Friday, July 30, 2010

Tenant-First Rent-to-Own Investment Model

Executive Summary:
The Basic Residential Real Estate Investment Model demonstrates our ability to generate superior investment gains through prudent use of leverage secured against hard assets.

Rent-to-Own builds on this model by enabling a tenant to ultimately own a home they are renting. Advantages to an investor are many: reduced initial capital investment; increased monthly cash-flow; reduced maintenance and management; a predefined exit strategy; and quicker turnaround of capital.

Here’s how it works. A future purchase price is established in advance. The tenant/buyer pays a non-refundable deposit (option) securing their right to purchase at that price. This deposit becomes part of their future down-payment, along with any additional instalments. We then work with the tenant/buyer to help them qualify to purchase from us outright within one to three years.

This strategy is ideal for good tenants who would rather own than rent, but have not yet saved a full down-payment, or for those who may not yet qualify through traditional means. Tenant-First simply means that we find people, rather than properties. We allow them to shop and select a home of their choosing, and then negotiate and close on their behalf.

Why Work With Partners?
Ready access to capital and credit enables us to immediately begin selecting and working with prospective tenant/buyers. The Capital Partner benefits by participating in returns that would be otherwise unattainable.

I’m often asked if there are many of these deals out there. Of course not! If there were, everyone would be doing this. We use a variety of sophisticated lead generation systems including our website to attract and screen tenant/buyers. While the concept of rent-to-own may be more common than you would expect, closing deals requires knowledge, skill and ability.

There is risk associated with all investment activity

Case Study
This is the same property profiled in the Basic Model. Potential returns are better because the Initial Financial Contribution is offset by the option/deposit, and cash-flow is increased through regular down-payment instalments and by eliminating property management from the budget.

You will note that there is a fee for acquisition and project management. This covers lead generation and general costs associated with full-time attention to the investment.

These projections are based on actual rent ($1335/month); mortgage payments ($588/month); property tax ($1,380/year); and condo fees ($195.50/month). I have assumed that an additional $150 per month will be contributed toward down-payment.

CASE STUDY (Stonewood Village)
Appraised Value
Purchase Price
Tenant Deposit (minimum 3% of Appraised Value)
Acquisition & Project Management Fee (1% of Purchase Price)
Initial Investment (DP + cash to close + light renovations + fee - Tenant Deposit)
First mortgage (80% loan-to-value)
Second mortgage (VTB)
Year 1 cash-flow ((Rent + Additional Deposits) - PITC) x 12)
Year 1 cash-on-cash return
Year 1 mortgage reduction (35 year amortization; 2.75% variable interest)
Year 1 gain (cash flow + principal reduction)
Year 1 return on investment assuming 0% appreciation (gain / investment)
Estimated 3-year value (locked-in 3.5% annual appreciation)
Estimated 3-year mortgage balance
Estimated 3-year gain (value + cash-flow - deposits - mtg. balance - investment)
Estimated 3-year return on investment (3 year gain / investment)

Capital Partner:
The Managing Partner finds, negotiates, and administers the investment from beginning to end. A Capital Partner supplies initial capital and credit, is fully secured on title and, upon disposition receives return of all funds invested, plus participation in 50% of net profits, as fully described in the Joint Venture Agreement.

Using the Case Study above, the Capital Partner’s projected net gain and return on investment is calculated as follows:

Calculation of Capital Partner 3-Year ROI
Estimated 3-year gain
50% of 3-year gain
Divide by Initial Investment
Capital Partner return on investment (3-years simple interest)

This post is provided for information purposes only. It is not intended to solicit investors.

Saturday, July 24, 2010

The 22 Immutable Laws of Marketing

I recommend "The 22 Immutable Laws of Marketing", by Al Ries and Jack Trout, to absolutely anyone in business. Here are the chapter headings... or maybe you should just buy the book.
  1. It is better to be first than it is to be better.
  2. If you can't be first in a category, set up a new category
  3. It is better to be first in the mind than to be first in the marketplace.
  4. Marketing is not a battle of products, it's a battle of perceptions.
  5. The most powerful concept in marketing is owning a word in the prospect's mind.
  6. Two companies cannot own the same word in the prospect's mind.
  7. The strategy to use depends on which rung you occupy on the ladder.
  8. In the long run, every market becomes a two horse race.
  9. If you are shooting for second place, your strategy is determined by the leader.
  10. Over time, a category will divide and become two or more categories.
  11. Marketing effects take place over an extended period of time.
  12. There is an irresistible pressure to extend the equity of the brand.
  13. You have to give up something to get something.
  14. For every attribute, there is an opposite, effective attribute.
  15. When you admit a negative, the prospect will give you a positive.
  16. In each situation, only one move will produce substantial results.
  17. Unless you write your competitor's plans, you can't predict the future.
  18. Success often leads to arrogance, and arrogance to failure.
  19. Failure is to be expected and accepted.
  20. The situation is often the opposite of the way it appears in the press.
  21. Successful programs are not built on fads, they're built on trends.
  22. Without adequate funding, an idea won't get off the ground.

Saturday, July 17, 2010

Investing in Rent-to-Own Property

A Complete Guide for Canadian Real Estate Investors
Mark Loeffler (Mississauga, ON: John Wiley & Sons, 2010), 186 pages

Mark Loeffler’s “tenant-first rent-to-own” strategy is truly a winner for all parties! My only criticism is with respect to style so I’ll get that out of the way now: this book might have benefited from tighter editing. That aside, Loeffler clearly explains and outlines each step of this investment strategy in sufficient detail to be of tremendous assistance to any active real estate investor.

Part 1 lays a firm foundation for the chapters to come by providing compelling reasons why one should explore this approach, and then clearly and comprehensively describes how to start, and who you need to know.

Part 2 is a rich resource for identifying and sorting prospective clients, and one that should be referred to and mined frequently for continually growing a client list.

Part 3 briefly describes how to find and purchase property which is certainly sufficient for seasoned investors, but beginners would do well to seek additional education and coaching in this area.

Part 4 will be a HUGE time, money, and mistake-saver for most new rent-to-own investors! Both here and on his website ( Loeffler generously shares forms and contracts developed through his own trial and error.

This book wraps up with two helpful sections. The first, called Tenant FAQs, enables the investor stay a step ahead in the process. The second, Worst-Case Scenarios, attempts to alleviate fear and encourage action.

This title turns light reading on significant strategy. Loeffler does an adequate job of describing the rent-to-own process with a terrific tenant-first twist. I readily recommend this book to fellow real estate investors and thank Mark for sharing his experience and insight.

Friday, July 9, 2010

Do You Require Technical Assistance?

I have an absolutely brilliant friend named Eric. He is extraordinarily intuitive and has a natural gift for business. When I first met him about five years ago – among other qualifications – he had recently graduated from a program in information technology.

One day, when working on a project together, I was having difficulty with my computer and asked Eric what I should do. When he said he didn’t know, I responded in mock shock: “What did they teach you in school?!”

Eric told me he only learned two things:
1. Almost any computer problem can be solved by rebooting; and
2. Never patronize the client.

Eric has come a long way since then. I have had the distinct pleasure of working with him again over the past few weeks. When unable to view a website update in my browser, I received this response to my request for assistance:

“I would suggest clearing your cache, your cookies, restarting, turning off your computer, turning it back on, trying in a different browser, typing in the address manually, trying with and without the "www", changing your internet provider, calling the geek squad, and buying a new computer, not necessarily in that order.”

Of course, Eric was right – and I hardly felt patronized at all!

Saturday, July 3, 2010

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Getting Naked

A Business Fable about Shedding the 3 Fears that Sabotage Client Loyalty
by Patrick Lencioni (Jossey-Bass, 2010) 220 pages | Summary: 8 pages

It’s probably not fair to review a summary, so I’ll just offer a few quick impressions of the wisdom offered in this well-written Executive Book Summary from Soundview.

In only eight pages, the editor does a superb job of condensing the storyline of a fable while retaining the key points of Patrick Lencioni’s book.

In Getting Naked, Lencioni bravely introduces the themes of vulnerability and suffering into business practice by showing how humility, selflessness, and transparency -- for the good of the client -- make good business sense.

I especially appreciated Lencioni’s focus on relationship as rationale for giving business away, and his simple explanation for why having a bad client is worse than having none.

Getting Naked provides helpful perspective for Management Consultants, Financial Advisors and Professional Practices. Buy the book or subscribe to Soundview Executive Book Summaries to fast track your business reading.