The Benefits of Lease-to-Own
by Paola Breda for CanadianFinancialFreedom.com
One of the best ways to get great cash flow and reduce tenant problems on a small home is by using the Lease-to-Own option.
At first, it seems a little scary - so most people are leery of it. But, if you delve a little further, you’ll realize that leasing properties to ‘owners to be’ is a great idea for everyone.
Let’s say you buy a ‘fixer upper’ for $80k. It takes you about $15k to fix it up. You get it reappraised, and now it’s worth $120k - that’s an equity increase of almost $25k for just a little bit of work and creative thinking. You just made yourself instant equity of $25k. But, what do you do now?
Let’s think about the facts. Now you have a property that’s worth $120k, you’ve invested $15k, plus your original 25% of $80 (let’s assume you did this traditionally). Why not re-finance and pull out the equity increase of $25k to purchase another property which in turn will also cashflow.
But, what do you do with the property? It may not sell quickly, or you may want to hold on to the equity in the home. So you decide to rent. Then, the inevitable happens: your tenants don’t pay, they wreck the house, the cat stains the wooden floor with that horrible stench, the kids have a fight and now you have a load of drywall repairs, and they leave garbage in the garage to build up instead of throw out. These are all the concerns most people have that block them from getting into rental investment, right? Haven’t you heard all the people with different versions of the same line: “I don’t want to fix toilets in the middle of the night?” or “I don’t want to deal with tenant problems.”
Let’s look at how the Lease-to-Own ideas answers many of these concerns:
• My tenants will call me to fix the toilet in the middle of the night.
➜ With lease to own, they are ‘practising’ owning the home during their lease contract, so the problems are theirs to deal with.
• The Landlord and Tenant Act gives tenants all the chips in the card game.
➔ With lease to own, you and the lessee are partners in a contract, not landlord and tenant, so the same rules do not apply.
• I need cash flow to survive, as I am struggling myself in my own business and cannot afford to add cash when necessary.
➜ You’ll get more cashflow monthly, instead of less, as you’ll be receiving monthly the market value rental amount, PLUS their monthly contribution to their downpayment. You can use the extra cash monthly to throw at another investment (perhaps a capital gains one that is losing a little each month) or to pay for a toy you just bought.
• I’m worried that I can’t recoup the money on equity lost at the end of the lease.
➔ you’ve included in your contract a small reasonable amount of equity buildup (asset appreciation), for example 4%,
• What happens if, at the end of the lease, the lessee has had credit problems or doesn’t qualify to buy the house, even with the down payment accumulation?
➔ Actually, this is not a bad situation at all, except for that fact that you’ve lost the chance to help someone who couldn’t have otherwise, buy their own home. You still have the house, you get to keep the extra accumulated downpayment, and your house is in much better physical shape than it would have been otherwise.
There are many other bonuses to lease-to-own:
1. Generally speaking, if a lessee realizes that the house will be theirs at the end of the lease, they will likely take a lot better care of it than they would have otherwise.
2. You get to help someone buy a home. This is a great way to feel good, help someone out, and
3. If they fail to qualify to buy the home at the end of the lease, but otherwise things have gone well, you could offer to renew the lease for a further period of time.
4. You’ll have few, if any problems with property maintenance.
5. Since the only other expense you’ll be paying (other than your mortgage on it) will be the taxes (you don’t want to fall behind with those), your cash outlay will be low.
6. There will be virtually no bookkeeping, as you will receive no other bills, like the hydro or water bill.
7. You can have the lessee deposit directly into your account by direct deposit (so you have nothing else to do) and you can have an automatic debit transfer of the mortgage amount to the mortgage account, and an automatic transfer of the remainder into whatever you want, e.g. purchase dividend producing stocks, your real estate investment down payment account.
8. You won’t have tenants who leave easily, making you search for new ones yearly.
9. The lessees may add value to your property by upgrading the home or adding a garage. This will add value to your property and allow you to ‘pull more equity out’ during the lease term. This in turn could allow you to purchase another cashflow property and replicate the process.
You might now be convinced that a Lease-to-own program might be one of the best ways to get great cash flow and reduce tenant problems on a small home. Don’t be afraid because other people are leery of it. More often than not, the one who does well is the one who is not afraid to go beyond their comfort zone. Lease-to-own is the positive cashflow property of the future!