There are a lot of several types of real estate investment strategies a budding real estate investor can take advantage of and one strategy you can look at is rent to own real estate investing.
Now, over last couple of years, the word “rent to own” business has referred to a lot of different stuff as you can virtually rent to own anything. Look at the car industry, for example; did you know that the one key to most dealership’s car sales success is “rent to own”?
It’s hard to sell cars on cash basis as not everyone would have the dough to drop lump sum at a dealership when buying a car. At least 90% of car buyers are comfortable with buying cars on a lease or financing which is basically a rent to own scenario.
How about appliances and furniture? Depending on which part of the world you live in, appliances and furniture stores has discovered the benefits of the rent to own strategy, specifically on racking up their sales figures. The very reason for this is the fact that it makes it easier for buyers to afford the item(s) they want.
As a real estate investor, a tenant first rent to own real estate investing strategy can simplify your real estate investing career by taking out all the guess work. Most real estate gurus will tell you that the easiest way to get into the real estate investing game is “wholesaling”. Being based in Canada where the wholesaling real estate investing strategy isn’t only frowned at but considered illegal, I find wholesaling a bit more complicated, requires more work and could potentially result to lawsuits (in Canada) than buy and hold, rent to owns and flipping.
If you feel that wholesaling is easier and you find great financial success with wholesaling properties then good for you but if you’re new to the real estate investing game and you haven’t yet wholesaled any properties, I think it would be a clever idea to switch your focus to either buying and holding real estate or renting to own them to future home owners.
Tenant First Rent to Own Home Target Market
Tenant first rent to own homes isn’t for regular home buyers who have good credit and can qualify for a mortgage without any outside help. Your ideal rent to own home buyers aren’t also home buyers who can’t afford to raise a down payment for a mortgage; rent to own home buying is for people who can put up a down payment but can’t qualify for a mortgage, at least in the next couple of years due to credit issues that keeps them from qualifying for a traditional mortgage that banks offer. So, what happens here is that you – the investor acts as a middle man between the bank/lender and your renter wherein the renters would piggy-back on your mortgage approval by renting their home from you first until they can afford to get their own mortgage while at the same time you assist your renters in building up their credit and down payment for their own mortgage.
How Tenant First Rent to Own Investing Works
A lot of real estate investors have dabbled with rent to own investing and finds it rather cumbersome as a strategy due to long vacancies which can result to higher holding costs. The traditional rent to own real estate investing strategy is a strategy wherein you would acquire the property first before you look for tenants which is pretty like traditional rentals. The drawback of this kind of strategy is of course, rather obvious which could lead to a negative cash flow when your property remains vacant for a longer time than expected.
Tenant first rent to own strategy ads a twist to the old rent to own strategy, what makes this a more attractive option for new real estate investors is the fact that you don’t own the house you’re selling (via rent to own) yet so you avoid spending on your inventory until you get your ideal tenant. Meaning, you qualify your tenants first and work with them in searching for their home of choice.
If you think that the explanation above is clear as mud, here’s a better explanation (I think). Tenant first rent to own investing is nothing more than a traditional rent to own investing wherein you find your renter first before you buy the house that they’re going to rent and own in the long run.
How to Finance Your Rent to Own Real Estate Investments
Though there are a lot of creative ways to finance a real estate deal, the easiest way to finance your rent to own deal is by securing a mortgage, some banks would allow you up to 6 mortgages at a time which means you can have 6 on-going deals each time and when you’ve sold one of your rent to own rentals, you just get another one.
There are other ways of financing a rent to own deal of course, if you want to go beyond your own mortgage qualification limits to expand your rent to own investing empire. One of which is joint venture; this is where you collaborate with another investor who would carry the mortgage loan for the deal and you do all the leg work to make the deal happen, split the monthly cash-flow and capital gains between the two of you.
Yet another way is by borrowing from private lenders, though this real estate financing strategy works better with fix and flip deals, some investors use this for rent to own (and even buy and hold) investments. What makes this a risky option for rent to own and buy and hold investing is that the interest can be sky-high that defeats that can eat up all your cash-flow while you’re renting the property.
Tenant First Rent to Own vs. Wholesaling vs. Flipping
Tenant first rent to own investing of course isn’t the best investing strategy but it’s one of the easiest to get started with. A lot of real estate investing gurus would tell you that the holy grail of real estate investing is wholesaling but aside from being illegal in some parts of the world, you would need to have a good grasp of real estate investing before trying to find deals specifically for wholesaling. Here’s why, if you’re planning to wholesale a house; you would need to buy it at deep discounts to allow your buyer (usually, a buy and flip investor) to profit from the deal as well. Typically, you would make between $5,000 – $10,000 per deal and is a fast-phased strategy. Tenant first rent to own is rather slow so even if you make some mistakes with your first deal, you would not find yourself in the red or go through a lot of trouble than wholesaling.
Wholesaling and flipping are sexy words in real estate investing, and a lot of real estate investing gurus would tell you that it’s a no-brainer but you would need to have developed a very good negotiating skill when you’re going this route because, for you to be profitable, you need to buy houses at least 60% off the property’s market value. You’ll have to talk to a lot of desperate home owners before you land a deal.
With a tenant first rent to own strategy, you don’t need to buy the house at a discount, you can buy it retail and still come out profitable from the deal.
When it comes to money, you can make more and earn faster with a fix and flip deal but you can also lose in the same manner – huge and fast.
All of these real estate investing strategies work, when done right; this is why you have to evaluate your options before jumping into a single real estate investing strategy as it all depends on your goal, heck you can use all of these strategies throughout your real estate investing career but one real estate investing strategy that would build your wealth long term would still and always be buy and hold real estate investing which is a different blog post of its own.
Advantages and Disadvantages of Tenant First Rent to Own Investing
Any real estate investing strategy works well when they work and a tenant first real estate investing is no exception.
One of the main advantages of a tenant first rent to own real estate investing strategy is that it’s slow-phased and simple. You find and qualify tenants, hook them up with your realtor to find them a house, buy the house for them, sign a lease with an option to purchase, make sure their working toward fixing their credit, finalize the sale two or three years down the road, rinse and repeat or you could have on-going deals simultaneously.
Another advantage of this strategy is that you don’t need to go through all the hoops of finding discounted (and often run down) homes and low-ball desperate home owners just to make some quick bucks off the deal. You can buy a newer or a freshly renovated home and still make some profits.
Just like any other real estate investing strategy, the tenant first real estate investing strategy works well when it works but it also can be messy when it doesn’t. The only drawback of this strategy is when your rent to own tenants won’t follow through with their home purchase after a couple of renting the place. This is a lose-lose for both parties; you will be left with a vacant property that you will have to try and rent out after your tenant moves and your tenant would be walking away from their already established equity in the home.
There are a lot of reasons why a tenant first rent to own deal may fail with a tenant not going through with their purchase but two of the main ones could either be marriage failure a financial crisis and the latter can happen if your tenant loses their jobs or they didn’t work with you in fixing their credit wherein they can’t qualify for a mortgage when the term of the lease ends.
Tenant first rent to own strategy is a simple, yet effective real estate investing strategy for those who are looking to get into the real estate investing world without the complexities, noise and hype that most real estate investing gurus feeds you. It will help you get some real estate investing experience without the hassle of hard core negotiating that is usually involved with real estate investing. Of course, this is not to say that you shouldn’t learn to negotiate as it’s one of the greatest skills that you should have as an investor or entrepreneur but if you’re just looking for your first profitable deal. This strategy can get you to achieving that milestone.
If you’re serious about considering this real estate investing strategy, you will need more information than what I can cover in this article as this strategy is a book of its own. What I’ve tried to lay down in this article is the big picture of how a tenant first rent to own strategy works but what I can write in a single blog post isn’t enough to guide you through the entire process of this strategy. One good book I would suggest you read is Mark Loeffler’s Investing In Rent to Own Property, it’s a thorough book complete with lease and options contracts as well as guides on qualifying rent to own tenants, computing how much of a house they can afford, tenant down payments, equity credits, your mark-up on the property’s monthly cash-flow, determining your final selling price and your capital gains from the sale.