Is rent-to-own right for you?
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From the lender’s desk
Is rent-to-own
right for you?
Rent-to-own can be a lucrative option for the astute investor. To help you
minimize your risk, our experts will guide you through the nuts and bolts
of this strategy, in this first instalment of this informative series
A
strategy that has gained is whether you are willing to become the problems that plague traditional
popularity recently is rent-to- a landlord and perform the associated landlords and require arbitration by
own, whereby a tenant rents roles and responsibilities as mandated the Landlord and Tenant Board are
a property for a designated by the Residential Tenancies Act. significantly mitigated. We believe that
time period with an “Option” to Rent-to-own is a re-invention of the implementation and management
purchase it in the future at a pre- a traditional rental business and if model is the critical element that will
determined, appreciated price. structured properly can provide make this investment strategy a success
Whether this is the right investment distinct performance incentives to for all of the parties involved.
strategy for you depends upon more the tenant/buyer in return for their We also think it’s important to
than the promise of a generous return fairly significant upfront investment assess whether the human element
on investment. As with any investment toward the future purchase of a home. is relevant to you, because investing
opportunity, it is important to assess In successful models, we’ve observed in rent-to-own is as much about
what the potential returns are relative that there is a balance between the risk/ investing in people and their dreams
to the risks involved, and most reward ratio for both the investor and as it is about investing in real estate.
importantly, how to manage those the tenant; enough so that many of In order to be a success, the tenant/
risks. It’s also important to understand
the rules that govern the transaction,
including the implications of being We also think it’s important to assess
a lender versus being a landlord, the
difference between loaning money whether the human element is relevant
versus investing in people, the
difference between the goal of capital to you, because investing in rent-to-own is
appreciation versus monthly cash flow,
and, of course, the tax consequences of as much about investing in people and their
active versus passive income.
Perhaps the most pressing question dreams as it is about investing in real estate
52 canadianrealestatemagazine.ca
From the lender’s desk
i What is a rent-to-own strategy?
Also called a Lease Option, a rent-to-own has two main components
The Tenancy Agreement adequate income, who has some money saved toward their
Often called a lease or rental agreement, the tenant rents the eventual down payment. The tenant/buyer will be required to
property from the investor using a customized rental agreement provide an ‘option consideration’ of at least 2.5% -5% or more,
that specifies a rental term typically between one to three depending upon the investor’s risk assessment.
years, but up to five years. During this term, the tenant pays an
amount in addition to market rent called a rent rebate, which is Pre-Qualifying the Tenant
essentially a ‘forced savings’ amount applied toward the tenant’s This is a crucial step in order assess the tenant’s credit situation
eventual down payment. The amount of the ‘forced savings’ and to determine whether they meet the necessary conditions
portion is generally the difference between the maximum for success. It is essential to have a certified mortgage
monthly rent payment that the tenant can afford and the professional examine a) Why the tenants are in the financial
prevailing monthly market rent. This amount also represents situation they are in b) Whether they have the means to change
cash flow that can be utilized by the investor until it is rebated their situation c) How long, realistically, it will take them to
back to the tenant/buyer at the end of the rental term. In many qualify for a mortgage? This examination will determine the
cases, the landlord/investor requires the tenant to accept length of the rental term, identify the rent payment they can
some additional responsibilities; such as sharing or absorbing afford, establish the maximum purchase price for the home, and
maintenance and its associated costs. factor in the affordability of their eventual mortgage payment.
A Purchase Option Agreement Finding the Right Property
Among other things, this agreement outlines the rights of the Ideally, the investor will find the tenant first so that they
tenant/buyer to purchase the property from the investor at the have the opportunity to choose the home of their dreams,
end of the rental term at a pre-determined price. The purchase that fits into their ideal price range and so that they have
price, property appreciation factor, roles and responsibilities strong emotional investment in the process. The investor
of the buyer and investor, the terms for default, extensions, can certainly put some boundaries around where they wish
assignment rights and inspection clauses are included. By doing to invest and they have the ultimate approval regarding the
so, the tenant/buyer knows exactly what to expect and the purchase of the property. Investing in cities with strong
investor knows upfront what their exit strategy and estimated economic growth and steady rental demand are important
profit will be. considerations since both the investor and the tenant/buyer
benefit from strong property appreciation.
Finding the Right Tenant Candidate
A typical tenant/buyer is someone who would like to own a The Sale
home but who either lacks the necessary credit score required On the option date, the tenant/buyer has the option to buy
to get a mortgage on their own or who has the monthly income the house at the agreed upon price, or they can choose to walk
necessary to support a mortgage payment but who doesn’t away. In most cases they will lose their option consideration
have the down payment of 5%-20% required by conventional and rent rebates if they choose not to buy the house, as these
lenders. A good candidate is someone with proof of regular and amounts will be used by the investor to liquidate the property.
canadianrealestatemagazine.ca 53
From the lender’s desk
The Benefits
to the
Investor
zz Helping others while making a buyer must be screened properly by own is that the return is taxed as ‘active
lucrative financial investment qualified individuals who care as income,’ or more specifically from
zz Reduced operating costs much about the tenant’s potential for actively managing a property. Not only
associated with maintenance, success as in protecting the investor’s is this tax rate typically lower, there are
advertising and vacancies, interests. The consistent element also specific tax deductions that can be
resulting in stronger profit within the successful transactions made that would not be possible for a
zz Having a tenant with a vested we’ve observed is that there is always ‘passive’ investment such as providing
interest in the upkeep and a certified mortgage professional who mortgage financing.
improvement of the property completes a thorough evaluation of the
zz Predetermined exit strategy and applicant’s financial picture and helps
projected profit the investor determine their eligibility
zz Saving on real estate sales for a rent-to-own. Quite often there
commissions is also a certified financial planner or
counselor, who works with the tenant/
buyer throughout the rental term to
help them stay on track. This process
protects both the tenant/buyer and the
investor and will help set the stage for a Dalia Barsoum , MBA , FICB and Enza
Disadvantages successful outcome. Venuto, AMP, CMP and are lending advisers
with CENTUM Streetwise Mortgages
A prospective investor must ask
for the themselves what their highest priority is
#11789 and real estate investors with over
48 years of combined lending , financial
Investor for their capital. Unlike buy-and-hold and investment experience. The team
investments where capital appreciation provides advisory services and lending
zz Giving up any appreciation above solutions tailored to Real Estate investors
over the long term is the goal, rent-to-
the option price and different investment strategies.
own has a relatively short time horizon
zz The property is tied up during the
and therefore lower capital appreciation,
option term as the investor does
not have the flexibility to sell it
but has the potential to provide lucrative Jillian Brett is
month-to-month cash flow, with an President of Solutions
zz The portfolio turn ratio is high Property Network
opportunity for tax deferral on a portion
relative to a buy-and-hold strategy, Inc. a Real Estate
as the investor doesn’t hold a rent- of it. Consultation with your financial
Investment company
to-own property for more than a and accounting team is crucial in order specializing in Rent-
few years and will need to replace to plan the most beneficial tax strategy. to-Own opportunities
that investment In general, one of the significant tax in Ontario.
advantages of investing in a rent-to-
54 canadianrealestatemagazine.ca
From the lender’s desk canadianrealestatemagazine.ca 55
Rent-to-own series, Part 3
How to structure
a winning deal
Experts reveal secrets to structuring an “equitable“ deal
I
n our previous article about rent- limitations on the investor that will payment, or they have been through a
to-own (RTO), we suggested protect the property during the bankruptcy, divorce, death of a spouse
that the transaction is just as holding period? or loss of a job and their credit rating
much about managing people as Doing proper due diligence and has taken a beating. Or, they may be
it is about realizing profit, and that performing planning based on self-employed, or facing an imminent
performing due diligence and managing reasonable, verifiable projections, as financial crisis and are seeking a creative
expectations is of utmost importance. well as being discriminating during solution in order to avoid losing their
The tenant/buyer and the investor/ the process of accepting a tenant/ home. Whatever the case, it is likely that
landlord need to be crystal clear about buyer are an investor’s best defence. the investor has a more sophisticated
what’s in it for them, and to be certain Both parties should be equally clear understanding of finances and should
about what they are willing to put about their responsibilities, the make sure the transaction is sound
at risk in order to reap the potential inherent risks, the opportunity cost by thoroughly vetting every aspect of
rewards. When the transaction is built and they should consult with their the proposed deal. In our experience
on a reciprocal foundation of clarity, financial and legal advisers prior to expenses such as closing costs and
and a financial plan has been created in signing any final agreements. out-of-pocket expenses are often not
conjunction with certified individuals An investor should only do captured in proposals, so it’s important
who are qualified to perform financial business with tenant/buyers whose to thoroughly understand the upfront
analysis and impart financial advice, the circumstances have been thoroughly and operational costs that can dilute the
probability of a successful outcome for analyzed and diagnosed by a certified promised returns.
both parties is substantially increased. mortgage professional. The tenant/ The RTO tenant/buyer should
There is an onus of responsibility on buyer should ideally agree to receive choose to work with an investor/
the investor and the consulting financial coaching from a certified financial landlord who has experience and
team to properly qualify a RTO planner or equivalent and agree credibility and who has the financial
applicant and to structure the terms of to participate in ongoing financial stability to undertake the responsibility
the agreement so that it identifies the coaching during their tenancy in order of covering all the costs associated with
risks for all parties involved, such as: to make sure they stay on track and that financing the transaction throughout
What happens if the buyer is not able to the investor is immediately apprised of the holding period. Not everyone has
buy the property at the end of the term? any setbacks. the technical knowledge and experience
yy What happens if there is either a Most RTO applicants face to structure an RTO deal properly.
decline or increase in the market extenuating life and/or financial Choosing to partner with a company
value of the property by the end of circumstances that preclude them from that is visible in the community, who is
the term? buying a home via conventional means. referred by a trusted source, and who
yy What are the obligations and Perhaps they haven’t saved a full down can provide references is a great start!
52 canadianrealestatemagazine.ca
Rent-to-own series, Part 3
The Buyer/ The Rent-to-Own
Tenant Solution
Situation The mortgage agent who referred her
to Solutions Property Network Inc.
Mrs. Smith approached us about (SPN) suggested that an RTO agreement
entering into a RTO transaction after might give her an opportunity to turn
being rejected for the mortgage things around. An RTO transaction was
renewal on her beloved home of 15 predicated on the agreement with her
years. Although she had a great job that the proceeds of the sale of her
and was a valued employee with house to SPN would be used to pay
outstanding references who earned a out all of Mrs. Smith’s debts, including
decent income, she had experienced her two mortgages, all her credit cards
several extenuating circumstances and her car loan. Mrs. Smith’s remaining
that had left her credit rating severely 5% equity would be held by SPN as an
damaged and she was facing imminent “option consideration” – an amount
financial disaster. Since she had made that would be rebated back to Mrs.
significant improvements to her home, Smith when she purchased the house
the idea of selling it was devastating to back from SPN in 24 months (the repair
her. Her financial situation had been period necessary to raise her credit
thoroughly analyzed by a certified score by following a prescribed credit
mortgage professional, and she had repair program).
been told that if she sold her house A rental amount was established
at market value ($244,000) in order that was determined by the ‘fair
to pay off her debts, that she would market rent’ for her house, plus a
have no equity left after paying real rent-rebate amount of $300 added
estate and legal fees. She would be to each rent payment. So long as
penniless and homeless. Due to the Mrs. Smith paid her rent in full and
high interest rates that she was paying on time each month, that $300
on an interest-only second mortgage would also be rebated back to her at
and several high interest credit cards, the end of the 24 months. Together,
she was sinking with debt – running at the option consideration amount
a $500 per month deficit. and the total of all rent rebates
would form the down payment she
would require in order to buy back
her house. The monthly cost to Mrs.
Smith to remain in her home as a
tenant, without any consumer debts
to pay, was $2,000 ($1,000 less per
month than she had been paying
while juggling maximum debt load).
SPN took over the property tax and
insurance payments and Mrs. Smith
continued to pay her utilities.
An appreciation factor of 5% per
year was applied to Mrs. Smith’s
house, meaning that after 24 months
Everyone Wins
she would buy the house back The RTO agreement bought Mrs.
from SPN for $269,000 and would Smith what she needed most – time
have a 7.84% down payment saved to repair her credit. Secondly, it had
that she’d accumulated in option brought expertise to her – a qualified
consideration and rent rebates team who were able to create a realistic
during her 24-month tenancy. Her and achievable plan for her financial
mortgage payments would be recovery. Thirdly, it enabled her to
approximately $1,200 per month – a realize the dream of remaining in her
far cry from the $3,000 in payments beloved home, with no apparent
she had previously been making – change to the outside world – salvaging
mostly in interest. her dignity and sense of security.
canadianrealestatemagazine.ca 53
Rent-to-own series, Part 3
An analysis of the deal revealed that
formerly, Mrs. Smith was paying $15,000
per year in combined interest payments
to service her debt load. These payments
were made monthly, and the burden of
making them was prohibiting Mrs. Smith
from ever getting ahead. Conversely, the
5% appreciation that Mrs. Smith paid on
her home during the RTO amounted to
approximately $12,500 per year, but it was
paid at the end of her 24-month tenancy
– giving her time to repair her credit
and get her finances back on track. The
appreciated mortgage amount was locked
in at an interest rate of 4%, as opposed to
the 15%-27% she had been paying on her
original consumer debts.
For the investor, this transaction
provided a cash-on-cash return of 44%
over 24 months, having mortgaged 80%
of the house purchase. The investor
achieved a decent return relative to the
risk/responsibilities that they had taken
on. However, they had not only invested
money in the deal, they had also invested
Rent-to-Own agreements are a
financial partnership and should be
structured with a win/win outcome in mind.
If the transaction is balanced, the potential
for both financial and emotional rewards can
easily be achieved Dalia Barsoum , MBA , FICB and Enza
Venuto, AMP, CMP and are lending advisers
with CENTUM Streetwise Mortgages
confidence in Mrs. Smith’s commitment suggesting that defaulting mortgagees #11789 and real estate investors with over
to follow her credit rehabilitation seldom dispute the eviction, whereas 48 years of combined lending , financial
program. Had she failed to do so, they tenants typically do. This adds a layer of and investment experience. The team
would potentially have had to evict complexity and risk for the investor that provides advisory services and lending
solutions tailored to real estate investors
the tenant, liquidate the property, and needs to be factored in when assessing
and different investment strategies (www.
incur all of the related real estate and the risk/reward ratio. With each legal streetwisemortgages.com)
legal expenses. For this reason, several process, there is a delay, and this too
lawyers who were consulted in the bears financial consequences that the
course of writing this article expressed investor must be prepared financially Jillian Bret is president
a strong caution for those investing in and emotionally to incur. of SOLUTIONS
PROPERTY NETWORK
RTO agreements, suggesting that the Rent-to-Own agreements are a INC. a real estate
rules for landlords evicting a tenant are financial partnership and should be investment company
codified under the Residential Tenancies structured with a win/win outcome in specializing in Rent-
Act, whereas the eviction of a defaulting mind. If the transaction is balanced, the to-Own opportunities
mortgagee is codified in the Mortgages potential for both financial and emotional in Ontario (www.
solutionsproperty.ca)
Act and Rules of Civil Procedure - rewards can easily be achieved.
54 canadianrealestatemagazine.ca
Advertisement canadianrealestatemagazine.ca 55
rent-to-own
PART 4 Divorce
Qualifying
The financial impact of divorce may
present specific challenges that require
the applicant to re-organize their life and
get back on their feet emotionally and
financially. Although one of the divorcing
parties may wish to maintain residency in
tenants
the matrimonial home, they may need time
in order to build an adequate credit score.
Missed Payments
Sometimes applicants have a history of
missed payments due to a specific change
in their personal or financial situation.
Health problems, for example, can present a
Who is best suited to rent-to-own temporary challenge that stands in contrast
to prior payment behaviour. An individual
(and how to find them) may have missed payments in the past due to
a lack of understanding of good management
principles or a lack of financial discipline, but
I
n our previous articles we emphasized the importance of proper tenant now they can demonstrate that they are back
qualification as one of the key success factors of a rent-to-own (RTO) investment on track and willing to follow a rehabilitation
strategy. In this article, we will discuss the specific characteristics of applicants process. The criteria for accepting this type
who are best suited to a RTO opportunity and provide a checklist regarding how to of applicant is their ability to demonstrate a
qualify applicants thoroughly. clear understanding of responsible money
management practices and be willing to
commit to a customized plan to stay on track.
W
ho is an RTO W
hat are their
candidate? challenges? Business Owners
and Self-Employed
An RTO candidate is typically someone who RTO applicants often include, but are not The tax benefits of owning a business or
was not approved for a mortgage but who was limited to, people facing one or more of the being self-employed are sometimes at the
not far from meeting the lender’s criteria. following challenges: root of an applicant having declared nominal
Generally speaking, the applicant has a low income for several years. Since lending
credit score in the 400 to 600 range, or lacks Lack of credit history institutions typically require at least two years
established credit history. Some applicants Some applicants don’t have established credit ‘Proof of Business Activity’ and personal
have not saved the minimum down payment history in Canada for a variety of reasons ‘Notice of Assessments,' it can be challenging
that they would require in order to attain and are sometimes immigrants, divorcees for a self-employed applicant to achieve mort-
an institutional mortgage. Each applicant or young adults who need time to build their gage approval. Often the applicant’s capacity
is unique, however, and could be facing any credit bureau. to afford their living expenses is significantly
number of these challenges. offset by their tax advantages, but this has not
Regardless of whether the applicant’s Low Credit Score been captured in their mortgage application.
challenges are down-payment related or There are many reasons why an applicant’s
credit-score related, they must demonstrate credit score may be low, including former
that they can afford the financial responsibil- bankruptcy, divorce, poor bill payment H
ow to approve
ity. Typically they will have been employed history or self-employed income. them?
for at least 12 consecutive months and have
adequate proof of income to support the previous bankruptcy Although the final approval rests solely in
proposed monthly rent payment. In addition, People sometimes declare bankruptcy in the hands of the investor, we feel it is very
they will have saved some or all of their down order to seek relief from outstanding debts important to involve a qualified mortgage
payment and be able to provide an ‘Option that they could no longer service due to job professional who can demonstrate a solid
Consideration’ in the range of 5% of the loss, divorce, death of a spouse or health understanding of credit approval and credit
acquisition price of the home. Thirdly, they issues. Conventional lenders typically want counselling practices. An experienced and
will be able to provide references from past to see at least two years of good credit history knowledgeable mortgage professional can
landlords in order to verify their reliability since the bankruptcy discharge in order to have a significant impact during the qualifi-
and accountability as tenants. approve mortgage financing. cation process in several ways, including:
76 September 2011 canadianrealestatemagazine.ca
11017_CRE_Magazine_SEPT'11_layout_FINAL.indd 76 11-07-21 5:18 PM
rent-to-own
• Pulling a credit report on the applicant the property. The Option Consideration ful-
(upon their written approval) fills a couple of useful purposes: a) It forms W
hat can they
• Providing a detailed analysis of the credit part of the tenant’s future down payment afford?
report b) It represents a financial commitment by
• Identifying critical aspects within the the tenant, as they know that if they default All of the above will help to assess the
report requiring remediation or decide not to buy the home, the Option client’s current situation and project
• Determining a realistic and achievable Consideration is retained by the investor to whether or not they will be able to afford
credit repair period be applied toward the liquidation costs of the rent payments and the eventual
• Establishing a time-measured action plan the property. If the Option Consideration is mortgage and expenses on the home. The
that the tenant can use as a guideline being borrowed by the applicant, you might process will reveal how many months it
and the investor can use to measure request that the lending party become a will take them to repair their credit and
benchmarks for success. guarantor for the duration of the tenancy. will establish the length of the rental
You might also consider asking for a higher term. Certain assumptions must be made
Option Consideration as a hedge against any regarding the future price of the property,
What higher risks that you are taking. what the mortgage rates might be at the
to look for? time, the available amortization options
Credit Situation and the client’s future financial situation,
“Look Beneath The Iceberg” is our guiding In consultation with the mortgage adviser, but no assumptions should be made
philosophy underlying tenant qualifica- you will be able to learn about the applicant’s regarding any information that can be
tion. We always ask the applicant to sign current behaviour with respect to money verified now.
an “Authorization to Release Information” management, their cost of living, debt repay- Your mortgage adviser can assist with
that includes permission to update records ments and how much they can afford for rent information regarding mortgage rates and
periodically throughout the tenancy period and save each month. amortization options. For determining
by contacting financial and employment the future price of the property, you will
references. Attaining formal written docu- Gross Debt Coverage need to analyze the historical appreciation
mentation as proof and asking strategically The ‘Gross Debt Service Ratio’ is used as rates in the area, review the economic
placed, targeted questions are essential steps a preliminary assessment tool regarding development plans for the municipality
in attaining reliable, verifiable information. whether a potential borrower can service and speak with an experienced local
the costs associated with home owner- Realtor who is knowledgeable about the
Income Verification ship. Generally speaking, the total monthly target market and who can help fine-tune
Verifying combined sources of current costs including mortgage payments, property any assumptions regarding property
guaranteed income for applicant(s) including taxes, 50% of condo fees and heating costs appreciation.
employment income, spousal support, child should not equal more than 32% of the gross
support, child tax credit, rental income (from monthly income.
municipally compliant ‘second’ suites) and Dalia Barsoum
, MBA , FICB and
any other legitimate and verifiable sources. Total Debt Coverage Ratios Enza Venuto, AMP,
Have the mortgage professional request an The ‘Total Debt Service’ (TDS) ratio CMP are lending
employment letter, pay stubs, the two most re- measures a person’s total debt obligations advisers with
cent Notice of Assessments, copy of separation (including housing costs, loans, car payments CENTUM Streetwise
agreement if applicable, cheque stubs and at and credit card bills). Generally speaking, the Mortgages #11789
and real estate
least three months' bank statements from the TDS ratio should not be more than 40% of investors with over 48 years of combined
applicant in order to verify their information. the gross monthly income. lending , financial and investment experience.
Find out how long they have been employed The team provides advisory services and
in their current job, and if less than two years, Property Cost lending solutions tailored to real estate
where were they were previously employed. By using industry ratios in combination with investors and different investment strategies
(www.streetwisemortgages.com)
advice from your mortgage adviser per-
Deposit taining to the applicant’s monthly debt obli-
The applicant would typically have saved at gations and income, you can then determine Jillian Bret
least 5% of the current purchase price of the how much rent your applicant can afford is president of
property that they will provide to the investor to pay, which will, in turn, determine what SOLUTIONS
PROPERTY
as an Option Consideration. This money is property value they can afford to buy.
NETWORK INC.
then credited back to the tenant at the time a real estate
they exercise their option to purchase the References investment company
property. In the meantime it can be applied Request employment references as well specializing in rent-to-own opportunities in
by the investor to closing costs and out-of- as references from other sources such as Ontario (www.solutionsproperty.ca)
pocket expenses associated with purchasing previous landlords.
September 2011 canadianrealestatemagazine.ca 77
11017_CRE_Magazine_SEPT'11_layout_FINAL.indd 77 11-07-21 5:18 PMrent-to-own
RISK 1 The tenant/buyer is
unable or chooses not to buy
the property:
A rent-to-own is set up in a manner that
provides the tenant with an ‘Option to
Purchase’ the property at a future date at a
pre-determined price. The tenant also enters
into a Residential Tenancy Agreement for
a specific number of months, usually the
time it will take them to either repair their
credit or save for the down payment. But
what if they either can’t or choose not to buy
the property when it comes time for them to
exercise their option to purchase?
HOW TO MINIMIZE THE RISK:
1. Qualify tenants carefully. An
investor needs to screen applicants very
carefully and ideally only do business
with tenants/buyers whose circum-
stances have been thoroughly analyzed
and diagnosed by a certified mortgage
professional. This not only protects
the investor, but the tenant too. Ideally
the mortgage professional will have
expertise in credit counselling and can
help to objectively assess the client’s
Managing
credit situation, thereby determining
a realistic term over which the tenant/
buyer can repair their situation. Ideally
they will also provide the tenant with a
clear action plan so that they can follow
a step-by-step process with benchmarks
for success, including debt repayment,
the Risks
saving for the down payment and mak-
ing sure they can afford their monthly
financial obligations. Ideally, the tenant
will agree to receive coaching from a
certified financial planner or equivalent
and participate in ongoing financial
coaching during their tenancy in order
to stay on track. This also provides an
Our lenders look at the top five opportunity for the investor to be ap-
risks investors face when adopt- prised immediately of any setbacks and
be pro-active in addressing challenges.
ing a rent-to-own strategy and The arrangement also establishes a
strong commitment to a successful
show how you can reduce them outcome for all parties.
2. Use reasonable assumptions.
I
n our previous articles regarding rent-to-own, we discussed the pros and cons Nobody has a crystal ball in order to de-
of this particular investment strategy and suggested ways to set up an equitable termine future property values in a par-
transaction. Since a rent-to-own is a bridge strategy for the tenant/buyer and, ticular market. While historical records
in most cases, there are issues with either their credit bureau or access to adequate do not strongly predict future values,
funding, it’s important to be aware of how to minimize some of the risks and increase they are a reasonable reference point for
the likelihood of success for everyone involved. establishing the historical value trends
68 OCTOBER 2011 canadianrealestatemagazine.carent-to-own
in that market. Factoring in the town and a diversified local economy. These
or city’s economic growth plan for the influences will not only help to maintain
period of the investment time horizon
helps to determine an appreciation rate.
The investor strong property values and increase the
likelihood that the tenant will choose to
Rule-of-thumb appreciation rates can be
hit and miss, so it’s important to do the
must be buy the property; they will also provide
stronger opportunities for the reengin-
preliminary research and set reasonable
rates based on the actual fundamentals prudent in eering of the investment strategy (such
as renting or selling the property) if the
of the region you wish to invest in. tenant decides not to buy it.
establishing
3. Consider extending the RISK 3 Refinancing:
option term. Even with the most
careful planning and coaching, it is pos-
reasonable Since the investor retains ownership of the
property until the tenant/buyer exercises
sible that the tenant will not be approved
for a mortgage by the “Option” date. If
borrowing their “Option to Purchase,” the seller could
potentially refinance the property during
so, the investor could consider ex-
tending the Option Term and the tenant limits and the rental period in order to acquire a lower
mortgage rate, lower their mortgage payments
might want to agree to a rent increase, or pull out equity for other investments.
an increase to the Option Consideration agreeing not to
amount, and/or an adjustment to the HOW TO MINIMIZE THE RISK:
purchase price in return for the exten-
sion. Extensions might make sense if
over-leverage The investor must be prudent in
establishing reasonable borrowing limits
the underlying reason why the tenant
can’t buy the house as scheduled is
the property and agreeing not to over-leverage the
property, which could make it difficult if not
driven by factors outside of their control impossible for the tenant to buy the property
and not because they didn’t commit at the end of the term. A clause could be
fully to their action plan. 2. Lend the funds. By the end of the written into the Option Agreement that
rental term you will be familiar with limits the maximum loan-to-value agreeable
RISK 2 Decrease in the tenant’s payment history and have to the respective parties.
property values: a good idea of their reliability. If they
Even if every reasonable effort has been are good candidates, you could consider
made to predict the property’s future value lending them some or all of the funds
DALIA
and the tenant has diligently followed required to purchase the property
BARSOUM,
their financial action plan, the real estate by providing either a first mortgage, MBA , FICB
market might dip, resulting in a property second mortgage or a combination of and Enza
valuation that is less than the option price. both. Your mortgage broker could as- Venuto,
If there is a big spread between the current sist with the arrangement of a private AMP, CMP
are lending
market value and the established option first or second mortgage and would be
advisers with
price, the tenant might choose not to buy able to determine the tenant/buyer’s CENTUM Streetwise Mortgages #11789
the property or they might have difficulty suitability to service the loan. and real estate investors with over 48
being approved for a mortgage, since years of combined lending , financial
lenders typically loan against the appraised 3. Extend the Option Term. A new and investment experience.The team
provides advisory services and lending
property value. Option Agreement could be entered
solutions tailored to real estate investors
into, establishing a purchase date far and different investment strategies
HOW TO MINIMIZE THE RISK: enough into the future to allow market (www.streetwisemortgages.com)
1. Share the cost. You could consider property values to adjust accordingly.
adjusting the option price if you don’t This strategy should be applied with JILLIAN
BRET is
want the tenant to walk away from the caution however, since market prices
president of
transaction. This would depend upon may adjust up or down and both the SOLUTIONS
whether the cost of liquidating the investor and the tenant will be taking a PROPERTY
property would exceed that of a price risk based on unpredictable trends. NETWORK
adjustment, and how close the tenant/ INC. a real
estate
buyer is to attaining mortgage finan- 4. Be selective. It’s imperative to invest
investment company specializing in
cing. A careful analysis of the options in cities with strong economic fundamen- rent-to-own opportunities in Ontario
and implications will help to identify tals such as job growth, immigration, (www.solutionsproperty.ca)
the best plan. income growth, infrastructure expansion
OCTOBER 2011 canadianrealestatemagazine.ca 69You can also read
