Why rent-to-own makes sense in 2018

by Clayton Jarvis on 16 Mar 2018

If you’re a buy-and-hold investor in a rapidly appreciating market like Victoria, Montreal, Toronto or Vancouver, you may be wondering when – or if – you’ll be purchasing your next property. Will you, like many Canadians, choose to purchase a condo and stand by as maintenance fees devour your cash flow? Will you purchase an overvalued home days before a market correction, like the one that hit the GTA in 2017, which swallows your equity?

As the uncertainty inherent in buy-and-hold investments grows more pronounced, stability and predictability have become valuable commodities. One strategy that provides an ample supply of both is rent-to-own.

Rent-to-own is often viewed as mostly beneficial for tenant buyers, who cannot find another way to purchase a home, but it has proven to be one of real estate’s most reliable investment strategies.

Prior to co-founding Homeowners Now, Dale Monette had left his Chartered Accountant role with Ernst & Young LLP to become a full-time real estate investor (he still maintains a portfolio of commercial and residential properties) whose success in leveraging a rent-to-own strategy inspired the company’s formation. The returns Monette was generating with rent-to-own properties were simply too good to be kept a secret.

 “When we came across rent to own,” Monette says, “what made it so viable was the vastly increased security deposit. With buy-and-hold investments, the tenants are usually providing a one-month security deposit, which will be determined by the size of the property and the local vacancy rates. But in rent-to-own, tenant buyers are providing a minimum down payment of $10,000 – our average is actually $16,000 – so their security deposits can be ten times higher than what you would typically see in buy-and-hold.”

Monette is also a fan of the average rental term required in rent-to-own deals.

“In buy-and-hold, your average rental term is generally 6 or 12 months, but in rent to own we have a three-year lease that is signed even before the property is purchased.” For investors who shy away from landlord-ing because of tenant concerns, that’s three years without a vacancy or fears of a midnight move.

If managed properly, a rent-to-own transaction provides the predictability investors are clamouring for and provides incrementally higher cap rates than your standard buy-and-hold investments.

“These tenant buyers are giving us the opportunity to have pre-sold inventory,” Monette says. “We’ve bought the properties, but our buyers have a contract in place to buy them back, so we know what our profit is going to be once the contract is signed. We purchase a home for $500,000 and we agree to sell it for $540,000. That certainty – or that lack of uncertainty – is a real selling point.”

Also certain are the returns. Monette says Homeowner Now’s investors can earn up to 12% on their investment and can choose from a variety of options around how their returns are paid out.

“If someone wanted maximum cash flow, we might provide them with a 9.5% return and give them 100% of that cash flow every month. But someone who wants maximum return over the project, we might pay them 7% cash flow and accrue the rest of the amount as a bonus for when the project is completed.”

A Homeowners Now investor can also use RRSP or TFSA funds to invest in second position mortgages, which generate returns of up to 10% and are free of the fees usually associated with RRSP transactions. Across the Homeowners Now portfolio, investors received an annualized return of 9.2% in 2017.

Because of Homeowners Now’s nationwide scope – a rarity in the industry – investors are also able to spread their capital across multiple deals in multiple markets, severely limiting their risk while also increasing their returns. “If an investor had $100,000 in their bank account,” Monette explains, “they could qualify for a single $500,000 mortgage by putting 20% down. But if they only had to provide $50,000 or $33,000, they could get involved in two or three deals in different cities. That way, in the unlikely event a market goes through a correction, not all of their properties will be affected. You can be naturally diversified across Canada’s largely independent market.”

Finally, investing in a rent-to-own transaction carries the added benefit of helping hardworking Canadians finally own a home of their own.

“We realized early on that the investors who get involved with us are often driven by the fact that they can help someone,” Monette says. “They’re making money, but they’re also doing something that improves the life of an entire family. It really is a remarkable feeling.”

 

For more information on Homeowners Now, on the opportunity to make up to 12% on your next investment or on how you can help Canadian families realize their dream of homeownership, visit https://www.homeowners-now.com/

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