The thought of buying a rental house today and
getting truly rewarded for that decision in 25
years is difficult for many - even less
attractive if your age is getting away on you.
After all, we can drive a new car out of the
showroom with nothing down in a few short hours
or even have it delivered to our door. In fact,
almost anything in the world is a click away and
can be delivered to our doors 24 hours later. So
why do we have to wait so long for wealth? Is
there a quicker way?
Buying a rental house and letting the tenants
pay off the mortgage in 25 years (often referred
to as the Buy/Hold strategy) is the simplest
wealth formula around and beats RRSP/Mutual Fund
investing any day. But, there is a faster way.
In last month’s Canadian Real Estate Magazine, I
answered the question about how many rentals you
really need in order to retire after seeing so
many investors continue to buy as many long term
Buy/Hold properties as they could without a
clear plan. So now that that question is
answered, let’s move on to speeding up your
wealth while you wait for your renters to pay
off your mortgages over the next 25 years on
your Buy/Hold properties.
By combining a long term Buy/Hold strategy with
a mid term strategy, you can accelerate your
wealth at a much quicker pace. My favorite mid
term strategy is the “Lease with Option to
Purchase” or more commonly known as the
“Rent-to-Own.” The Rent-To-Own strategy is often
used as a way for a tenant to become a home
owner through two separate agreements. The first
agreement is the “Lease” (standard provincial
tenancy agreement). The second agreement is the
“Option to Purchase Real Estate,” which outlines
all the terms and conditions of how the tenant
can purchase the property.
The Rent-To-Own offers the landlord, seller or
investor several benefits over the Buy/ Hold
1. Reduce Risk: With the Buy/Hold strategy, once
you have found the right asset type and crunched
the numbers properly, the main risk is found in
the monthly variable expenses, not the fixed
ones. The fixed expenses are the mortgage,
property tax and property insurance payment.
Assuming you use fixed rate mortgages or fixed
payments with a variable rate, the monthly
payment amounts don’t fluctuate. However,
vacancies, repairs and maintenance are the
fluctuating variables which can often eliminate
any cash flow and turn it into negative cash
flow very quickly, especially if they continue.
With the Rent-to-Own strategy, the tenant signs
a 2 to 3 year lease and takes care of all the
minor maintenance of the property, therefore
eliminating the variable expenses. As a result,
your risk is reduced while your cash flow and
overall return increase.
2. Ease of Tenant Management: Since tenants do
not own the property as it’s often a temporary
housing solution for them, they are less likely
to treat the property as if it were there own.
Whereas with a Rent-To-Own, the tenant’s mindset
and motivation is different as they will
eventually own the home. They take care of the
property, often fix it up themselves and display
pride of ownership, making these types of
properties very easy to self manage. Plus if
they are late on rent, they can lose their
opportunity to buy the home. Therefore the
tenant is very motivated for good reason to pay
on time with zero excuses.
3. Win/Win Investing: Giving someone the
opportunity to own their own home with a proven
plan can be very rewarding personally,
especially when you hand them the keys for good.
Let’s face it, buying a rental is typically all
about us as investors and the numbers. We want
the tenants to pay off our mortgage with the
least amount of hassle as possible. Buying a
rental house that someone else will eventually
own through the Rent-to-Own strategy not only
increases cash flow and reduces management, it
also produces a positive outcome for both
parties. Adding value to someone else’s life and
being financially rewarded is win/win investing.
4. Increased Rate of Return: By significantly
reducing our ongoing monthly expenses, our Rate
of Return sky rockets. Running a simple Property
Analysis calculation over a two year period
using a 5% annual appreciation on a $350K rental
property shows a 3.0% Annual Rate of Return on
Cash. By applying the Rent-To-Own Strategy to
the exact same property with the exact same
appreciation rate produces an Annual Rate of
Return on Cash of 20.0%. How significant is
that? Well, $50,000 invested at 3.0% over 2
years turns into $53,045. At 20.0% per year, it
turns into $72,000. A $16,955 difference. Over 5
years at 3.0%, the initial $50,000 turns into
$57,963 whereas at 20.0% it turns into $124,416.
A staggering $66,453 difference in just 2 years.
For all the reasons above, this Mid Term
Strategy is at the top of my list. So instead of
continuing to buy more Long Term Buy/Holds and
waiting for 25 years, consider adding some
profitable Mid Term Strategies to your own
portfolio. You may be surprised at how easy,
profitable and rewarding they really are.
To implement this Mid Term Strategy effectively,
visit www.PaulMHecht.com and watch the Lease
with Option to Purchase Video today.