allow them to receive a mortgage.
We will allow them to pay less rent from the market on the one hand and on the other 3 years to rebuild their credit so that the desired moment will come when they will then get a mortgage and buy the house from us. The tenant now locks the price he will buy from us, he lives in the house from now on at a reduced price and a certain percentage of the monthly rent accumulates in his favor as a credit from the purchase price. Actually we make a lease and sale together, and the tenant pays a certain down payment for the property.
Let's take a real example we did. We purchased a property for renovation for $ 85,000 in a neighborhood where the value of the properties is about $ 120,000 - $ 140,000. The property needs a $ 20,000 renovation. Total investment $ 105,000, average rent in the area about $ 1,250.
The business plan was structured as follows:
3 lease agreement for years at a fixed price of 1,100 without an increase in the rental price (reduction of $ 150 from the average rental price) when the renter has an option to purchase the house during those 3 years on 149,000. The tenant pays an advance of 8,000 $ for the purchase of the house and receives 20% credit each month on the final payment account. Please note that if the tenant is late in the monthly payment he does not receive the credit for that month.
You probably ask yourself why the tenants would agree to pay you $ 149,000 for the house if its value is 120,000 $. We actually help them fix the credit on the one hand, on the other they live in a good neighborhood where they wanted to live a lower monthly fee. We give them credit at a price of almost $ 8,000 if they meet the rents in time and allow them to own themselves as property owners within 3 years.
So what do we get out of it?
1. The repairs throughout the period are at the tenant's expense, we are responsible for the systems for the first month only.
2. The tenants treat this house as if it were theirs and guard it, unlike the tenants who do not care about the house. If in the end they do not buy it, we will have a well-maintained and renovated house.
3. There is no payment to the management company and the tenant transfers the monthly payment directly to us every month.
4. There is no broker fee on sale.
5. The only payments we are responsible for are property taxes and property insurance.
Over the course of 3 years we receive about $ 800 per net month (after deduction of property taxes and insurance) which total $ 9,600 per year and constitute a net return of - 9% annual. Profit for 3 years: $ 28,800
Selling within three years at 149,000 $ less than 8,000 $, minus the credit accumulated by the tenants 7,920 $ leaves us a surplus of 133,080 $ which is another gain of 28,080 $ in the sale.
So how much did we earn?
Rental to 3 years: 28,800 $
Advance on property: $ 8,000
Profit from sale: 28,080 $
Total profit on the transaction: $ 64,880
3% 61 return or annual return of 20%
Of course, there are also Cluesing expenses in the purchase and sale and also took into account a good lawyer who deals with Rent To Own contracts to accompany you in the transaction.
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- Wow… without a doubt an amazing world
Completely different from the country.
- Awesome idea
- Very interesting
- You painted a very ideal situation that all players play well and the market also cooperates.
Tenants with credit problems usually have a reason. What happens when they stop paying rent? What happens if things in the house are ruined and decide it's not their responsibility? What happens to the real estate value in a declining area and do they decide that the deal doesn't pay off?
- What happens if after 3 years the property does not exceed its value and reaches 149k and the appraiser appreciates
- In which city property?
- How do you decide when to enter this strategy? Do you determine in advance?
- An interesting option.
Can 3 years be enough to fix the credit (I don't ask for really low credit)?
- Yakov Shem Tov
- An interesting strategy.
Thanks Yariv for sharing.
- Great strategy.
I have used a variety of selected areas.
You will be surprised to discover that it becomes a very attractive deal !!
Thanks Yariv Golan
- I came across some situations that after 3 years comes to the inspection of the bank and issues a report laden with repairs rather than a mortgage. On the way these tenants do not know how to keep the house.
- Very nice post and opponent. I will just say that there are other similar and different strategies for sale but I like Liss Upshin depending on the region. It's really a win win how you don't look at it for all parties and every option if you build the deal right.
- Really interesting thanks for sharing
- Thanks for the excellent post
- interesting !
- Ehud Sharon
- In the example cited here, the purchase price at the end of the rental period is significantly higher than the average price in the area.
How do you determine the purchase price at the end of the period? , It probably is not a number thrown into the air
- Hen Lang
- Yariv, how do you get away from maintaining the house while the tenant is renting? Do you replace mechanicals and appliances during renovations or get a home warranty?
- Very interesting,
Why do not you pay the broker?
- The interest in this even increases when you start to combine with this strategy additional strategies - for example buying in owner finance and / or selling in owner finance to the buyer if he is a good tenant who pays over time but has not been able to get a loan from a financial entity - give him the loan at an interest rate And so you will increase the repayment even more. I do that too, it is entirely possible and real
- Yariv, you recorded that there is no payment to a management company.
Who collects payment from the tenant?
Who brings a handyman?
Who cares about accounts?
- Rival Golan Can you explain the credit? It's actually $ 220 that goes down to the renter every month from the home price, and why you missed the down payment from the final sale price? After all, it's part of the sale price ..
- agree. Without a management company, who will take care of the property and the tenant who will fulfill his obligations? It can suddenly cause damage or disappear, and you are a million miles away… The idea is not bad but complex and the remote control execution raises too many questions about the realization later on.