I had a pretty eye opening week this week. Call it an “A-HA” moment, if you will. I know each of us have our specific reasons for investing in real estate. Whether that is to retire early from our day jobs or help build a nest egg for our kids or help buy a cottage for the family enjoy. We all have our reasons for investing and the specific goals we are trying to reach.

This week I wanted to write about why we invest in rent to owns, specifically. I am not going to give you the “rah-rah speech” as to why rent to owns can be a good real estate investment and all that… This may sound strange to some of you, but I actually lost sight of why I invest in rent to owns. Being a little bit of a numbers nerd, I find I focus a little too much on stuff like return on investment, cash flow, or net profit. (I don’t know, maybe that’s the MBA in me). Don’t get me wrong – these are very important aspects to consider for every real estate investment you make – but the point I am trying to make is sometimes I focus on this, a little too much. Let me explain.

This week, I had a phone call with one of my rent to own tenants. They’ve been rent to own tenants of mine for almost 2 years now and they are now approaching the end of their term and are ready to buy the house. So, naturally I called them to go over some of the paperwork they need to sign and how the mortgage process will work. About 5 minutes into the conversation, Jenny started to cry. My first reaction was: “What’s wrong? Is everything ok?”. She paused for about 30 seconds and said that everything was definitely more than ok. She was crying because she was completely and utterly grateful for being in this position today to own their home. She never thought after all they had been through that they would own a home… ever. This is when my “A-HA” moment came… and I finally realized why I invest in rent to owns. I helped this family achieve their goal of home owner ship while they helped me get closer to my goal – it’s an amazing thing and a very powerful moment that is unique to rent to owns. It’s just not the same feeling when I rent out one of my apartments out to a regular renter. Not even close. That phone call with Jenny really hit home and reminded me of why I invested in this couple two years ago.

I know many of you are in the midst of doing your rent to owns and haven’t got to this stage yet with your rent to own tenants. But when that moment arrives, words can’t really describe the feeling you get when you have such a big impact on a family’s life.

Here’s to building wealth one family at a time…

Alex

As many of you know, we’ve been in business for over 4 years now. In the beginning, we made a lot of mistakes. Since rent to own was practically a non-existent industry in Canada, we made up the rules as we went along. Not many of you know this, but I actually was the investor in the first two rent to own tenant deals. And, boy oh boy, did I pick the wrong tenant… (I actually lost money on both deals). Hindsight is 20/20 and I had to use this as a learning experience and not dwell on the negative side of things too much.

I know I am getting a little off topic here, but I think it’s important to provide perspective when looking at this topic.  So, what are our default rates? I define a default as a tenant who is behind in rent payments, equal to one month or more.

So, here is, in percentage, the number of tenants that defaulted in each of the following years of being in business:

Year 1: 46%

Year 2: 38%

Year 3: 21%

Year 4: 15%

Last 6 months: 6%

So, what can we grasp from these numbers? In the first two years of business we made a ton of mistakes.  We took in tenants with 2-3% deposits, income was so-so and our policies and procedures were terrible.

I was sick and tired of taking in the wrong tenant, so I took it upon myself to analyze what went wrong with each default.  The results were staggering – there was an identifiable pattern with over 90% of the defaults! With this information, we made some drastic changes to how we underwrite each deal.  While our number of defaults dropped significantly, our default rates were still too high for my liking.

So, about 8 months ago, we want back to the drawing board.  We spent a lot of time analyzing and identifying who was the ideal rent to own tenant was.  At the same time, we streamlined our internal processes to make sure no steps were missed and all checks and balances were in place (btw we’ve got a super admin team in Emely, Rachel and Parm).

So if you look at the last 6 months, we have a default rate of 6% (or a success rate of 94%, depending on how you look at it).  I am really proud of this number.  Some of you skeptics are probably thinking… “Yeah… but 6 months is such a short amount of time”. While, that is true, in my experience a default is most likely to occur within the first 6 months. I really do believe that a tenant’s payment patterns don’t really change.

So there you have it, these are the numbers. While we can never guarantee success, we work very hard behind the scenes to get it right and it is my goal by the end of the year to have a default rate of less than 5%. There, I said it.

I hope you enjoyed my little blog here – I’m also going to post this on our investor site: www.RentToOwnInvestor.com. You’ll be hearing more from me next week!

To investments that change lives,

Alex

In a  first of a series of talks with real estate investor business coach Brian Pulis, we  explore the 5 biggest mistakes real investors make.

It was a very insightful 45 minute talk and I’m sure you will be inclined to take notes and write down any questions you have.

To listen, simply click on the link below to listen.

To listen:  5 Biggest Mistakes Real Estate Investors Make

Here is a timeline of the 5 mistakes.

Mistake #1- 5:30
Mistake #2-11:30
Mistake #3-18:20
Mistake #4-27:10
Mistake #5-39:20

Enjoy!

To investments that change lives,

Home Owner Soon

PS…if you would like to learn more about Brian check out the bio below and/or cruise on over to his website to learn more about his coaching business.  Click here to head to his site.

PSS…if you have a topic or a question you would like to have addressed on a future podcast feel free to email me at dean@homeownersoon.com.

Who is Brian Pulis…

Entrepreneur…Real Estate Investor……Business Coach

Entrepreneur…

Since 1984 Brian has owned and operated several successful businesses in the Peel Region area. All his business ventures following the same belief that “a business is a profitable, commercial enterprise that runs without you.”

Real Estate Investor…

Brian started Investing in Real estate in 2002 and holds a portfolio which includes Student homes, single family, duplexes, Triplexes, fourplexes, and finally mixed commercial residential building. Spread across five of the top ten Ontario towns.

Business Coach…Advisor

His experience in team building and systematizing gives his clients an opportunity to enjoy the benefits of being true business owners rather than working “at a job”, further supporting his belief that the real purpose of owning a business should be to develop it so that your time is being spent working on it and not in it. Therefore making more money and spending less time in the process.

We wanted to take the time to address some very realistic concerns investors and tenants have identified in recent months about the future purchase price of their property at the end of the rental term.

In the last 12 months, Canadian real estate has experienced a significant valuation decrease and increase. The variance observed in the real estate market could only be characterized as a valuation roller coaster. For most of our deals, the future purchase price agreed upon in the Occupancy Agreement will reflect the market value of the property.

However, there are markets that remain somewhat depressed and as result, the purchase price does not reflect the home’s current market value. This has raised a considerable number of questions.

Mortgage companies will not lend on an inflated property value and will most certainly conduct an independent appraisal prior to close. Tenants might also become skeptical about buying a property above market value. This could potentially increase defaults, and leave certain investors holding the property they believed their tenants would purchase at the end of the rental term.

We  realize this is a serious problem, which is why we wanted to take the time to explore 2 very creative ways of solving this issue.

Option #1 – Extend the Rental Term

At the end of the rental term, your tenant will have amassed some equity in their property, anywhere in the range of 5-10%. If they don’t purchase the property from you at the end of the rental term, the Occupancy Agreement states they are in default and their security deposit, along with the monthly option credits they’ve amassed, are forfeited to you.

Because tenants are significantly invested at this point, they do not want to compromise the equity they’ve established. So in order to avoid default, and as a way to provide tenants with the ability to purchase the property at a price that reflects its value, we suggest extending the rental term by 6 months to a year. For you as investor this is quite beneficial.

One, it guarantees your tenant will be in a position to purchase the property at a price that reflects the value, and thus they will be inclined to execute the purchase and not leave you with a vacant property. Two, it affords you the ability to collect premium monthly rents for another 6 months to a year (depending on the extension period). This will contribute greatly to the overall return on your investment and net profit at the end of the transaction.

Option #2 – Agree to a Lower Purchase Price

Another option for you, the investor, if extending the rental term is not a choice and you need to discharge the property as soon as possible, is to work with your tenant to arrange a lower purchase price at the end of the rental term.

We understand this is not an ideal arrangement because it goes against the principle of having signed the Occupancy Agreement with the expectation of honoring its arrangement. However, as mentioned, this is only an ideal situation if  Option #1 – Extending the Rental Term does not work, and you need to discharge the property as soon as possible.

If you require any more information or would like to talk about these options please feel free to give me a call or send an email.

You can also leave a comment below as well.  We would love to know what you think.

Regards,

Alex