Surrey Real Estate Investment Club

Welcome!

“Don't judge each day by the harvest your reap, but by

the seeds that you plant.”

~Robert Louis Stevenson

Sponsors

Welcome to the Surrey

Real Estate Investors Club!

Future Plans

1. Strategy & Getting Started

2. The RE Cycle / Selecting An Area

3. Property Selection and Cashflow

4. Funding Your Deals

5. Multi-Family Investing

Property Management

6. Using Rent to Own

7. Due Diligence

Review of Last Meeting

www.AspireRealEstate.ca/blog

Tonight‟s Agenda

• What is Rent to Own (RTO)

• Advantages and Disadvantages

• How to Structure a Deal

• Exit Strategies

• Some Examples

The Legal Stuff…

The information contained herein (the “Information”) is intended for general informational purposes only and should not be relied upon by recipients hereof. Although the Information is believed to be correct, its accuracy, correctness or completeness cannot be guaranteed and has not been verified by either Aspire Holdings or any of its affiliates.

Views expressed in this presentation are based on research materials available from sources that Aspire Holdings (d.b.a. “Aspire Real Estate”) considers reliable but neither guarantees, warrants nor assumes any responsibility or liability of any kind with respect to the accuracy, correctness, completeness, or suitability of, or decisions based upon or in connection with, the Information.

All real estate opportunities come with varying degrees of risk and past performance is not an indicator or guarantee of future results. Prices can go up or down and current performance may be lower or higher than any performance data quoted for comparisons.

Opinions on RTO….

A Basic Overview of RTO

•RTO is…a situation where a tenant rents a property with the intention (which is an option but not an obligation) to buy it at a pre-determined price in the future.

• A good RTO arrangement sets upthe tenant-buyer (TB) for success!

Jargon…

Cashflow = Income – Expenses

ROI % = [($ gain-$ invested) $ invested x 100]

Term = number of years the TB is in the RTO program before purchasing the property

Option Fee = $ paid by the TB to hold the legal option to buy the property at end of term

Rent Credit = $ amount of monthly rent returned as a credit to the TB at end of term

How does it work?

Find a GREAT

property

A QUALIFIED

tenant is

selected

Payment program and property

purchase price is set and agreed

upon. Contracts signed.

Tenant pays

option fee

~2-4% of

property value

Tenant

moves in and

pays rent +

rent creditsTenant gets

ready to

qualify for

mortgage

Tenant

buys

property Investor makes money!

Happy homeowner!

Rental vs. RTO Example

Rental

• Tenant pays security deposit, first month‟s rent ($1600) and moves in

• During occupancy (24 months), the landlord is responsible for all repairs and maintenance

• At the end of the rental period, tenant moves out and security deposit returned

Rental vs. RTO Example

RTO

• Tenant pays security deposit + option fee ($9,000) + first month‟s rent ($2,000) and moves in

• During occupancy (24 months), the TB is responsible for minor maintenance

• At the end of the rental period, TB buys property and is given a credit (option fee + rent credits = $19,800)

Types of RTO

• Tenant First• Find a good TB and let them choose a property

• Property First• Find a good property and fill it with a good RTO TB – you are in control!

• Sandwich Leases•You‟re a „deal maker‟ in a long-term flip

Why Use the RTO Strategy?

• A significant market of people who don‟t qualify for traditional financing

• Creates great monthly cash flow

• Easier property management

• Better tenants

• Built in exit strategy and profit

Who Makes a Good RTO Tenant?

• Hard-working people with good, stable incomes but are missing something…

• Poor credit or credit glitches

• Self-employed

(provable income)

• Low down-payment

• New immigrants

Why would they do this? Where are they?!

What Makes a Good RTO Deal

• Starter family homes that can be purchased below FMV in great areas

• Relatively new and in good condition

• Buying at the correct time in the RE cycle

• Has multiple exit strategies

Setting Up The Deal With The End In Mind…

Aims

• TB has credits of 5-7% of the purchase price at end of term and qualifies for financing i.e setting up the TB for success

• Monthly payment is close to today‟s actual ownership costs

• Fix the final purchase price at deal set-up and base it on market knowledge

Example 1 : Deal Setup

Original Purchase Price $280,000

Fair Market Value $300,000

Initial Capital Invested $65,000 (23%)

Option Fee $12,000 (4%)

Monthly Rent $2,000

Monthly Expenses $1,500

Cashflow per month $500

Rent Credit per month $475 (24%)

Term 2 Years

Example 1 : Deal Close

Income Expenses

Cashflow $12,000 Rent Credits $11,400

Option Fee $12,000 Option Fee $12,000

MortgagePPD

$8,000ClosingCosts

$600

Sales Spread (3% app)

$38,000

Total $70,000 Total $24,000

Net Profit $46,000 ROI70% / 35% p.a.

An Alternative Exit Strategy

Example 2 : Disillusioned Homeowner!

Original „Purchase‟ Price $330,000

Fair Market Value $340,000

Initial Capital Invested $1,500

Option Fee $6,000

Monthly Rent $1,650

Monthly Expenses $1,000

Cashflow per month $650

Rent Credit per month $350 (21%)

Term 3 Years

Example 2 : Deal Close

Income Expenses

Cashflow $23,000 Rent Credits $12,600

Option Fee $6,000 Option Fee $6,000

MortgagePPD

$18,000ClosingCosts

$600

Sales Spread (3% app)

$38,000

Total $85,000 Total $19,200

Net Profit $65,800 ROI

Exit Strategies

• Ideally, the deal closes as planned!

• Contract can be extended (under certain circumstances!)

• Property converted to a buy and hold with current tenant (or another), or sold

• New RTO tenant (Company retains option fee & rent credits)…

What‟s the Downside?

• Property turnover

• Not a long-term wealth creator

• Can be lots of moving parts – you need to be a good project manager!

• More work & marketing finding a good tenant prospect, then educating them

Summary

• A great strategy for creating or improving cashflow or as an exit strategy for a current property. Lots of demand.

• It requires good project management, marketing and tenant education

• It is not a long-term wealth creator

• It doesn‟t work in all market cycles

Feedback, Prizes and Action plan!

Questions or comments? Please let us know!

Next meeting Wed. July 31st @7pm

Summary: www.AspireRealEstate.ca/blog/

• Find a new person in the group and tell them what you are going to do in the next month to achieve your goal!

• Follow up at next SREIC meeting.