Rent-to-Own Strategy Still Viable given Canada's Strict Down Payment Requirements for Investors?

by Adam
(Barrie, ON)

The landscape for rentals has changed dramatically for investors over the past few years making it ever more difficult for investors to buy multiple properties. In reading the free download of the 'Income_For_Life_For_Canadians_eBook' (thanks, by the way), the rent-to-own strategy sounds extremely sound and profitable. However, the examples given are for a 5%-10% down payment.

However, running the numbers for a 20% down payment really seems to weaken the rent-to-own strategy. Would you agree? I want you reply and say I'm crazy, but the numbers seem pretty grim.

Example:
My initial investment on a 250k property with a 20% down payment is around 57k (down payment + closing costs + advertising + 2 months carrying costs). I understand that closing costs might be able to be covered by the seller, but lets pretend that that's not going to happen.

Monthly Costs: $1300
Monthly Rent: $1600 (w/ $200 as a credit to the renter for buy-out)
Positive Cash Flow: $100
Upfront Option Payment: $5000
Market Value of House: 260K
Value after 2yrs with a 4% appreciation: $281,216
Buyout price after 2yrs: $271,416 (281,216 - 9800) (9800 = monthly credit+option payment)
Profit from buyout: $21,416

My initial investment layout is still way more than if I add up my positive cash flow for 2 yrs ($100, which has the potential to disappear with a major repair) plus my profit from the buy out.

Am I missing something? Please say that I am.

Thanks in advance for your time.

Cheers,
Adam

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Jun 24, 2013
RE: Rent To Own Strategy
by: Tom Karadza

Hi Adam,

Thanks for the question!

We can write a book on this one!!

1. In your example, really quickly, it looks like a 38% return over 2 years. So as is it's pretty darn amazing. Even take some of that for repairs etc and you're doing very well.

2. On top of that there's a few numbers that you'd want to adjust. For example, the cash flow would be $300 (although at $1,600 for that price of property the rent would now be considered on the low end), the appreciation would be over 3 years at 5% (we've found that works very well) and I believe you're missing the equity over the period that is gained via mortgage being paid down.

So with your numbers or ours... to us, it's looking good.

Hope that helps a tad!

Tom

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