Rent to buy

Hello,

Just wondering if anyone has does this before for any of their IPs and what the process is? I've been contacted by someone interested in doing this with our IP but I don't really know much about what's involved to make a decision.

Thanks

 

Could you elaborate more about this? Are we talking about vendor financing? Personally I have concerns around this type of financing as it potentially indicates that the purchaser is unable to obtain bank financing.

http://www.theage.com.au/victoria/p...on-over-renttoown-scheme-20150123-12xci0.html

 

I agree with Peter... There is likely a reason the bank will not lend them money...

 

Thanks. I don't really know much about what they're proposing exactly. My IP is currently advertised for sale and I got an email asking if I'd consider a rent to buy arrangement.

 

Hiya

Do some googling on "vendor finance" - sounds like that's what's being proposed.

Cheers

Jamie

 

Here is a current example

Regents Park Qld - http://www.realestate.com.au/120952190

 

I jave done this before on 3 properties but would not do it again.

 

how come? even with the hassle. etc kicking a tenant buyer out. you'd still be a head i would have thought? also did you have to kick a tenant buyer? how was the legal process? i couldn't find any cases on the courts for resi properties

 

The tenant will make more money than the owner in a rising market. It will only work for the owner if the tenant doesn't exercise the option. I had no legal problems with my tenants. One died in the property and he executor just handed back the keys. One bought the property off me for about 20% less than it was worth and one did a runner owning me rent, but I kept the option fee.

 

this sounds like in all 3 deals you made money (come out on top) with the deal where you sold it 20% below market value i'm assuming you paid 100k for it on sold it to tenant buyer for 110k and then the market moved past that point? also i would be interested in how long the terms were for the option i've been told that 5 years is a fair amount of time as any less then 3-4 years is to hard on the tenant buyer

 

Yes I made money on them all, but for the small extra you make upfront and in rents it is just not worth it.

My agreements where 5 years plus an option to renew.

 

you say it's not worth it but for me a beginner i can't see why not as it gives you cash flow say u buy a 200k property (market value at time say 230k) and on sell for 240k on 5 year lease option. it allows for you to make profit which increases your borrowing capacity / allows you to use profit for your NG capital growth properties. and thus allowing you to continue to grow your portfolio. also any damages / loss of rent are covered under a normal landlord policy

having said that cons i see are that if rents increase that would suck as you've signed a lease for 5 years and also if interest rates went up that would be lame but could just fix them for 5 years?

 

The way to get rich is with capital growth, but this is what you are giving up with selling an option. In return you are getting money $50 more per week - a few thousand per year.

I am not an accountant, but the option fee received is a capital gain and the extra income from rent is taxed as received - compared to a capital gain which can be leveraged off and delayed for 50 plus years possibly.

Sounds good in theory maybe, but I wouldn't do one again.

 

Oops i meant to delete the bit about the CGT, i agree that it's not going to make as money as capital gain. to me it looks like a good cash flow tool to use to continue to build your "buy n hold" portfolio. as many investors will max there borrowing capacity out and with new apra changes it's even harder. if your a high incomer earner then you most likely wouldn't have to do this as you could continue to buy CG properties all the CG properties i've found are negative by around -5k p.a

i guess theres only one way to find out if i'll actually like doing them and thats by giving it a try.

 

Every dollar in rent helps stretch servicing, but you will not get much more in borrowing capacity from the extra rent.

Also you will be breaching the terms of the loan agreement by selling an option over mortgaged property.

 

I should add that the property is a bit of a dud and not likely to increase in value in the short to medium term. I presume it would be worthwhile in this instance?

I presume I'd need to go through a lawyer to draft an agreement? How do you go about determining payment amounts and the sale price at the end?

 

You need 3 agreements - contract of sale, option agreement, and lease. You should get legal advice.

Payments are up to your imagination and whatever the market is willing to pay.

 

Thanks Terry. We've just got new tenants in so will keep this on the backburner for now.

 

Hi All,

This maybe a bit late to add my 2c but for future enquiries, it might be worth doing it anyway

I've also done this before and both parties are happy and full of joy. The 'Rent to Own' path is quite simple: tenants pay rent + option fee to buy the property at an agreed sum on an agreed date.

Yes, there must be a reason. Most of the reasons can be overcome given enough time and will. I found that people can find the money to pay a weekly fine (for example) of $100 but can't save even $50 p/w (if there is no fine or some other obligation to make them)

I think that what Terry means is that overall the profit isn't that high. I agree with this statement. The cash flow, however, is great. So it the security and peace of mind of having tenants that really treat the property as their own, knowing they need to get the bank to favour the property in a few years.

Oh? That's the first I'm hearing about that. Are you sure? Can't see any breach by having a future sale agreement for a current mortgaged property.

Cheers,
Ethan

 

Yes definitely. Just think of the complications for the mortgagee needs to take possession and sell the property to recover the debt owed. You having sold it already will complicate things.

So granting an option will require permission of your mortgagor. They won't know you have granted one till much later, but if the option buyer lodges a caveat then they will if they do a title search. The mortgage agreement will also require you to do everything you can to remove the caveat.