Family seeking Rent to Buy investor for home in Perth

Hi OP, I like that you are thinking creatively to try and solve this challenge!

Have you considered the market risk if the value of the property falls in three years and you can’t get a mortgage because the bank valuation doesn’t stack up? As an investor on the other side of the deal this would be a concern for me. Also, there could be valuation problems if you are paying significantly above market price for the property even if the market stays flat. Unless you are planning to buy with cash?

I would consider the benefits of renting as a business owner. We are in the same boat. Our capital is invested in our businesses and investments and our home is an affordable rental. It frees up all our borrowing power for our business and investment lending and no non deductible debt. Yes we pay rent, but’s it’s a relatively small amount in our monthly budget. We have the flexibility to move when opportunities come up and no maintenance to worry about on the house!

 

For any long term investor, the payoff is at the back end after compound growth.

say for a 1m property, the investor is tying up 250k deposit and 800k borrowing capacity.

Say you offer 2% more yield and 20% premium on the purchase price. The investors return on investment might be 100% over 3 years. But giving up future gains.

any investors out there who would take this?

have you thought about just maxing lvr and use a 10% deposit or something? Youd be paying >5% of the price of the property in rent and maintenance anyway, so its not much more.

 

For the same reasons nobody else wants to rent:

1) You cant settle and make a home.

2) You have no certainty over staying in a single property for 3 years e.g. owners return from overseas and dont renew lease, they decide to sell the property as they only rented it until market improved etc. etc. etc.

3) You have less choice of properties/locations and lets be honest, rentals are typically a little run down unless they are owners who couldn't sell which leads to point 2.

4) We would have no opportunity to personalise the house or make improvements over the 3 years to add further value to the property.

Look, this is a genuine opportunity for a win/win outcome for an investor. Business is about relationships and fit. An investor would find it hard to find more 'bankable' business partners than us and thats what this would be, a business transaction with clear outcomes and governance.

I am focussing on where I can get the best return on my capital doing what I do best and seek to partner with a property investor who seeks the same.

I have done the numbers and they work. If there is a likeminded investor who is serious about doing a deal, please private message me and lets discuss if there is a fit.

 

In layman term - you don't have enough money to do both.
But you want to dip your feet in both.

I am going to say it as it is. Please don't be offended.
Nobody in their right minds - even astute investor would touch a deal like that with you.

 

As I've already mentioned, I think some would as long as the premium was too good to pass up. But it would likely have to be so high it wouldn't really be worth it unless you had a really good reason (e.g. it was a neighbouring block).

Earlier I stated 2x, which might seem absurd but is it? There are many areas which I expect to go up 50-70% in the coming years, so a doubling would be adding a relatively small premium on where prices might actually end up anyway.

 

If the OP is willing to go into the "Premium deal"
Then the OP have rocks in their head too.
A deal can only success if both party comes to an agreement.

 

I like it when people think outside the box to come up with a solution to their needs. Rent to buy is not common but it is a viable option for some.

I hope you can find a way to get this deal off the ground.

 

These are the problems from the investor side:
Have to rely on the renter’s financial situation. You say you are solid, but there are no guarantees.

Stamp duty needs to be recouped.

even assume shorter term guaranteed capital gains, have to give up on long term gains.

tie up deposit + borrowing capacity.

you overvalue your dependability (the investor doesnt know you, or want to take on your business risk) and undervalue the investor’s opportunity cost. 100% return on investment over 3 years, say, isnt much compared to the longer term returns on leveraged property.

if you put 5% of the contracted purchase price a year into a trust account, that would be safer. But then you might as well just buy it yourself.

what you think are good things might not be for the investor. You want to renovate to your taste, what if you dont end up buying it?

if you were that bankable, cant you just get a higher interest loan, secured by business assets, for the deposit?

 

How long will it be? what percentages are you thinking? How much rent above market? How much premium on the purchase price? Penalties if you dont go ahead?

 

Thank you Currious2019, I am glad you have understood my intent coming to this forum. You raise a great question and one I have considered.

For me, the bank valuation would only be an issue if I didnt have enough deposit to meet LVR for a reduced valuation. As I could meet this today, I think it is a very reasonable assumption that I will have a much larger deposit in 3 years time from further profits to more than cover any variation (I am prepared to share income statements/tax returns to demonstrate this).

For the investor, worst case for them is if in the unlikely event I couldnt execute is that have a nice property that I have spent paying down their principal at an increased rate over the 3 years through the monthly premium. We could do some sensitivity analysis to explore the effect at different market reductions i.e. 5%, 10%, 15% to proivde further confidence in the financial model.

 

Nailed it to the coffin!
You have explained it clearly what my mind was thinking.
I just couldn't be bother to outline it with so many words.

 

In OP’s proposed deal he wants to be obligated to buy it after three years.

 

And people default on their obligations all the time. This is a risk that the investor will want something for.

Why do property sellers want to take deposits?

 

I don’t particularly agree with any of these points (1-4) but the important thing is they are your values.

I think that the premium you might have to pay to make this attractive enough to go through the entry and exit costs for an investor for such a short timeframe may result in the deal costing you more than if you just saved for another three years and bought something then. A lot of rent to buy deals are new builds and can be ****** deals for the renter/buyer.

I think point 4 could be problematic even with rent to buy - I don’t think an investor will want you making improvements to a property you don’t yet own.. too many issues with this.

I don’t think that is a safe assumption at all - look at what has happened the last 6-8months. Many people who thought they were invincible are facing some hard truths. Businesses have ups and downs. You could get sued and lose everything, your business could fail, you could split up with your partner and need to divide your assets, you could become incapacitated, your business profits might drop because a new competitor enters the market.. I’m not saying this to be mean, but these are things as an investor I would be concerned about. Circumstances change all the time, many OTP deals fall over for similar reasons.

For the investor that is not the worst thing at all, I would be ****** if I tied up a significant amount of money in a deal like this and then it fell through, there is a significant opportunity cost that I could have invested the money elsewhere for a better return. I doubt the monthly premium would be enough to cover my stamps and other costs.

How does the initial purchase work? Do you pick the house? What if the house you like is t a good investment? You are looking for a PPOR - they are looking for a good investment - these can lead to some conflicting outcomes..

What does the investor do if you fail to buy at the end of 3 years? Kick you out and rent to someone else? Sell to someone else? Then you are back at square one anyways.

 

@JPH double stamp duty sounds like a killer here.

So you have plenty of income but don't want to sink much cash in to a big deposit - why not just purchase now via a high LVR loan? Surely you could tip in 5%. Are you limited to low doc loans and low LVR due to the nature of your business income?

 

Can you put some hypothetical examples of properties and the numbers out there please. This may help put some context around it.
House purchase price
Rental for the 3 years
Purchase price in 3 years