New Investor with Questions

[sylviaDL]

Hello,



I am fairly new to real estate investing and I have few questions. Currently, I own a house that is being used for student housing. I also have a duplex that is rented out to 2 families. Both of them have their fair share of headaches and issues that needed to be deal with.



More recently, I got into a rent-to-own deal. So far, everything looks good, but I'm unsure of it as an investment. I am hoping that those with more knowledge of rent-to-own can weigh in with their opinion and help me to understand more.



1. What are other investor's impression of rent-to-own? Is it a good investment or is it too high risk?

2. What is considered a good program? What about a bad one?



If anyone can help in answering those questions, thank you.



Sylvia

 

[Thomas Beyer]

I think well executed and researched rent-to-own is more profitable and far less risky than a strict rental property, because

• the tenant-buyer has more skin in the game,
• the cash-flow is higher (option credit plus normal rent),
  the expenses are known and
  the expenses are lower (no utilities, no turnover cost, no vacancies, no R&M)

However it is shorter term in nature, and taxes payable are higher. As always, there needs to be decent expertise by the operator, such as vetting of tenant-buyer, the proper legal agreements and the correct future exit price.

 

[Sherilynn]

I agree with Thomas, but there are a few points to add:

• tenant issues are extremely minimal because the tenant is a future buyer and has "more skin in the game" (as Thomas mentioned)
• while the risks can be lower depending on how the deal is structured and the market that it is in, the short-term nature of RTO is quite unforgiving. If you have issues or make mistakes with a long-term hold (paying too much or putting Grade A reno's in a Grade C property/neighbourhood, for instance), you potentially have years and years to let time and market forces correct your mistake. However, with a 1 - 3 year RTO term, you have to fix those mistakes yourself, meaning that you might have to eat the cost of the mistake.
  As for whether it is a good investment and what is considered a good program, it really depends on your market and the deal structure. For instance, RTO's in Edmonton are currently fantastic but I wouldn't want one in a declining market. Plus there is a huge difference between "property first" (where you already own the property or buy it at a discount and then find an RTO tenant) and "tenant first" (where you qualify a tenant and then find a suitable property).
  Also, this is an advanced investment strategy and the contracts are absolutely critical. A few wrong words could really sink you. Be sure to have a lawyer well-versed in RTO.

 

[sylviaDL]

I read some books on rent to own, and I understand the general concept. Right now, I am on the list of a few rent to own dealers and they are showing me deals. My lack of experience make me nervous and I don't know if I should take one or turn it down.



Speaking to some investors that bought house-first from an organization in Kitchener-Waterloo, they told me their deals defaulted within 6 months. Because of that I am really scared. I see another dealer pushing tenant-first homes in the Durham area. Looking at the data sheets, the tenants are only graduating with 5% down payment. I thought banks are not approving 5% deals for people with previous bad credit? Am I wrong in thinking that, or is this dealer trying to sell me a bad deal? I am worry that they are showing 2-3% down, isn't that considered risky? What if they decide to do a midnight move? I don't have much to hold them down.



If someone could shed some light on that, thank you.

-Sylvia

 

[Sherilynn]

Tenant selection is definitely a critical factor in the success of RTO, and the RTO "dealer" is responsible for this. Poor tenant selection will sink the deal. Before signing up with any RTO dealer, be sure to do your due diligence on them, including:

• their previous experience with RTO and with real estate investing in general
• how many RTO sales they have closed with tenants
• did those deals go as planned? If not, then what happened?
  their tenant screening procedure: what documents they require from the applicants; what benchmarks they use for income, debt, etc.
  have their contracts been designed/reviewed by a lawyer experienced with RTO
  you may also want to take the RTO contracts to your lawyer for review when you take in the JV contract for review

Yes, banks are still approving deals with 5% down. The trick is getting CMHC approval. Based on what I've seen this past year, if the buyer has a score of less than 650, he will likely need at least 10% down, so planning for 10% down (whether or not is it in the RTO contract) is a much safer bet. That being said, we just closed a sale to a tenant with only 5% down and a score of less than 650, so it can be done.



As for the initial option, I won't accept less than 3% for a single family home in a major market or 5% in a smaller center. In my opinion, $5k is too easy to walk away from so I want my tenants to have more at stake.



The other risk is the RTO dealer. If the dealer is setting up a win-win-win (for the tenant, investor, and himself) and is willing to make adjustments to ensure the success of the deal, then everything should work out. However, there are some dealers who don't seem to care if the tenant buys or walks - they collect another option payment and move on to the next tenant. The only person who wins there is the dealer.



RTO can be an excellent investment vehicle with the right RTO expert in your corner. Be patient, do your research, and find the right person.

 

[Thomas Beyer]

[quote user=sylviaDL]that considered risky?


ANY investment is risky. Real estate investment is risky, as is buying stocks, bonds or holding mortgages, ETFs or mutual funds.



Risk is reduced by knowledge, market selection and moderate leverage. RTO is less risky than normal rentals due to tenant-buyer having more skin in the game and paying more per month.



As such, educate yourself more (such as by joining REIN) and evaluate your JV partners more, or put more cash down.



Consider the alternative: not doing anything. That has risk too, namely a lower income, lower networth and less retirement income.



You have to judge which risk you prefer !

 

[robloh]

[quote user=Sherilynn]

Yes, banks are still approving deals with 5% down. The trick is getting CMHC approval. Based on what I've seen this past year, if the buyer has a score of less than 650, he will likely need at least 10% down, so planning for 10% down (whether or not is it in the RTO contract) is a much safer bet. That being said, we just closed a sale to a tenant with only 5% down and a score of less than 650, so it can be done.







Hello there. My name is Rob and I'm also rather new to the real estate investing scene as well. This thread has been rather helpful as I want to specialize in RTO.



I've also been in contact with a firm from the Durham region, much like Sylvia. They told me that there would be 5% on the exit and that ScotiaBank was funding regardless of past credit issues. Really?



Based on what I've read so far and what I'm being told, it seems that there are conflicting answers. Some say that these 5% down can be done, others are saying it can't be done.



I'm not sure which one is true...

 

[Sherilynn]

[quote user=robloh]ScotiaBank was funding regardless of past credit issues


Possibly true, but I would think it should say 'within reason.' With less than 20% down, it doesn't matter if the bank wants to approve because CMHC must sign off on it.



This past year I have gotten most of my new RTO clients after they were approved by banks but declined by CMHC.



The bottom line is that 5% down can be done, but it doesn't work in every case so one shouldn't rely on it. Having at least 10% down greatly increases the applicant's chances with CMHC.

 

[HomeOwnerSoon]

Hi Sylvia,



I see you are in good hands in this forum and a very good topic. My name is Guy and I operate Home Owner Soon over in Toronto. We have been doing rent to own since 2006 and we have done over 400 real estate transactions since we started. I noticed you were discussing about exits with 5% at the end of the program. I myself stay away from these deals.



We see a lot of deals every week and our deals comes from the mortgage community. I have (2) deals right now that are from my competition that is exiting out with just 5% and they were declined right away at the banks because CMHC wasn't comfortable with seeing R2's from 2 years ago. The tenants are super angry at the landlord and the language the contracts was written in because they want to keep all of the tenants money and kick them out. We try to educate consumers about coming in light and exiting without the down payment lenders are looking for. We are actually putting them through our program to exit out with 15% or what lenders and insurers do want, if the landlord would allow them to assign the contract over to us. We are still fighting the landlord on this issue.



For HOS, it is a constant battle with dealers that accept 3% down, short terms, and low exits which gives rent to own a really bad name. This is why we move away from this pack and call our program lease purchase. We also exit out between 10-15% and terms of 3-5 years so they can build up enough equity. We also just signed up for Score-Up program so the tenants could get a proper credit rebuilding program that is second to none.



It is all about WIN-WIN for both sides that make any program successful.

 

[HomeOwnerSoon]

Hi Rob,



Maybe someone is selling you down the river, Sherilynn is 100% correct. Anything with less than 20% down has to be approved by CMHC or Genworth. All the insurers are declining files at this point if the file is less than perfect if you are coming in down payment light.



I mentioned to another member that 5% exit is really light and these deals be avoided at all times......unless they are triple AAA...than why would they be in a rent to own if they were? We at Home Owner Soon start our down at 5% and up, and we try to exit with 10-15% so the tenants have a chance to make it. With a proper credit rebuilding, payout on all exiting debts, that makes a huge difference in our files compared to others.



You can look us up at www.hosinvestors.com. That is the Home Owner Soon site for our investors. If you contact me at [email protected], I can send you my 9 pitfalls of rent to own so you don't fall into the trap of taking a bad deal. It is free and I can email you right away