How Rent-to-Own Real Estate Works

[00:00:00] Welcome to The Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] To rent or to own, that is the question.

[00:00:17] Why not both?

[00:00:19] Whether tis nobler in the mind to suffer the slings and arrows of outrageous rent or to take arms against a mortgage.

[00:00:27] Oh, you're really gonna do the whole Shakespeare thing, eh?

[00:00:29] I'm actually surprised you didn't put on the British accent.

[00:00:33] You remember doing those Shakespeare monologues in school?

[00:00:35] I feel like everyone just like, you're naturally put on the British accent.

[00:00:39] Man, that reminds me, do you remember that 90s Macbeth movie with the dirt bikes and the machine guns?

[00:00:46] We probably watched it in elementary school.

[00:00:49] Actually, an excellent movie.

[00:00:51] You could call that version of Macbeth Mad Mac, actually.

[00:00:56] Definitely better than the Amanda Bynes 12th Night soccer movie.

[00:01:00] Okay.

[00:01:01] No need to throw Amanda Bynes under the bus here, but would you-

[00:01:05] You know, current day Amanda Bynes is something else, eh?

[00:01:08] Yeah.

[00:01:08] Let's-

[00:01:09] Oof, man.

[00:01:10] Recently saw a picture of that.

[00:01:12] For those that don't know, maybe just go look at a before and after of poor Amanda.

[00:01:15] I think she's been through some tough times, but we are 30 seconds in here and already getting way off track, Dan.

[00:01:20] Let's get up back on track here.

[00:01:22] Would you prefer to be a renter or to be a owner?

[00:01:27] That is the question.

[00:01:28] Okay.

[00:01:30] So, Canadians do have an obsession with homeownership, but it is out of reach for many with housing unaffordability at record highs in many Canadian cities.

[00:01:39] Now, what if I told you that those two living strategies did not have to be mutually exclusive?

[00:01:46] I would probably think you were trying to sell me something like a rent-to-own program.

[00:01:51] Well, sir, you would be incorrect.

[00:01:54] When you lease a car, you're essentially paying for its depreciation over a set period.

[00:02:01] Usually, let's say two to four years.

[00:02:03] So, essentially, think about renting a car.

[00:02:05] It's like renting the car's value loss.

[00:02:10] If you're a realtor, this car is probably a white BMW or Mercedes CLA.

[00:02:14] Dan, I do get a lot of my mortgage business from realtors.

[00:02:17] So, please be nice to them on the show, guys.

[00:02:19] That was Dan making fun of you, not me.

[00:02:21] I want you to know the difference, okay?

[00:02:23] Yeah, but you get it from top producers who are leasing like Lambos and G-Wagons probably.

[00:02:28] Noticeably fewer Lamborghinis in the parking lots of mortgage conferences and realtor conferences these days, I will say.

[00:02:35] We're already off track again.

[00:02:37] When you lease, you are given a set of parameters, like kilometers you can travel during the lease period.

[00:02:42] Now, COVID, if you remember that, really messed this one up for those with the white CLAs because everyone was driving two to three times as far to do deals outside of the city as everyone moved to the suburbs and to cottage country, etc., etc.

[00:02:57] And at the end of that lease, there's a point to this whole discussion.

[00:03:00] You have options.

[00:03:01] You can return the car and walk away or you can buy it out transitioning into a longer term financing product.

[00:03:06] So, it's a bit like test driving your future car ownership, kind of, right?

[00:03:12] You get the experience of the car, you build some quote-unquote equity, and then you decide if you want that long-term commitment or not.

[00:03:22] And you know what?

[00:03:23] This concept of trying before buying isn't just limited to cars.

[00:03:26] In fact, it's becoming increasingly popular in the dating world with a record number of people not waiting until marriage, Nick.

[00:03:33] Oh, my goodness.

[00:03:34] But this is certainly not a relationship podcast here, Dan.

[00:03:37] So, you may be wondering if I can get a trial period before everything else, why can't I get that for my house?

[00:03:46] Yes.

[00:03:46] And you do see this kind of thing in the real estate market as well.

[00:03:51] Clever.

[00:03:51] Clever setup.

[00:03:52] I see what you did there.

[00:03:53] So, after all of that, we're here to talk about rent-to-own properties, I'm guessing.

[00:04:00] Bingo.

[00:04:01] So, just like leasing a car, rent-to-own real estate allows people to test drive home ownership, but it comes at a pretty steep cost, just like leasing a car, which is kind of why I wanted to use that comparison.

[00:04:10] Yeah, I love it.

[00:04:11] I see it now.

[00:04:12] So, it's not really the most financially sensible way to take possession of a vehicle, but it works for a lot of people because most people don't have enough cash to buy that car outright.

[00:04:24] Welcome back to the Canadian Real Estate Investor Podcast.

[00:04:26] In this episode, we are going to deep dive into the mechanics of rent-to-own agreements, offering an insider's view on how they work.

[00:04:34] So, let's get started.

[00:04:35] I thought you were going to say, like, welcome back to the relationship and car leasing Canadian Vodcast, but no, we're back at real estate, which is good.

[00:04:44] You just got to create those accessible examples.

[00:04:47] For sure, man.

[00:04:48] For sure, of course.

[00:04:49] We got to paint the picture and make it relatable.

[00:04:51] And I think that's what we try to do here.

[00:04:53] Sometimes more successful than others.

[00:04:55] But back to rent-to-own, we are going to talk about the advantages and the disadvantages of this strategy.

[00:05:02] We're going to talk about how to structure an agreement with some examples and more.

[00:05:06] And it's not just about signing a lease.

[00:05:08] It's about having a payment plan and holding an option, a choice, and a future plan to make that house your own, to make that house your home.

[00:05:19] So, we will decode the financial blueprint supporting these typical arrangements.

[00:05:24] And there's a handful of different types where rent payments not only keep a roof over your head, but also chip away at your future down payment.

[00:05:30] We'll also provide best practices for both investors eager to leverage this innovative method to build returns that are charging premium rents while offering tenants the dream of future home ownership.

[00:05:44] So, whether you are a prospective tenant dreaming of putting down roots or an investor poised to seize a unique market opportunity, let's explore the rent-to-own model together.

[00:05:53] This is not just for a house, but to create a home shaped by your aspirations.

[00:06:01] So, first things first, what is rent-to-own?

[00:06:05] Well, the rent-to-own real estate is similar to the car example that we just went over, right?

[00:06:11] It's a leasing agreement where that tenant pays rent every month, but the option to purchase the property at any time during that lease period.

[00:06:20] Now, rent-to-own contracts are typically structured so that the tenant pays rent on the property over a year or two with an option to buy that property at the end of this period for a predetermined price.

[00:06:32] I think there are a handful of versions of this as well.

[00:06:35] Like, there's the one where the tenant pays inflated rent and the excess amount goes towards a down payment or a credit towards the purchase price.

[00:06:42] So, what you just described would be a lease option agreement.

[00:06:45] Tenant has the option, but not the obligation to buy that property at the end of the lease term.

[00:06:49] The alternative would be a lease purchase agreement with a key difference.

[00:06:51] The tenant is obligated to buy the property at the end of the lease term.

[00:06:54] Now, from the investor's perspective, which many of you are probably wondering, investors would benefit from this method because they can generate potential higher returns than they would receive from renting out that same property in the traditional long-term method that they're all very familiar with, right?

[00:07:13] This is because they can charge a higher rent than the going rate in that area.

[00:07:18] And that eventual buyer, that current tenant that may choose one of those options, either lease purchase or lease option agreement, they're going to have to sign off on that.

[00:07:29] And they're going to be well aware that they are paying a premium as well.

[00:07:32] Yeah, that's kind of how it works, I think.

[00:07:35] But I wouldn't technically call it a return from my perspective because as an investor, you're getting higher cash flow, but that cash flow is being deducted from what you would later receive when they take possession of the house, right?

[00:07:49] In a lot of cases.

[00:07:50] So, it's kind of like a blend of making rental income and giving the person a VTB almost, vendor take back mortgage.

[00:07:57] So, it's closer to a return of equity maybe than a return on equity.

[00:08:01] Okay, that's a really interesting perspective.

[00:08:03] I like the VTB aspect in there.

[00:08:05] And I'd say kind of yes and no to that, right?

[00:08:08] A return of equity refers to the recovery of the original capital or original investment that was initially put into that asset or that project.

[00:08:19] In this example, the home.

[00:08:21] Now, in simple terms, it's the return of the money that you originally invested.

[00:08:26] If the property went up in value, the tenant is also paying you and newly earned equity that you have.

[00:08:33] They're just paying it to you early and on a monthly basis before they take possession of that house.

[00:08:41] Okay.

[00:08:41] So, technically then it's a return of equity and a return on equity, I suppose.

[00:08:45] It's a good point.

[00:08:46] Double whammy.

[00:08:47] Return on equity just, yeah, return on equity just, again, for a refresher, financial ratio that measures the profitability of a business in relation to its equity.

[00:08:54] The shareholder's equity are, you know, for you as an investor, the cash that you have in the deal invested into it.

[00:09:00] It shows how efficiently the property is using its equity to generate property.

[00:09:05] Basically, net income divided by equity.

[00:09:07] In your perspective, I guess the income is any increase in the purchase price in this example that you were getting today.

[00:09:16] Yeah, exactly.

[00:09:17] Now, you know we're always going to make that joke.

[00:09:20] Like, investing for cash flow makes more sense because you can't get monthly capital appreciation payments, even though that would be a very sweet deal.

[00:09:28] So, yeah, I mean, I guess that this would be kind of the closest you'd get to getting those capital appreciation payments if you've locked in a good, compelling future value.

[00:09:40] Okay.

[00:09:40] So, tell me how this works.

[00:09:42] I think you put an infographic in here from the wawa.ca website.

[00:09:45] Yeah.

[00:09:46] Good friends of the show over there.

[00:09:47] So, let's look at this and I'd encourage anyone to go check this out.

[00:09:52] So, when you are renting, you're making your rent payments and when you are looking to rent to own, you're making regular rent payments but a portion of that rent is saved in the form of credits and you are responsible for things like maintenance.

[00:10:06] Right.

[00:10:07] You don't have that traditional tenant landlord relationship and then once you get to that own piece after that allotted amount of agreed upon time has passed, you buy at the pre-agreed purchase price in one of those examples.

[00:10:23] Right.

[00:10:23] Still requires a mortgage approval but those rent credits that you had built up can be used towards that purchase price.

[00:10:32] Yeah.

[00:10:32] So, a rent to own home agreement allows tenants to apply a portion of their monthly rent payments towards the eventual purchase of the property with the purchase typically set for one to three years in the future.

[00:10:44] Yeah.

[00:10:44] Although I feel like that may not be enough time to save up for a meaningful down payment in Canada for most Canadians at least in some of the more let's say popular markets, Dan.

[00:10:58] Yeah.

[00:10:58] I guess if you're like let's just do the math on it.

[00:11:00] If your unit was renting for $2,000 and you were paying $3,000 you'd save $1,000 per month or $12,000 per year so $36,000 in three years which would only be a 10% down payment on a $360,000 home assuming you can get that mortgage from CMHC after this arrangement.

[00:11:18] Obviously double that if it's a 5% down payment so it doesn't seem super easy to execute from my opinion like these are those episodes where you're really just making them for like these one-off cases where it works right.

[00:11:30] Yeah.

[00:11:31] And I don't know if it's one-off.

[00:11:32] I mean I think there are places across the country where this can still work and there's landlords looking to do this kind of stuff but you know overall I do agree.

[00:11:42] So again back to the example if you're paying $2,000 on top of the rent right like now things are getting even trickier.

[00:11:50] Yeah.

[00:11:51] So if you're going to pay if you increase that amount to $4,000 per month in rent now you can probably just afford to buy unless there's something else prohibiting you from buying like credit or down payment as an example.

[00:12:04] Exactly.

[00:12:05] Exactly.

[00:12:05] And that's where I think some of these nuanced situations can help right.

[00:12:11] So that's where a program like an RTO rent to own can really help out for people that are maybe new to Canada and don't have the employment track record or let's say have you know bruised blemished or even bad credit and need a few years of rebuilding to get back on track.

[00:12:27] And you know Dan especially guys like you and I self-employed people that may have had a good year followed by a bad year followed by a good year followed by a bad year.

[00:12:36] You know you need to get those two years of NOAs of NOAs for most lenders to want to lend on them.

[00:12:44] Yeah.

[00:12:45] So with a purchase agreement a portion of the rent may be applied towards the purchase price.

[00:12:49] And so going back to that kind of how much of that rent is going to be included then there's a down payment or an option fee tenant may pay a down payment like you know kind of like some cash you've put down on your lease.

[00:13:03] And at the end of a lease term the tenant is required to complete the purchase often needing to secure financing such as a mortgage by that point.

[00:13:11] And that's kind of where that again if you're using the rent to own to build credit and I know there are kind of there are a lot of like almost fintech startups or like prop tech startups that are doing this that have like a similar kind of thing.

[00:13:23] One that we've you know like that we've done on the credit building side is or that we've spoken about is Chexie that they I think you can pay rent with your credit card and then you can do you can use it to build your build your credit.

[00:13:34] But and then there's like rent to own programs like Key who we've had on I guess they wouldn't technically be a rent to own but like a code there they're more like a kind of within the umbrella of I guess.

[00:13:44] Lotly as well would be another example.

[00:13:46] Lotly we met at that finance event.

[00:13:48] Yeah.

[00:13:49] So I think there's a lot of interesting examples here trying to make home ownership more accessible or affordable.

[00:13:53] For people but but yeah so basically if you fail to complete the purchase in the purchase agreement you may result in in legal or financial consequences which is makes it a little bit more high stakes let's call it than a than an option agreement.

[00:14:07] Yeah for sure and and that kind of purchase obligation again you write you it'd be the same not the same but it'd be similar to breaking any other legal financial contract such as a mortgage right there are going to be penalties for something like that.

[00:14:22] So now with a daniel you said there's right the down payment or option fee or the purchase obligation so with an option agreement tenants often pay an upfront non-refundable option fee and risk losing that accumulated equity right those rental credits if they don't buy the house by the end of that agreed upon date.

[00:14:45] Now the structure with these two is there's first of all there's rent payments and a portion of that rent again referred to as a rent credit in some cases is typically applied toward the future purchase.

[00:15:00] Now that second one the purchase option the tenant can decide to purchase the property or they can decide to walk away at the end of the lease right maybe something has drastically changed maybe you don't want to live in that neighborhood anymore maybe you and that landlord aren't getting along maybe you've got maybe you've repaired your credit or you've got a better job or whatever it may be.

[00:15:20] So if that's the case the tenant can opt not to purchase and they'll still forfeit the option fee and any of those you know rent credits that they've built up but they are obviously in a bit better shape and have more options outside of just sticking to that rent to own program at that point.

[00:15:38] Yeah yeah so let's like we'll lean in a little bit more on the benefits and drawbacks so I mean for landlords obviously we discussed it steady income committed tenants reduce maintenance costs because in a lot of cases that the tenant takes on the maintenance costs and tenants often take better care of the property if they intend to buy it so it kind of reduces your risk should they walk.

[00:15:59] They also have that future sense of pride of ownership and minimal risk since they receive rent and deposits regardless of the sale outcome.

[00:16:07] Yeah I think that that kind of future sense and future pride of ownership is a big one right I mean you're not gonna if you are entering into an agreement like this regardless of the outcome the likelihood of a tenant taking really good if not great care of that property with the potential sense that hey I might be living here this might be my home you know I think that that's probably comforting for some landlords.

[00:16:34] Now here in Canada the rent to own process usually starts with a buyer paying that option deposit now that can range from one to five percent of the home's purchase price giving them the right to purchase that property so let's say you know the average Canadian home across the country still around you know I'd say on the lower end about $650,000.

[00:16:55] Now if you're listening to this and the lower mainland downtown Calgary or the GTHA you're probably thinking what the hell is Nick talking about but across the country that does seem to be close to the lower end of the average so that could be again between 1.1 to 5 percent so that could be as low as $6,500 or as you know up and around the $32,000 30 to $40,000 range depending on.

[00:17:23] Yeah and this price is typically fixed similar to our car lease comparison where they set out the value before you enter the lease though sellers may appraise the property near the leases end or come to an agreement to pay market value for the house that type of agreement does exist.

[00:17:38] Buyers make monthly payments part of which goes towards their future down payment and in most cases are responsible for the maintenance costs.

[00:17:46] Now at the end of the rental period if the buyer proceeds with that purchase their contributions and deposit are applied to that down payment but again if they decide not to buy it they must then adhere to the contract terms that were agreed upon and set out initially so let's quickly look at the advantages and disadvantages of the RTO strategy.

[00:18:10] RTO eh? Rent to own. Here I was thinking you were talking about reverse takeovers which is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.

[00:18:26] Okay speaking of complex that that's a little too complex for me and dude come on it's it's real estate you know there's an acronym for it.

[00:18:35] Yeah of course typical. Rent to own is only three syllables though so it takes just as much time to say rent to own as RTO.

[00:18:43] Honestly like that's like one of those it may actually be easier to say rent to own than RTO.

[00:18:48] I know it's it's BRB LOL I don't I don't even know anymore.

[00:18:52] Anything any acronym with a W in it is like a useless one because like W alone is like three syllables just three anyway.

[00:18:59] Well I can't really say I can't really say the full version of WTF on on this podcast so we'll leave it at that.

[00:19:06] Okay so let's get into advantages of these rent to own agreements here in Canada.

[00:19:13] It gives you time to improve your financial situation before you buy.

[00:19:19] It also forces savings towards a down payment on a preset schedule right?

[00:19:25] Damn we talk a lot about this right homes being used you know being confused as investments but often being used as savings vehicles.

[00:19:32] Now this this kind of plays into that.

[00:19:35] It also provides the option to lock in a set future purchase price potentially at a you know today's prices.

[00:19:43] So that tenant current tenant potential future homeowner might actually get a better deal with the landlord still being paid a bit of a premium.

[00:19:53] So it can provide that win-win situation.

[00:19:55] Now Dan I got to say the advantages because I'm a bit more of the even though we're both realists I'm a bit more of the optimist you're a bit more of the pessimist.

[00:20:03] So why don't you tell me some of the disadvantages of a program like this on RTO?

[00:20:08] Yeah I mean the main disadvantages would be if your purchase price is locked in you risk overpaying if the housing market drops in your favor.

[00:20:17] If the purchase falls through you would forfeit all accumulated rent credits or deposits that you're making towards it.

[00:20:23] The buyer potentially covers all maintenance and repair costs throughout the process.

[00:20:27] So again if you walk away those would be sunk costs.

[00:20:29] Now maybe let's just do that list again with the perspective of an investor and tenant would-be buyer kind of scenario.

[00:20:35] Yeah for sure okay so I'm going to do benefits for an investor and Dan you can do tenant buyer advantages.

[00:20:43] Okay so benefits for investors.

[00:20:46] The first is the gold standard cash flow right.

[00:20:50] We're talking monthly cash flow investors receive regular cash flow from those tenant buyers which of course is what we're all after.

[00:20:59] And that helps to offset any of their own expenses or losses from other properties if you have a portfolio.

[00:21:06] Especially if this one you're getting a bit more of that premium rent.

[00:21:10] Now the next piece would be limited maintenance responsibilities right.

[00:21:16] Now if you've got a portfolio or a couple properties or even if you're just real estate curious at this point.

[00:21:22] You've heard those horror stories of people not taking care of those properties.

[00:21:27] That is unlike it's different here.

[00:21:30] It's unlike their traditional renters where these tenant buyers and these rent to own agreements tend to handle ongoing maintenance.

[00:21:37] Kind of the the ongoing op-ex right those operational expenses and overall just small and general repairs a bit better.

[00:21:46] Because again they're viewing that property as their potential future home.

[00:21:52] So they're obviously going to take really good care of it.

[00:21:55] Well I don't I say obviously but let's say hopefully going to take really good care of it.

[00:21:59] Now the third main benefit from my perspective would be the profits from that future sale.

[00:22:07] You know a lot of investors don't really know if they're ever going to have kind of a major liquidity event.

[00:22:13] Maybe sometimes their hands are forced but this you kind of get you know it's kind of a win-win situation.

[00:22:19] Because you get the eventual money from that sale when that tenant buys you out when they are ready to make that purchase.

[00:22:27] But you also get that premium cash flow for the time being until that happens.

[00:22:32] So you get that you get the premium cash flow and the eventual big money moment.

[00:22:37] And then the tenant slash buyers advantages would be they get the path to homeownership.

[00:22:45] They you know for people who can't necessarily qualify for a mortgage.

[00:22:49] It allows them to work on that financial readiness while living in the home.

[00:22:54] It's nice kind of you get the advantage of like I mean I would like to do that.

[00:22:57] I can this to like pre-con right.

[00:22:58] I found at any point in the past buying a resale condo was probably a better investment than buying a pre-con the same day.

[00:23:06] And yet so many people bought the pre-con even if the pre-con was you know a hundred or two hundred dollars per square foot more.

[00:23:14] So like let's say two three five percent ten percent more expensive.

[00:23:18] Why did they do that?

[00:23:20] Well in a lot of cases it's because they didn't want to own it or they didn't want to own it immediately.

[00:23:24] And or they didn't have the money.

[00:23:26] So the deposit structure of being able to like kind of go you know five percent today five percent in thirty days five percent in sixty days whatever gave them a little bit of a savings plan.

[00:23:37] Or like this kind of rent to own program.

[00:23:39] But this is the for the opposite situation like where people somebody needs the occupancy right away.

[00:23:45] You're going to pay rent for a place anyways you know you're already but you know maybe you only know you can save five hundred or a thousand dollars.

[00:23:52] And a lot of Canadians need that financial commitment.

[00:23:54] They need that like legal obligation to do something to help them save money.

[00:23:58] So it kind of creates that.

[00:23:59] It helps people build equity by making monthly payments gradually building up the down payment and the credit standing to facilitate the final purchase.

[00:24:06] And that's another key part is some people just don't have credit or they have bad credit.

[00:24:10] And so if you can build credit in the meantime it can help quite a bit.

[00:24:13] Yeah no great points Dan.

[00:24:14] So so that's from the tenants perspective.

[00:24:17] Now the question is and and usually is who should be looking to optimize this strategy.

[00:24:26] Yeah I think this is an important question to ask because the best strategies are built with the end user in mind and rent owned homes can be a good option for renters who want to buy a home but do not meet their requirements.

[00:24:38] Very much like leasing a car right where they they just can't do a conventional purchase or they can't afford to buy a home today.

[00:24:45] Again car companies lease cars to people because it makes financial sense for them.

[00:24:49] And so I would I would honestly like I just really want people to understand that like this it's a win-win deal but like in most cases it's the the person doing the lease that is winning more I would say like that.

[00:25:00] Sorry the the landlord let's call it.

[00:25:03] But tell me the the traits of a person who who should be can considering this Nick.

[00:25:09] Yeah I agree and I'm happy to tell you those those the traits of someone Dan.

[00:25:13] But I again I think it's important to note that when we talk about strategies like this you know we are here to to educate we are not here to provide financial advice.

[00:25:21] This is not financial advice.

[00:25:23] This strategy does not work for everybody.

[00:25:26] People have been burned on on both sides of this whether you are an investor or a tenant but it is important to know and as we move into kind of a new era of real estate here in Canada.

[00:25:37] It's important to be aware of all these different types of strategies.

[00:25:39] So that's why we're doing an episode on this today.

[00:25:43] Now Dan you had asked me some of the traits of a person who should be considering this.

[00:25:48] Okay so the first one would be if you have an inadequate down payment right for those people who want to buy a home but don't have enough down payment saved up.

[00:25:57] Well you can consider this and maybe you don't have enough down payment but you also don't have the bank mom and dad to go to which is where we see a ton of gifted down payments or down payment assistance coming from.

[00:26:07] Okay now it allows renters to build up their savings both directly through again those rent credits that we've spoken about but and those will eventually be applied towards the home purchase.

[00:26:18] But you know also indirectly just because you're you're essentially renting but you're saving up more of a down payment at that time.

[00:26:27] So both indirectly and directly it allows you to save up more for that down payment.

[00:26:31] The next piece is if you've got low credit right now a low credit score can be one of those things that can prevent you from qualifying for a mortgage.

[00:26:42] Trust me I know I unfortunately I see it more often than not these days as one of the things that is hurting people.

[00:26:50] Now individuals can work on improving their credit score during this lease period of time to you know work back up to that minimum credit score that you need to be required that's required from a lenders who most people are trying to secure mortgages with just because they've got usually in most cases better terms and better products better rates.

[00:27:12] Now again this can increase the likelihood of an approval for that eventual mortgage that you're going to need and it's going to you're going to have more favorable rates when you get there.

[00:27:20] So you know there's a bunch of stuff there's a bunch of tools out there you go use a rent first buy calculator see which one is better suited for you.

[00:27:27] But those would be kind of the two things from my perspective Dan is an adequate down payment and lower credit score but there are a couple more.

[00:27:34] Yeah so the other piece would be that and this one's kind of ironic right because you know like mortgage payments and rent payments should be relatively comparable for subject properties.

[00:27:44] But if people can't meet the income requirement like if you cannot qualify for a mortgage because you have an adequate income this is funny like you always see that joke on Reddit or like by YouTube comments or whatever it's like oh the bank rejected me for my mortgage application because it says I can't afford $2,400 a month so now I'm going to go rent a house for three grand.

[00:28:01] Yeah it's like and so this one's kind of like it's a double-edged sword right but in this situation if you you know if your personal underwriting tells you or maybe you have a co-signer that the bank wouldn't approve or some income perhaps that the bank didn't didn't consider right like if people making cash or have a different hustle or like a side hustle or whatever that the bank didn't count towards their application.

[00:28:25] You could choose a rent to own option and work on increasing your income or putting your income better on paper or making it more consistent during the lease term.

[00:28:35] And then people with non-traditional income which I kind of just alluded to who are maybe limited by more strict underwriting guidelines.

[00:28:41] You know people who self-employed people where you'd often require a higher down payment to qualify for a mortgage or people who you know maybe just they need that time to save money.

[00:28:51] Maybe they had some sort of financial crisis coming out of a divorce or you know whatever it is like you know life happens.

[00:28:58] There's many different reasons.

[00:28:59] We're not here to judge but you know for those people who need that kind of like that opportunity to reconfigure things and spread that obligation.

[00:29:06] Yeah.

[00:29:07] Yeah that's a good yeah good word.

[00:29:09] Anyway that's about it.

[00:29:10] Yeah okay I love all that that that's very clear but obviously there's some some legalities and some frameworks around this strategy.

[00:29:18] Can we can we go through maybe a couple points of like how this thing actually works?

[00:29:23] Yeah yeah let's look at the legal framework.

[00:29:25] So there's a purchase agreement structured similarity to a standard property purchase agreement.

[00:29:30] There where the investors listed as the buyer at the start then there's a tenancy agreement residential lease agreement that complies with local resident regulations and outlines the tenants rental responsibilities.

[00:29:41] And then there's an option to purchase agreement specifying the tenants buyers right to but not obligation depending on the property or depending on the agreement to purchase the property and details of purchase price time frame you know two to five years whatever and any rent premium that contributes towards the down payment.

[00:29:57] Right as we always say good contracts make good friends.

[00:30:01] I think this is a very very clear area where you really need all of that stuff ironed out so get your lawyers involved.

[00:30:09] Now let's keep this going Dan and chat maybe about some of the risk management and a couple more legal considerations here.

[00:30:14] So contract termination provisions right.

[00:30:18] So we need contracts to specify what happens if that tenant slash tenant buyer potential buyer can't close on the purchase after that allotted amount of time that agreed upon amount of time.

[00:30:29] Again typically forfeiting that accumulated option or credit money a clear exit terms and strategies and vacate clauses are completely essential right.

[00:30:41] The last thing you want to do is have a disgruntled from a landlord's perspective or from a tenant perspective.

[00:30:47] The last thing you want to do is have a disgruntled person in there after a couple years after a bunch of goodwill and it falls apart at the very end.

[00:30:54] So again good contracts make good friends and this is where we want clarity and simplicity in those contracts right.

[00:31:00] Use plain language make the contracts easy to understand and easy to enforce right.

[00:31:06] Avoid all the legal jargon that could you know that lawyers could argue about and could lead to misunderstandings.

[00:31:13] So again cannot stress this enough make sure your lawyers are involved and you need to be working with legal professionals to draft all these agreements and review all of them ensuring that they all protect both the interests of both parties involved.

[00:31:29] Yeah for sure.

[00:31:30] You mentioned the good contracts make good friends piece.

[00:31:32] And so like again this would include obviously all of the details description property rent information any dates down payment agreed upon purchase price responsibilities of both parties etc.

[00:31:43] So I guess well this brings us to kind of the last piece where do you go and find an RTO property.

[00:31:49] Yeah that's a great question.

[00:31:50] You know how does one go about finding these.

[00:31:53] Well there's there's several ways to find rent to own properties in your area.

[00:31:57] You know one of them would be to just go and negotiate a rent to own agreement on a current rental property that you are in or on a potential rental property that you are looking to take possession of from the tenant perspective.

[00:32:12] Now you can approach home sellers who might be open to such an agreement because they could benefit from the rental income and potentially secure that higher future sales price right.

[00:32:23] So similar to going and presenting a VTB to a potential seller day and it's all about being able to explain this and explain the benefits and explain how it's mutually beneficial to both parties.

[00:32:35] So that would be an interesting way to do it literally go and pitch it to someone.

[00:33:04] So you know be weary of that.

[00:33:08] And and yeah that would be that would be kind of the two main things right to either go and do it yourself and pitch it or go find a company that has the infrastructure and is already doing that.

[00:33:19] Yeah for sure.

[00:33:20] I think maybe we'll try and wrap it up here just in the interest of time.

[00:33:25] Any thoughts anything that we that we left out that we need to include before we before we jump.

[00:33:33] Yeah maybe maybe let's just go through this this quick this final kind of quick example here just so people have a just people have you know again that that that takeaway.

[00:33:42] So let's assume you plan to buy a home in the next three years at which point that value is expected to be $500,000.

[00:33:49] Now let's say this is in a Saskatoon or Winnipeg or something.

[00:33:54] Yeah not not a Toronto Vancouver or Calgary.

[00:33:57] Yeah exactly.

[00:33:58] So I mean again there's many awesome markets across the country where you can get a house for that price.

[00:34:04] Now the contract has an initial 2% deposit based on the future value of the home.

[00:34:10] So you'll contribute $10,000 to the purchase price with a remaining balance of $490,000.

[00:34:16] Now assuming a minimum down payment of 5% you'll need $25,000 or $15,000 if the contract allows you to include that option deposit.

[00:34:26] However keep in mind this doesn't include your standard closing costs.

[00:34:30] Yeah and I guess when you get to your monthly payments $2,500 a month of which $500 can contribute to the home equity at the end of the three years you'll have saved that $18,000.

[00:34:43] So when it comes time to purchase the home for $500,000 you'll have $28,000 in home equity after the down payment has been factored in.

[00:34:51] Now this still means your remaining mortgage is going to be $472,000 plus mortgage default insurance which is required for down payments of less than $20,000.

[00:35:01] So keep in mind that our example again isn't including things like closing costs or maintenance that that tenant generally has to cover well in that renting phase.

[00:35:13] So there are some other costs here Dan but give me a little breakdown here would you?

[00:35:17] Yeah so with the agreed upon purchase price $500,000 deposit 2% so $10,000 down.

[00:35:24] Lease term three years balance owing at the end of the term $490,000.

[00:35:28] Minimum down payment was $5,000 or $25,000.

[00:35:32] Monthly rent was the $2,000.

[00:35:35] They added $500.

[00:35:36] So total down payment saved was $18,000.

[00:35:40] The remaining mortgage required was $472,000 plus your mortgage default insurance or CMHC insurance.

[00:35:45] Yeah so I mean look at the end of the day it can be a simple yet powerful strategy.

[00:35:51] And I've actually seen it enacted by actually many parents along my time here in real estate in kind of a bit of a different fashion.

[00:36:01] Like years ago I had some friends that had to move home after school or you know some unfortunately after breakups and long-term relationships.

[00:36:09] Or you know just being international for a while right.

[00:36:11] You come home you move back in with mom and dad and their parents made them pay rent as they should right.

[00:36:18] And by the time that those you know young adults were ready to move out their parents had actually saved all the money that they had been paid in rent.

[00:36:25] And gifted it back to their kids to be used as a down payment for that actual house.

[00:36:31] So not exactly a rent-to-own strategy but similar in the concept of you know you're giving that rent as a bit of a savings vehicle.

[00:36:38] It's going away.

[00:36:39] You think you're not going to see it again but it comes back in the form of a rent credit.

[00:36:43] Yeah.

[00:36:44] Okay so I guess we're all done.

[00:36:46] I think we covered it pretty exhaustively.

[00:36:49] To conclude there I mean I think this is a decent option.

[00:36:52] But I think I'm sort of of the opinion that you know it works well for the landlord as well.

[00:36:58] It helps to kind of smooth the journey for ownership.

[00:37:00] It definitely has a place but I would say it doesn't beat the traditional path from my perspective.

[00:37:05] So obviously use caution and understand the cost.

[00:37:08] These agreements obviously come with risks.

[00:37:10] There's a lot of things that could go wrong.

[00:37:12] So be careful and make sure you have a thorough understanding.

[00:37:16] Hopefully this is a good place for you to start.

[00:37:18] And if you want to learn more about this or anything else in an in-depth and kind of more visual setting.

[00:37:25] Make sure you check out our course realist.ca.

[00:37:27] I think that's all I have for you today.

[00:37:28] Thanks for tuning in.

[00:37:30] The content of this podcast is for educational and informational purposes only.

[00:37:33] It is not intended as financial, legal, or investment advice.

[00:37:36] Always consult a qualified professional for advice tailored to your unique circumstances.

[00:37:41] The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations.

[00:37:49] Daniel Foch is a real estate broker licensed with Valerie Real Estate Inc.

[00:37:53] Website is Valerie.ca, V-A-L-E-R-Y.ca.

[00:37:57] And a member of the Canadian Real Estate Association, the Ontario Real Estate Association, and the Toronto Real Estate Board.

[00:38:05] Nick Hill is a mortgage agent and partner at OWL Mortgage License Number 10317, Agent License M21004037.