Rent to buy (with a twist)

Discussion in 'Investment Strategy' started by Scott No Mates, 20th Feb, 2024.

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  1. Scott No Mates

    Scott No Mates Well-Known Member

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    I came across this in my feed today as a means of getting into the market

    https://www.realestatebusiness.com....ld-lease-to-own-bridge-the-home-ownership-gap

    Offering tenants a five year term, capped 4%pa reviews and a more mainstream set of investors supporting the scheme.


    No idea who is behind it, whether it's new or existing property, what rights or protections there are for prospective buyers (eg caveat) etc.

    Is this a more mainstream way to enter the market or going to create a whole new subclass of investors and tenants.
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    These deals come with a huge credit balloon warning. They often tie in repayment escalation which rises bit by bit. They prey on people who cant afford to buy and who must rent yet the deal wants BOTH rent and loan repayments to be made. If you cant save why can you suddenly meet that high cashflow ?? So rent rises by 4%pa and then on top of this extra repayments are made which may translate to equity. So on top of rent you also must buy the home. Its like paying both a mortgage and rent at one time over 5 years. Plus $12500 up front. Anything goes wrong you end up unable to pay.

    The property is all selected developer pushed apartment stock which is a red flag for lack of independence over the credit and the property selection etc. If the market for property stalls what happens ?? How many units in the build are exposed to this issue ? That could lead to dumping or price issues for that block if its a concentrated risk. I will imagine the buyer has a last right of access to their apparent equity. Or is it lost ?? The CGT principles arent explained. eg WHEN do you become the homeowner ? And at what value ?? I would like to see a product tax ruling on that issue. If you are renting I do question if you have a INTEREST in the property or a right that needs to be exercised later. Maybe little more than a option that needs targets to be met to then exercise the purchase. Just when do you become the owner for CGT and the sole party with their own finance capable of refinance ??

    Little is explained about duty which I suspect is all under threshold to leave it as $0
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I looked at rent-to-buy schemes about 20 years ago with a veiw to refinancing people out of them. These are often sold as pay a premium rent now, refinance at a set price in a couple of years. Kind of like buying an option. Consistantly there were several problems with this.

    1. The agreed property value was always higher than the property was worth. This was mitigated by the idea that the value would increase and it would be a very fair deal in a few years time. In reality the property value might have increased, but not enough to cover the agreed purchase price plus a margin to cover a deposit.

    2. Often people would enter into these agreements because they had a problem stopping them from approaching regular lenders, such as bad credit. Again they were sold the idea that if they pay the rent consistantly then lenders will look past it. In reality by the time the option came due, these problems hadn't resolved themselves and lenders didn't want to deal with them.

    The general outcome of the vendor finance deals I saw was the purchaser handed over a significant deposit up front, paid a premium rent in the middle and couldn't buy the house at the end. There's a reason why the government regulators went so hard after certain high profile vendor financiers (there was more to it than the seminars they were flogging or their deceptive advertising).
     
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