Option2buy

If you could increase your property yield by 3% a year by providing the renter a right to buy the house in 5 years time at an agreed higher house price (20% from today's value), would you be interested? If not, what would be a reasonable incentive?

 

A 15% discount on todays price to acknowledge the rent paid & 1/2 case of 2004 Grange.

 

Are you a potential buyer or seller?

That agreement could be in the renter's favour rather than the seller's, if you are in a major city where prices are rising. Some urban increases could beat 20% plus an extra 3% a year = 35% over the five years.

I'm not sure why a vendor would agree to do this unless it was a hard to sell house.

 

And if the house does not go up 20% in 5 years from today? .....how will the renter get finance for it?

 

In my mind that would be very limiting for the investor. Limits capital growth potential. Limits flexibility. Would probably need to be more than 3%... furthermore a renter who can afford to pay an additional 3% yield would probably be disciplined enough to have saved a deposit to buy.

A right to buy, doesn't mean they are forced to buy. It's effectively hedging the renter against an excessive price increase over the next 5 years, they would only buy if it's worth at least as much as capped price.

 

Nope.

Imagine $200,000 property renting for $300 per week.
An extra 3% is an extra $9 per week.

In 5 years the property may double in value.

Or it may grow at least 50% in value. That would make it worth $450,000.

Selling it for $360,000 when its worth $450,000 for an extra $9 per week ($4468 per year) does appeal to me.

Not to mention the legal and finance complications.

You won't even be able to access equity if the optionee puts a caveat on title (which they could).

 

Increase yield by 3%, not 3% more rent. So an extra $115pw.

 

That makes it a bit better! An extra $6k per year or $30k approx over 5 years.

You might get $390k for a property worth $450k.
But you might also find the property has dropped in value.

I have previously done 6 of these deals, but most of the tenants did better than me.

What about the option fee?

 

Check your maths/numbers here too. Off a $200k current price, if it grows 100% then its $400k. If it grows 50% then its $300k. I think you based your $450k off a $300k inital price.

 

The renter will set aside a fixed amount of say $200 per week depending on his net saving ability that will be used to save up to the deposit they cannot currently afford. They do not have to worry about the price as under the 'option to buy' scheme they would have secured the house at a pre-determined price through signing a contract today than missing out completely were the prices to rise more drastically.