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 www.SecretHomes.ca 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 ( | |
Appraised Value | $204,000 |
Purchase Price | $198,000 |
Tenant Deposit (minimum 3% of Appraised Value) | $6,120 |
Acquisition & Project Management Fee (1% of Purchase Price) | $1,980 |
Initial Investment (DP + cash to close + light renovations + fee - Tenant Deposit) | $40,760 |
First mortgage (80% loan-to-value) | $158,400 |
Second mortgage (VTB) | $0 |
Year 1 cash-flow ((Rent + Additional Deposits) - PITC) x 12) | $7,032 |
Year 1 cash-on-cash return | 17.25% |
Year 1 mortgage reduction (35 year amortization; 2.75% variable interest) | $2,730 |
Year 1 gain (cash flow + principal reduction) | $9,762 |
Year 1 return on investment assuming 0% appreciation (gain / investment) | 23.95% |
Estimated 3-year value (locked-in 3.5% annual appreciation) | $226,178 |
Estimated 3-year mortgage balance | $149,977 |
Estimated 3-year gain (value + cash-flow - deposits - mtg. balance - investment) | $45,017 |
Estimated 3-year return on investment (3 year gain / investment) | 110% |
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 | $45,017 |
50% of 3-year gain | $22,509 |
Divide by Initial Investment | $40,760 |
Capital Partner return on investment (3-years simple interest) | 55% |
This post is provided for information purposes only. It is not intended to solicit investors.
We often think of things in different perspective. Sometimes we should think as one to attain a certain goal. We must do it as a team in Property Investment. Maybe we should do something that bonds us together or have some team building activity.
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