First Rental Property

The Rent to Own System of real estate investing is by far better than the out of date Buy-Hold-Rent method.

Some of you may not have heard of the Rent to Own method before. That is okay. Here is an explanation:

A real estate investor has a rental property that they would like to rent out. They find a tenant who would like to rent the home, with the option to purchase it down the road. (In this scenario, we are going to refer to the tenant as the tenant/buyer). An agreement is established between the investor and the tenant/buyer. Contained in this agreement are a number of things. First, in order for the tenant/buyer to rent the home from the investor, they have to provide a down payment to the investor. This down payment that is provided will be used toward the future purchase of the home by the tenant/buyer. Second, the tenant/buyer agrees to pay the investor their standard monthly rent. In addition to the monthly rent, there is a premium that the tenant/buyer pays over and above their monthly rent to the investor. This monthly premium is credited to the tenant/buyer’s down payment and factored into the final sale price at the time of the purchase. Also, the final sale price of the home is usually established on day one by the investor. The final sale price of the home can be the market value of the property at the time of sale, or there can be a fixed appreciation model in place. For example, if the term of the Rent to Own agreement is 3 years. It can be pre-determined that the property will appreciate in value the first year by 4%, the second year by 5%, and the 3rd year by 5%. Usually, Rent to Own Terms are established for 2 or 3 years. After this term has been completed, the tenant/buyer has the right to exercise their option and purchase the property.

The benefits of the Rent to Own system to the tenant/buyer are plentiful. In my opinion the most important benefit is that the tenant/buyer is able to realize home ownership sooner rather than later. They are able to realize homeownership sooner because the ideal Rent to Own candidate has sufficient income in order to qualify for a mortgage, however their credit may be slightly bruised, and in need of some repair and attention. The tenant/buyer works with the investor over the course of the Rent to Own term, in order to repair their credit, so that they are able to purchase the home at the end of their Rent to Own term.

The benefits of the Rent to Own method to the investor are equally as plentiful. In my opinion, a couple of significant benefits are, 1) the increased monthly cash flow, and 2) significantly reduced repairs and maintenance required on the property.

This is an area where The Rent to Own and Buy-Hold-Strategy differ quite substantially. With the Rent to Own arrangement, the tenant/buyer is often times responsible for all repairs and maintenance on the property. In addition, Rent to Own tenant/buyers generally speaking have a high degree of pride of ownership. With this increased pride of ownership, properties are often treated better by the tenant/buyers, and they are not treated the same way as a straight rental unit.

So why is the Rent to Own Method better than the Buy-Hold-Rent strategy?

Two reasons.

1) As the real estate investor (which you are), you are (or should be) concerned with the cash flow of your investment property. The more cash flow that can be generated by a property, the better.

2) You do not have any repairs and maintenance to worry about. This point should not be underestimated, as many beginning investors are terrified of being a Landlord, and they are terrified of the duties and responsibilities that come along with this new role.

In addition, the Buy-Hold-Rent method of investing is less favourable than the Rent to Own Strategy, due to a number of reasons.

1) You are responsible for repairs and maintenance. No matter if the property is brand new, or many years old, there are repairs and maintenance issues that come up on all properties. If you are not a handy person yourself, then you should be delegating this work out to qualified handymen. This comes with an addition cost though.

2) Not as good cash flow is another reason whey the Buy-Hold-Rent method is less favourable than Rent to Own. Often times with these properties, your profit margins can be thin. Any unexpected repair or maintenance issue that you have to have completed can potentially wipe out your positive cash flow for the month, or even for the entire year.

The Rent to Own Method is gaining more popularity and support among real estate investors due to the clear advantages over the outdated buy-hold-rent strategy.

When you are investing in real estate, hopefully you will get to the point where you realize that you are running a business. Whether you own 1 investment property, or 100 investment properties, you are applying the same concepts, or should be at least.

Often times more experienced investors who own multiple properties realize through trial and error that they are running a business.

Beginning investors who take the time to learn from more experienced investors can be at an advantage. They will be at an advantage because they will learn to apply certain principles early in their real estate investment career.

All of the senior real estate investors that I associate with all have learned to run their real estate investments as a business. They all recommend that beginning investors should run their real estate investing as a business as well.

These experienced real estate investors that I speak of own a large number of properties. One of these investors owns 21 properties; the other one owns 50, while a few others own 100 and 200 respectively. Due to the number of properties that they each own their advice is extremely credible as they have the experience to show.

Here are some things that you can do so that you too can run your real estate investing like a business.

1) Be Decisive

The saying, ‘Time is Money’ holds true. You have to learn to make quick and decisive decisions. Once you have made your decision, stick to it. Don’t flip flop back and forth once you have made your decision.

For example, I have a rental property right now that is vacant. I received an offer from a prospective tenant to rent the property. The prospective tenant was supposed to return the signed lease to me, along with a deposit cheque, in order to rent the property. The lease and cheque was supposed to be returned to me 2 business days ago. Through communication today, the prospective tenant said that they are still interested in my property and that they are going to submit the documents to me. At this point I don’t care if they are still interested. They have lost their opportunity. I am not going to wait for them. I have cut them lose and have put the property back on the market. If they want to do business with me, they must meet my timelines. Be decisive and move on.

But wait…you might be asking…How do you be decisive? Good question. It comes with practice. The secret with being decisive I have found is that you have to think logically, not emotionally. When you think logically, making decisions is easy because everything is black and white. For example, I decided to cut this prospective tenant loose because the more time I spent waiting for their signed lease and deposit cheque, resulted in lost opportunity for myself. There could very well be other interested parties who want to rent my property. As such, I need to spend my time focusing on these people.

2) Make sure that the money coming in is greater than the money going out

I do not know of any business that has become successful in the long run by continually losing money month over month and year over year. It is easy to apply this same concept to real estate investing. Pay close attention to this next sentence.

Make sure that your expenses on your rental property are lower than your gross income for the property. If this is the case, then you are making money. This is a good thing. For example, if all of your monthly expenses on a property are $800, and your gross monthly income is $1000, then you have a $200 profit each month.

You do NOT want to be in a position where say for instance, your total monthly expenses are $1000, and your total monthly gross income is $800. This would mean that you have a $200 loss on your property each month. It is difficult to continue to grow a business when you are losing money. How do you make sure that the money coming in on a property is greater than the money going out, you may ask? For starters, you will have to know the market rents of your target property. By knowing the market rents, you will be able to accurately estimate what your actual rents will be. Also, before purchasing the investment property, you will have to do some pre-work in order to determine how much all of the expenses cost. For example, how much are your mortgage payments going to be? What about property taxes? Are there any condo fees to take into consideration? What about repairs and maintenance, how much will you allocate for that? Finally, are you going to hire a property manager, or will you manage the property yourself? These are all variables you have to take into consideration. After reviewing all of these variables, you will be able to accurately determine if the money coming in is greater than the money going out!

If you talk to any experienced real estate investor about their path to ’success’, chances are that they will share that their journey was not a smooth one.

At the end of the day, when you remove all of the B.S., real estate investment is not a walk in the park. It can be stressful at times, and many experienced investor reaches the point where they consider throwing in the towel, and giving up all together.

I have considered giving up once. It was at this time that I was considering selling all of the real estate assets and going back to school. Looking back, I am glad that I chose to stick with real estate investing because, this is really what I am interested in and what I like to do.

With investing, since the road is not always a smooth one, I have included some tips on how to stay motivated in the real estate investment game. These are all tips that I personally practice. As time goes on, I am sure that this list may very well expand. For now, here are some of the ways one can keep motivated, and thus continue to stay invested in real estate.

1) Surround Yourself with Like Minded People

There is no better way than to stay motivated. When you align yourself with people with common goals, this encourages you to stay the course with your own goals. Comparing notes with people with a similar vision makes you feel that you are not alone. Conversations with like minded people often help to recharge your batteries and give you enough energy to keep on moving forward.

This past Sunday I had a real estate meeting scheduled with some fellow real estate investors. I didn’t really feel like going as it was dark outside, and the weather has just changed as the winter is upon us here (December 2009). This was problematic for me as I am not a fan of the Winter or cold weather. Despite the outdoor climate, I knew that I had to go to the meeting. I know that if I did, I would feel better and more motivated after my meeting. As such, I bit the bullet and went to my meeting. I spent some time talking to investors who were using the same investment strategy that I currently am using (rent to own). After my conversation with them, I felt so much better, and I had increased confidence and reassurance that I was on the right track.

When you surround yourself with like minded people, they will charge your batteries. They will give you the energy you need in order to keep on moving forward.

2) Surround Yourself with Action Takers

Action takers and Like minded people are not one and the same. There is a big difference between the two. Like minded people may believe in the same things that you believe in. For example, that real estate investment is a good way to generate monthly cash flow. However, action takers are the ones who are not only talking about the benefits of monthly cash flow, however, they are implementing things and actually DOING something. They are the ones that are buying properties, and leading by example. Action Takers are powerful people to be associated with. Their actions rub off on you and force you yourself to take action.
A friend of mine is a big time action taker. This year he, and his joint venture partner have purchased 11 properties. He is an inspiration to be around because he has such positive energy. This positive energy is no doubt a result of his recent success with all of his purchases. As human beings we often compare ourselves to other people. Comparing yourself with an action taker is a good thing, because if they are taking action and you are not, you will want to take action as well, just like them.

3) Read as much as you can about real estate investment

The more you read about real estate investment, the smarter you will become on the topic. Being smart is important because smart people can find solutions for problems. As well, smart people can come up with creative ways of solving different problems. Not only that, but knowledge is power. The more you know the better.

For example, I was recently reading about a real estate investment strategy called RRSP second mortgages. It is an interesting strategy which allows a real estate investor to utilize RRSPs as a second mortgage on an investment property. With my initial reading, I had discovered that this strategy was only permitted as an Arms Length transaction, which means that the 2 individuals involved (Real estate investor and RRSP lender) cannot be blood related. This discovery posed some problems for me, as I was looking to implement this strategy with family members.
I was not content with my findings, so I continued to read further on this topic. After further reading, I came across some information that confirmed that the RRSP second mortgage strategy was in fact allowable between blood related people. This was a big breakthrough for me, as this discovery will potentially lead to 3 or 4 new investment properties in 2010.
If I did not continue to read more on this topic, I would not have found this solution. Reading about real estate investment is powerful because it allows you to gain more knowledge. Knowledge creates options.