Are Rent to Own Real Estate Deals a Cash Cow?

by Dave Peniuk

In recent years, especially in Western Canada where we live, a lot of real estate investors have found it tough to make the 'numbers work' on buy and hold deals. The biggest challenge is finding a deal that you can buy for a price low enough that you can cover all the costs with the rent it will generate.
 
While home prices sky rocketed over the last 8 years (up to 2008 anyways), rental rates took a slow and steady path upwards.
 
One of the ways we've been able to continue investing in Western Canada and still make money from our investments is to buy properties and then find tenant buyers for the properties. That is, we've done a rent to own real estate deal.
 
The most recent example is from a single family home we purchased in Kelowna, BC.
 
For our readers that are unfamiliar with how the Rent to Own (RTO) strategy works, here's a brief summary.

The rent to own strategy is just like how it sounds, a tenant rents your property with the intention (and option) to buy the property at some point in the future (and at a pre-determined price).

To help your tenant prepare for the purchase you charge them a rental rate over and above the market rate with a portion of their rent building up as a rent credit.
 
For example, if a single family home (3 beds, 2 baths, 2 storeys, good neighbourhood) rents for approx. $1,300 per month as a standard rental unit, in a RTO, the tenant may pay $1,700 per month and $400 of that $1,700 goes towards the purchase of the property (when and if they buy).
 
Thus, if the renter (known as a Tenant-Buyer) elects to purchase the property after 1 year, they will have $4,800 ($400 times 12 months) towards the purchase of the property. This, coupled with an Option Fee (similar to a down payment) which the Tenant-Buyer (TB) pays to the Landlord at the beginning of the rental period, goes towards the purchase price.
 
Here's a quick look:

       
In essence, the TB no longer has to come up with $350,000 when they buy the property, they now have to come up with only $335,200 (plus standard closing costs). And, if the Tenant-Buyer is able to obtain good financing, they may only need to put down a few more thousand to make-up the difference between the purchase price and the mortgage amount. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it's like forced savings) instead of having to put aside $500, $600, $700 per month into a crappy (low interest) savings account.

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