Sometimes a house for rent to own can seem like more work than it's worth... until you set the emotions aside.
I remember walking into one of our properties, a house for rent to own, after a tenant moved out and I immediately wanted to turn around and walk out.
There were all sorts of belongings left behind along with some furniture, the new bathroom sink the tenant had bragged about (that looked like it was installed by a grade school student), the carpets were filthy, etc.
Normally things like this don’t faze me much but at the time we were absolutely swamped with a large number of things. To the point where taking out the garbage at home seemed like a hard thing to fit in.
We all have busy lives and sometimes the emotions of running a mile a minute can cause us to make hasty decisions.
Standing in our recently vacated property I was frustrated with it, and because I am a bit of a control freak when it comes to our properties, I knew that I would be the one getting it back up and running.
With everything else going on, it was hard to imagine taking this on as well.
To me, it was time to sell it.
Like any good business partner (and brother), Tom said to take a minute and let the emotions unwind a bit before we make any quick decisions.
Of course he was right, the absolute worst thing to do is make long lasting decisions based on your emotions... especially with your investments.
It may seem like the easiest thing to do, and perhaps the most profitable, but if you really break down the numbers you may realize differently.
In a case like ours, we had to get the house ready to be shown to prospective buyers unless we planned to take much less money than it was worth, which is never the case.
We had to pay for junk removal, carpet cleaning, and some small bathroom repairs, whether we rented it again or sold it.
But if we were to sell, we would want to paint the whole house (there is no better return on your money when you are showing a property), get some new flooring to replace certain areas of carpet, and do some landscaping to give it nice street appeal when potential buyers came for a visit.
Overall our repair and maintenance costs would actually increase.
Next, we would have to think about the costs involved in the sale.
Even with our real estate licenses we would still be looking at a 2.5% to 3% commission rate that we would pay.
There would be legal fees involved, potentially a penalty to break the mortgage, and likely a few months of carrying costs.
Depending on how long we owned the property, only a few years ago we would have acquisition costs like, land transfer tax, legal fees, title insurance, etc.
If we add those to the price we paid for the property and pile on our other expenses, selling the property may not turn out to be as profitable as we think.
Then there is opportunity cost, probably one of the most overlooked factors.
We are obviously believers in acquiring self liquidating assets. Assets that pay for themselves, or others pay for over time.
So if we were to unload this property, we would be interested in another one.
That means our capital would be tied up for months while this one house for rent to own sold, we searched for another, purchased it, and had it close.
All this time our investment could be working for us by generating rental income, which would pay for the property, and give us monthly cash flow to cover the cleanup costs we incurred.
And finally, there are probably not any time savings at all. It will take up just as much of our time to sell the property as to rent it.
At the end of the sale we may have cashed out some profit, but now what? Where are we going to invest it?
When looking at the choice like this, the decision to get the house for rent to own on the rental market again as soon as possible, starts to look like the obvious thing to do for us.
Even if the same thing happened in a couple of years, that would mean we now have more equity in the property that we can tap into, a couple of years worth of cash flow, and an income producing asset.
Seems like a pretty good place to be.
But if the new tenants stay for longer in the house for rent to own, there is even more potential upside for us.
Those damn emotions… almost got us again. But once we look at things with a bit more logic, there was no way we were selling our property.
Now we just have to figure out a way to ensure that unexpected vacancies happen around our schedule.
We’ll let you know if we crack the code on that one!