The Entrepreneur Forum | Startups | Entrepreneurship | Starting a Business | Motivation | Success

REAL ESTATE Please clue me in!!

SnyCorp

New Contributor
Oct 30, 2007
35
1
9
Helena, MT
I've seen more "Rent to own your home today" than ever how does this process work? and is it a wise thing to do with your property's?
I guess what I'm asking is does it make money??
Thanks
 

Don't like ads? Remove them while supporting the forum. Subscribe.

czach41

Contributor
Read Millionaire Fastlane
Oct 11, 2007
208
72
69
34
Denver
I think what you are getting at is lease options. Essentially, renting to own would mean performing a lease option (assuming you are owner). Say you purchase property "A" for 60k. You find these tenants who, for whatever reason, cannot get financing at this moment (bad credit). Charge them a few grand as an up front non-refundable deposit. They sign a contract with the option to purchase property "A" from you for 75k, three years down the road. All the while, they are paying the monthly payments "renting to own." Therefore, depending on what you charge for rent, you may be cashflowing or atleast breaking even. After the three years are up, the tenants may excercise the option to purchase property A for 75k, meaning you pocket the 15k all the while it was producing a monthly cashflow for you!
If they choose not to buy the property - even better! Find new tenants, sign another lease option (yes, you collect another non-refundable deposit!) and three years down the road, they may excercise an option to buy the property for something like 85k!

I suggest researching lease options as they seem to be a very valuable tool for real estate investors in today's market. I Hope I answered your question to your satisfaction.
 

kwerner

Bronze Contributor
Read Millionaire Fastlane
Speedway Pass
Oct 4, 2007
1,399
261
118
Czach41 covered the basics pretty well on this subject - one thing of great importance to realize though, is that the lease-option is 2 different contracts. One is for the tenant to "lease" the property, the second is allowing them the "option" to purchase the property at a later date, at a specified price.

If you're going with the lease-option route (or any other method), the greatest importance in order to cash flow is to buy right. For example, if you can pick up a property with a FMV of $103,000 for $75,000, it's going to be much easier getting it to cashflow than if you had purchased it for $95,000. And typically with lease-options, you can command a higher monthly rent or option price or both, just depending on how you structure the deal, and what the market will allow in your area.

Another strategy that works very well w/ the lease-option is to set the option timeline for 12-18 months, and get the tenant to purchase the property. You want this. Although you can get a higher ROI by them not purchasing the property, in the end you do want them to cash you out so that you can 1031 exchange into another property.

I've attached an excel spreadsheet that shows the basics how it works. Notice the tabs at the bottom - these are your subsequent purchases, after 1031 exchanging. The figures as far as insurance and taxes are for what works in my area, yours may be different.

Hope this helps...
 
OP
OP
SnyCorp

SnyCorp

New Contributor
Oct 30, 2007
35
1
9
Helena, MT
Thanks you.....
You both helped me a lot. I'm going to me with a attorney next week, just to see if there are any legal matters I should be aware of.
Thanks Adam
 

kwerner

Bronze Contributor
Read Millionaire Fastlane
Speedway Pass
Oct 4, 2007
1,399
261
118
Another thing I forgot to add from my previous post: a big benefit from buying right (like buying a $103,000 house for $75,000, from the example) and 1031 exchanging into another property (buying at a 25% discount again) is that you pay off your properties in 4 years, rather than 30 years, and in the meantime commanding a higher than average rent rate.

So in essence, by purchasing 5 of these in your first year and 1031 exchanging each year into another property - after four years you have control of a half million dollars worth of real estate that's cashflowing nearly $7000 a month and completely paid off. Now, throw in the business of money lending, using lines of credit against the equity in the properties, and loaning it out on 6-9 month terms at 15% interest; then you have a cash flowing MACHINE. But that's another story...

:hurray:
 
Last edited:

MJ DeMarco

Administrator
Staff member
EPIC CONTRIBUTOR
FASTLANE INSIDER
Read Millionaire Fastlane
I've Read UNSCRIPTED
Summit Attendee
Speedway Pass
Jul 23, 2007
29,233
100,964
3,751
Fountain Hills, AZ
Another thing I forgot to add from my previous post: a big benefit from buying right (like buying a $103,000 house for $75,000, from the example) and 1031 exchanging into another property (buying at a 25% discount again) is that you pay off your properties in 4 years, rather than 30 years, and in the meantime commanding a higher than average rent rate.

So in essence, by purchasing 5 of these in your first year and 1031 exchanging each year into another property - after five years you have control of a half million dollars worth of real estate that's cashflowing nearly $7000 a month and completely paid off. Now, throw in the business of money lending, using lines of credit against the equity in the properties, and loaning it out on 6-9 month terms at 15% interest; then you have a cash flowing MACHINE. But that's another story...

:hurray:
Thanks! Time to leave parking! Speed+
 

Russ H

Gold Contributor
Read Millionaire Fastlane
Speedway Pass
Jul 25, 2007
6,556
1,289
381
58
Napa Valley, CA
kwerner-

If I'm reading you right, you're suggesting you can purchase a property for, say, $75K, and get it paid off within 4 years via a lease option.

Is this correct?

I'm guessing you'd need to be getting at least $2000/mo for the lease? ($75K divided by 48 mos = $1556/mo, plus property taxes ($200-300/mo), insurance ($50-100/mo), and other maintenance expenses ($100-250/mo) = $2000/mo).

I would hazard a guess that $103K houses would have mortgage payments of about $600-750/mo, and rent for about $350-500/mo.

So how do you do this?

I'm guessing that I'm missing something here* :)

Thanks,

-Russ H.

*Is is just that you're using the 25% under FMV and multiplying by 4? That you are assuming 1 prop is purchased each year at 25% under FMV, sold at FMV, 1031'd, and that there are NO EXPENSES? No closing expenses? No 1031 agent expenses? No realtor or listing fees? I'm still stumped. Sorry. :(
 

kwerner

Bronze Contributor
Read Millionaire Fastlane
Speedway Pass
Oct 4, 2007
1,399
261
118
kwerner-

If I'm reading you right, you're suggesting you can purchase a property for, say, $75K, and get it paid off within 4 years via a lease option.

Is this correct?

I'm guessing you'd need to be getting at least $2000/mo for the lease? ($75K divided by 48 mos = $1556/mo, plus property taxes ($200-300/mo), insurance ($50-100/mo), and other maintenance expenses ($100-250/mo) = $2000/mo).

I would hazard a guess that $103K houses would have mortgage payments of about $600-750/mo, and rent for about $350-500/mo.

So how do you do this?

I'm guessing that I'm missing something here* :)

Thanks,

-Russ H.

*Is is just that you're using the 25% under FMV and multiplying by 4? That you are assuming 1 prop is purchased each year at 25% under FMV, sold at FMV, 1031'd, and that there are NO EXPENSES? No closing expenses? No 1031 agent expenses? No realtor or listing fees? I'm still stumped. Sorry. :(

I think you might have slightly misunderstood; were you able to check out the Lease-Option Excel spreadsheet above? By using the lease-option method and 1031 exchanging each year, you'll have one property that is completely paid off at the end of 4 years (having purchased 4 properties, one each year).

The figures I used in the spreadsheet work in my area, they will likely need adjusted for other areas of the country. But here, using the $103,000 house as an example, you can lease it for $900 a month, get a $120 a month option consideration fee, $4,000 down as a non-refundable deposit, and credit the buyer $300 a month for a successful purchase at the end of the term.

So what's in it for the buyer? IF he purchases the property he gets the equivalency of renting a $900 / mo. house for $720 / mo. ($900 + $120 - $300) AND he purchases it slightly below FMV at the end of the term. This allows the purchaser to choose a little nicer neighborhood / little newer house / slightly bigger house during their rental term. And at the end of the term, they're getting a good deal on the house they wanted to live in all along.

And, like you stated, of course you're going to have some selling costs and exchanging fees. However, as far as maintenance expenses - it depends on how you have your lease document written. It's recommended that you set a ceiling on repair costs (ie. the buyer agrees to take care of repairs under $250; anything above $250 will be repaired by the landlord); this keeps you from getting calls to come out and fix toilets. :thumbsup: And since the tenant is planning on purchasing the house, they will usually take better care of it than a typical renter.

Hope this answers some of your questions...
 
OP
OP
SnyCorp

SnyCorp

New Contributor
Oct 30, 2007
35
1
9
Helena, MT
Kwerner,
Thanks for the great info, it's just what I've been looking for.:eusa_clap: Speed+
 

kwerner

Bronze Contributor
Read Millionaire Fastlane
Speedway Pass
Oct 4, 2007
1,399
261
118
You know, I got to thinking about the spreadsheet I created, and found a flaw... I needed to adjust the formula to reflect the fact that your monthly cash flow is not affected from the tenant purchasing the property, in actuality, you are simply adjusting the purchase price to credit them for the "rent credit".

It may seem trivial, but I figure I should correct it and repost it, to avoid confusion...
 

Create an account or login to comment

You must be a member in order to leave a comment

Create account

Create an account on our community. It's easy!

Log in

Already have an account? Log in here.


New Topics

Fastlane Insiders

View the forum AD FREE.
Private, unindexed content
Detailed process/execution threads
Monthly conference calls with doers
Ideas needing execution, more!

Join Fastlane Insiders.

Sponsored Offers

  • Sticky
MARKETPLACE Lex DeVille's - Advanced Freelance Udemy Courses!
I really enjoyed the course actually. It's exactly what's needed to set off in the part-time freelancing direction. Taken a few courses before...
Replies
19
Views
995
Top Bottom