So you’re sure that you want to invest in real estate but don’t know how. Look no further! The rent to own option is one of the most lucrative and safest ways to enter the market, and it’s my personal favorite. The process is simple and works just like a car lease. First, you purchase a house with a 3 – 5 year term mortgage. Then you hold an open house(s) to find a buyer. Now in the agreement, you stipulate that, just like a car lease, the purchaser must put a down payment (typically 1% – 3% of the home value) and make regular rent payments until they buy the home from you at the end of the 3 – 5 year term. The rent payments are higher than other rental properties because a portion of the rent goes towards the down payment when they finally purchase the home from you (at a price that you both agreed to originally).
Now, why do I love it so much? It’s simple, because it’s one of those Win Win situations for both the buyer and seller that you hear about. Now you, the seller will win in many ways. First, you have an investment property that is making money while you sleep. If set up properly, you are collecting monthly cash flow income from your property because the rent is higher than the carrying cost of the house. E.g. you are charging $1,500 per month rent but the mortgage payment and property tax come up to $1,200 per month making you $300. You can also make money though 100% guaranteed appreciation. Because you set up the purchase price 3 – 5 years in advance, even if the real estate market drops, you will still be able to sell your property at a price you expected it to be.
Second you are able to access tax benefits from Revenue Canada. The interest and any loses on your investment property are tax deductable. So even if you don’t qualify for the best interest rate, you are able to write of the extra interest. Also, any loses or expenses you incur can be used against the profit of the property. For tax purposes, it may appear that you are losing money but in reality, you are earning it.
Third, you are building equity without doing a thing! Your tenant is essentially paying off your mortgage and every cent he/she puts towards the principle is equity which you can later tap into. Every month, you are building more and more equity so you don’t have to have positive cash flow to benefit from this.
Lastly in my opinion, this is by far THE SAFEST real estate investment you can possibly make. If the real estate market collapsed today, your tenant must still pay the appreciated price that you two agreed on if they wish to purchase the house. If they back out, you can keep their down payment and the extra rent payment (for the option to purchase the home). In addition, the collapse of the market will create a renters market where people will be better off renting a home for some time instead of buying one. Your house can now change from a rent to own property to a rent only property for the duration of this time. Finally, it is likely that since your original tenants intended on purchasing the home, they will have likely kept it in a good condition and may have improved the property.
So now how can this be good for a purchaser? Well, to start off it is meant for those who either have good credit but not enough for a down payment or those with bad credit but with the money needed for a down payment. In short, they can’t get approved for a decent mortgage because of their situation. So they benefit in at least 4 ways. First, instead of wasting their money on rent they can build equity from day 1. A portion of their rent and all of their down payment will go towards the principle of the house. Second, if the housing market collapses, they are not obligated to purchase the home and can avoid the financial burden by renting elsewhere.
Third, they have time to repair their credit (you can vouch for their improved credit history) as well as time to accumulate capital for when they finally purchase the home. Fourth, they can begin their lives today. Rather than having to rent for a period of time and then shifting their whole lives over when they finally purchase a house, they can buy the house of their dreams from day one.
Now don’t think that this is the be all and end all of rent to own properties. You will have to work hard to find tenants and spend time dealing with a lot of issues along the way. But remember, Rome wasn’t built in a day and neither will your real estate investment portfolio. It’s going to take time, energy and money. But as your experience grows, so will your profit margins and investment knowledge. Many people know they SHOULD invest in real estate but then SHOULD all over themselves. Yes it’s important to know a lot about investing in real estate before you make the leap but the information is useless if you don’t take the leap! For more information, please feel free to contact me at Narinder_Sidhu@centum.ca.
Narinder is a leading expert in the mortgage industry, focusing in the GTA. He works as a full time agent at Centum One Financial Group and in his spare time, both contributes articles and holds free seminars within the community. To learn more, please visit NarinderSidhu.com.
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