Rent-to-own is becoming an increasingly attractive option for investors. While the practice isn’t as popular with our neighbours south of the border, here in Canada it is a great option to consider especially with tightening regulations, a complex market and new mortgage rules.
With more than 11 billion people across the country renting, and housing prices becoming more unattainable, tenants are looking for more options and investor interest is brewing on what opportunities are out there.
A rent-to-own strategy is an alternative route to home ownership for buyers who aren’t quite able to purchase their new home but are interested in eventually attaining ownership. It could be a great option for someone who is self-employed, new to Canada or has a damaged credit. The tenant would pay a monthly fee similar to rent, but a portion of that goes toward a down payment for that home. In addition, at the end of the agreed -upon term, the tenant would be in a position to qualify for a mortgage through traditional lending institutions and the property title will transfer to their name.
“There are many people across the country who are so close to getting their own home but need someone on their team like Homeowners Now and our partners that can support them through those last few steps,” said Conrad Field, VP Partnership at rent-to-own company, Homeowners Now.
From an investor’s perspective, rent-to-own is a low risk option that can maximize cash flow, target areas with high appreciation and allow for turnkey operations to occur. “Rent-to-own models have the ability to both grow wealth in strong markets, as well as protect it in a correction,” said Field.
According to him, rent-to-own is like a cross between shorter-term development projects and longer-term buy-and-hold properties. You get the benefit of receiving your capital back with profit in a relatively short time period like a development project, but also the security of monthly rent revenue like with a buy-and-hold. “There are benefits for everyone in the eco-system, from our partners, tenants and the rent-to-own company. As a wealth-building vehicle for our partners, some of those benefits include the security of substantial deposits, additional revenue streams under contract, minimal ongoing management, reduced expenses and more,” he added.
Homeowners Now has partnered with some of the most experienced professionals in the real estate industry to put systems and processes in place to maximize the success of tenants and provide security for their partners. The tenant-first approach is a key aspect of that, according to Field. “We find the tenant, qualify them for our program based on a set of financial criteria and then they pick their dream home on the market that is within the price range they can afford. What’s great about this is the tenant truly gets the house of their choice instead of having to select from a potentially very small list of available properties,” said Field. This means the tenant is more motivated to follow through with the program and likely to have years of happiness in their home. Homeowners Now uses a deferred purchase agreement, rather than a lease option, which is able to provide additional security for investors.
In a new whitepaper, Field shares more detailed information on how to maximize return on investments this year through a rent-to-own strategy. “A lot of people don’t have the time to put these pieces in place and are looking for a hands-off way to get involved. They want their money working for them so they can focus on other priorities,” said Field.
Source: Canadian Real Estate Magazine – 30 Jan 2020
“I was very interested and involved in clinical teaching,” said Jensen. “I always wanted that to be part of my career.”
Those goals didn’t change when they had their first child, a boy named Colton, in 2014. But other priorities suddenly shifted into view.
Jensen and Wilson both grew up in small towns and began talking about where they wanted to raise their family. They agreed it wasn’t in the frenzied downtown of a big city, so in 2015 they left Toronto and moved to St. Catharines, a smaller centre in Ontario’s Niagara region.
“It was a long discussion,” said Jensen. “But Brian and I love the Niagara region … and it kind of checked all our boxes — career-wise for myself, and then also in terms of the community that we wanted to raise our children in.”
Jensen accepted a teaching position at the Niagara campus of McMaster University Medical School and also works as the site lead in general internal medicine at Niagara Health’s new state-of-the-art hospital in St. Catharines.
Wilson initially commuted to his job in Toronto — three-plus hours on a good day, four on a bad one — but later accepted his current role as legal counsel for Niagara’s regional government, which serves 12 local municipalities.
“My satisfaction with work and life increased dramatically,” he said. “And I don’t miss it.
“There’s a lot of big-city amenities with a small-town feel, so I don’t feel like we’re wanting for anything by not having that Toronto connection.”
This kind of story is increasingly common. Young families, tech entrepreneurs and mid-career professionals are moving to Niagara in large numbers, seeking an alternative to the harried and hectic life they find in larger centres.
“There’s a feeling of serenity out here,” said Stephanie Petroff, a realtor in Niagara-on-the-Lake who previously
worked in public relations at the LCBO head office in Toronto.
“When I come off the highway … it feels like my shoulders go down about three inches just because it’s a feeling that you are vacationing where you live.”
Niagara’s population is projected to rise by 40 per cent over the next two decades, thanks in part to its affordable real estate, excellent school systems, vibrant arts community and an alluring urban-rural mix that provides big-city amenities with small-town charm.
Last year the average house price was $413,700 — roughly half the cost of a typical home in Toronto, and less than the average Toronto condo. Niagara real estate is also a prime investment opportunity — the fifth-best market in Canada, according to MoneySense magazine.
World-class elementary and secondary schools are located throughout Niagara, and Brock University and Niagara College provide exceptional post-secondary education at the foot of the Niagara Escarpment, a UNESCO Biosphere Reserve.
St. Catharines also has a stellar rising culinary scene — young, urban and world-class — that complements Niagara’s renowned wineries, distilleries, craft breweries and fruit orchards.
The region also has some of North America’s least-congested roads. By the standards of any major city, rush hour simply doesn’t exist there.
“I love the fact that you can get anywhere in about 15 minutes,” said Lloyd Oliver, Petroff’s partner and a fellow Niagara-on-the-Lake realtor who previously worked at Maple Leaf Sports and Entertainment in corporate sales.
“Here you can just get in your car and go — whether it’s commuting to work, shopping, eating out or even crossing the border, everything is at your fingertips.”
Niagara-on-the-Lake is home to the world-renowned Shaw Festival theatre, and the Meridian Centre in St. Catharines is a 5,300-seat stadium with OHL hockey, minor-league basketball and big-name concerts.
Jerry Seinfeld, Elton John and John Mellencamp have performed there, and A-listers Adam Sandler, John Legend and Kelly Clarkson have played Fallsview Casino in Niagara Falls.
Niagara residents enjoy all the attractions tourists do — picking peaches or riding horses on summer afternoons, sipping cocktails at some of Canada’s best restaurants in the evening and watching Grammy-winning artists at night.
“It’s a great place to live,” said Dr. Lorraine Jensen. “It’s a fantastic place to raise a young family, and from a medical perspective, it’s very feasible to meet your career goals here.”
“Do it,” added the lawyer Brian Wilson, urging others to put down roots in Niagara. “You won’t regret it … it’s a great place to live, work and play. People shouldn’t think twice.”
You can learn more about what the region has to offer at LiveInNiagaraCanada.com.
Source: Ben Forrest Postmedia Content Works January 27, 2020
This story was created by Content Works, Postmedia’s commercial content division, on behalf of Niagara Economic Development.
But first-timers may encounter a number of obstacles, from financial to psychological. Eliot Fuchs, 31, describes buying his first home in Newark, New Jersey, a two-bedroom, two-bath condo, as “a learning experience.”
One of his early lessons came when he lost out to a higher bid after his first offer. That sparked a realization, says Fuchs, who works in corporate strategy for Prudential.
“You’re not going to necessarily get it just because you put down the asking price,” he notes. “So if you want a competitive unit, like one in this building, you’re probably going to have to pay more than the asking price.”
Real estate investing:Is buying a property right for you? Here are six tips
When he eventually found a condo that ticked off all his boxes, he and his real estate agent, Brian Nielson, developed a bidding strategy.
“Once I saw the apartment, I knew that people were gonna want it,” Fuchs recalls. He says he and Nielson developed a plan for making second- and third-round bids, which prepared him for going above the asking price.
The condo, originally listed at $263,000, sold to Fuchs for $292,000.
“Having done it all, I’m happy that I did it,” Fuchs says.
Read on to learn five tips shared by Fuchs and Nielson about the first-time home-buying experience.
A mortgage preapproval – when a bank determines how much you are qualified to borrow – will help buyers zero in on their price range, says Nielson, a Realtor with Keller Williams.
“You want to make sure that you get preapproved before you start looking,” Nielson says. “That paper tells you exactly how much you can afford per month.”
Having preapproval shows sellers that you’re serious about making an offer, Nielson adds. And it can help buyers move quickly once they find a home they love.
“So when you do find something – ‘Bang, I want this property, here’s my offer, here’s my preapproval’ – the bank already knows about it and we can hit the ground running,” he says.
Fuchs knew he wanted to move from Manhattan to Newark, where his office is based, because it would mean a shorter commute and more affordable home prices.
Nielson showed him homes around Newark, a city of about 280,000 people close to New York City, helping Fuchs narrow his search to three neighborhoods that appealed to him for their amenities and locations.
“You don’t want to ever regret buying a place,” Fuchs advises. “Cast a very wide net in the beginning … and spend a lot of time just looking at different places.”
It’s also important to know what you want in a home – and what you might be willing to give up. A home-buyer with children, for instance, might not want to budge on good schools. For other buyers, home size may be more important.
“If you want to be in a better area with better schools, then we might have to switch around what it is you’re looking for,” Nielson says. “Sometimes you want a bigger house, but in the nice neighborhoods you might not get that.”
Fuchs says he eventually found exactly what he wanted in his condo but cautions that finding the perfect home can require months of searching. “That’s probably why it took like seven months to get it to find this place and get it,” he notes.
Nielson notes that many of his clients find their dream homes within two months but adds that others take six months or longer.
“It has to do with more of them not getting the offers accepted,” he says of the longer searches. “The product is there. They just didn’t feel that the product is worth the price tag.”
Once a seller accepts your offer, the closing can occur in about 30 days, Nielson says – or even faster “depending on how fast your attorneys are, depending on how fast your bank is with everything else,” he adds.
Make sure to budget for closing costs, he says. “Closing costs are everything outside of the down payment,” such as attorneys, insurance and other expenses, he notes. Budget about 3% to 5% of the overall cost of the home on these expenses, he adds.
Lastly, Nielson says an agent will walk the buyer through the closing process, such as setting up an appointment with an inspector to examine the property.
“The agent doesn’t cost the buyer anything,” he notes. “It costs the seller’s agent. We help you negotiate the deals and we get the deals done quickly and as fast and as securely as possible.”
Is this crazy? I sat there with my 23-year-old head spinning—looking at the first $400,000 multifamily rehab project that I had just put under contract.
You’ve probably asked yourself (at least) a couple times if it’s crazy to get into real estate, too. If you asked your friends and family instead, they probably immediately answered, “Yes!”—followed by a spiel about whatever aspect of managing a real estate business that scares them most.
Maybe they mentioned the risk of a market crash, the challenge of dealing with tenants, or the pitfalls of negotiating with contractors. It’s only human. We fear risk.
We fear risk even when our fears are irrational.
Even if you drink the real estate Kool-Aid and know that real estate can be an amazing way to build wealth, the fear probably hits you each time you’re about to write an offer on a building. Do I really know what I’m getting myself into?
On that night in May 2017, I was on the verge of taking what—to many people—would look like the biggest risk of my young life. I was 23, had recently graduated from college, and had barely six months of real estate experience. This project would pit me and my business partner against countless situations we were not prepared for, faced with countless questions we didn’t know the answers to.
Luckily, as real estate investors, it’s not our job to know the answers. It’s our job to know the numbers.
The numbers on our first rehab deal told us that even in our worst-case scenario—even if everything that people warned us about went wrong—taking the plunge would get us closer to financial freedom than sitting “safely” on the sidelines ever could.
Why are we comfortable losing money, as long as we know how much we’re going to lose?
As a recent grad, most of my college friends ended up in big cities on the coasts.
In 2017, the median rent in Manhattan was $3,150 a month. According to Rent Jungle, the average rent for a one-bedroom apartment in San Francisco was even higher: $3,334 a month. Over the course of a year, that adds up to $40,000 in rent for a one-bedroom apartment.
For reference, the median family income in the city of St. Louis is $52,000 a year. In St. Louis, that money can buy buildings.
On the coasts, it buys you the right to spend up to 39 percent more than the national average on basic necessities like groceries. The costs are pretty crazy, but the craziest part is that spending a family’s annual salary on rent is somehow considered a perfectly normal financial decision for a young person to make.
Young people spend that money with no expectation of getting a return. Rent, groceries, and transportation are costs—not investments.
What is the risk of embarking on a rehab project compared to the 100 percent certainty of spending $40,000 a year on rent?
Risk is exposure to uncertainty. Because of this, renting doesn’t feel like a risk. Neither does spending a lot to live in a big coastal city. The costs are large, but they’re constant. We know them up front: $40,000, paid in tidy, predictable monthly increments.
Or do we?
What is the real risk of renting away your twenties—and how do you compare it to the risk of a rehab project? Does renting in a big city make your financial future—not in 10 months, but in 10 years—more certain or less so?
When you’re embarking on a rehab project, uncertainty stares you in the face. The risks are all right ahead of you, a landmine of knowns unknowns:
Those seem like hard questions to answer. Small wonder that most people warn you away from real estate.
Except when you’re following a safe, “normal” path, uncertainty isn’t gone. It’s just waiting for you out of sight.
Five years from now, will I be working at a job I don’t like? Or will I be free and doing the things that matter to me most in life?
Ten years from now, will I have the resources to protect what I love? To support my family, friends, and community?
Those are hard questions to answer.
For me, those questions would have been impossible to answer if I lived in a big city on the coast, took a fancy job where I was well paid but spent most of my salary on rent and groceries, and had to spend most of my time working for someone else.
We are conditioned to deal with long-term uncertainty the same way we’re taught to deal with short-term risk: by avoiding it.
But avoiding risks doesn’t make them go away. It doesn’t teach us anything. It doesn’t get us any closer to answering life’s hardest questions.
The numbers on our first rehab deal told me two things. In the worst-case scenario, I would come out of the deal not losing any more money than someone who chose to rent in a big city. In the worst-case scenario, I would come out of the deal with an education that would allow me to take control of my financial future.
I could live with that.
My business partner, Ben Mizes, and I started our real estate portfolio with an FHA loan. We were only required to put a small down payment on a relatively stress-free, low-maintenance fourplex.
Five months later, we were planning to borrow $315,000 from the bank and $105,000 from private family investors and spend as much of our own time, sweat, and money as it took to come out the other side of our first four-unit rehab.
The project would be our first BRRRR (or buy, rehab, rent, refinance, repeat).
We were upgrading kitchens, bathrooms, and AC units to bring the rents up from $825 per door to $1,400 per door—a 70 percent increase.
With renovations complete, Ben and I would try to appraise the building for $700,000. Depending on the lender, you can borrow between 70 to 85 percent of a building’s appraised value. In this range, as long as we hit our numbers, we could completely repay our investors, recoup our costs, and walk away owning a cash-flowing castle.
The potential upside was clear. Just as important, we looked at our downside.
Ben and I modeled a worst-case, “do-nothing” scenario, trying to understand what would happen to us if we got stuck and couldn’t complete the rehab at all.
Ben and I had a contract to buy the building for $420,000. At the closing table, the seller would credit us for the $20,000 worth of repairs that had to be done immediately: fixing a collapsed sewer, repainting and sealing damaged windows, and replacing falling fascia boards.
Note: We always, always, ALWAYS make our buildings watertight before doing anything else. If they aren’t watertight when we buy them, we negotiate for repair credits to fix problems on the seller’s dime—immediately upon closing.
The $20,000 repair credit provided by the seller brought our effective purchase price to $400,000. Combined, our mortgage payments, taxes, and insurance came out to $2,277 per month.
The numbers told us we could make our mortgage payments comfortably, even in its current (read: very rough) condition. The building was generating income of $3,350 per month, or about $825 per door.
Assuming we got completely stuck and had to keep renting the units out for their present value of $825, we would have $1,073 per month with which to pay all of our fixed and variable expenses. Utilities and HOA fees (the building is in a private subdivision with an annual assessment) came out to $380 per month, leaving $693 a month to deal with variable expenses.
In a worst-case scenario, we would be self-managing to save on property management fees. That would still leave us with vacancy, repairs, and maintenance costs, and the need to set aside money each month for a capital expense escrow.
Was $693 really enough?
Under our most-conservative model, we planned to put aside $10,000 each year for repairs and escrow. After five years, that equals $50,000 put into proactive maintenance—enough to deal with a roof, a complete tuck-pointing redo, and major structural repairs.
Then, we figured 10 percent vacancy cost—high for the area but not impossible if we had hard luck. What was the worst that could happen?
Under our worst-case model, we would be losing $600 every month. Losing $600 a month is a losing deal. That’s not a deal that gets you on a podcast. It’s not a deal that successful investors show off in a blog post.
Luckily, it’s not the deal we ended up with, either. (Spoiler alert: We came out of this rehab with a lot more paint on our shoes but a lot more cash in the bank, too.)
But when we talk about “risk,” here’s the curveball question: Would this “worst-case” deal be a step away from, or a step toward, financial freedom? Let’s look at those numbers again.
An investment is any place where you can put your money, such that it creates more wealth over time. In the model above, a lot of the expenses that look like “costs”—that is, look like places where Ben and I would have lost money—are actually investments, places where our money helps us build wealth.
In our worst-case scenario, we would pay $600 a month (on average) to cover the costs of repairs and build a sizable rainy day fund.
However, our $1,600-per-month mortgage would be completely paid for by our tenants. In the first year alone, our tenants would pay for our ~$14,000 interest payments and help us build $5,000 worth of equity in the building.
Over time, that equity build-up only accelerates. In our thirties, Ben and I will build up $85,000 through principal paydown alone (pun intended).
The amazing part is that would be the case even if the rehab project was a complete failure. Breaking even on mortgage and utilities and scraping out of pocket to cover unexpected repairs, Ben and I would still be positioning ourselves to accumulate passive wealth in the future.
If you spend $50,000 on a building in five years, it becomes a lot cheaper to maintain. Under our worst-case model, we would have $10,000 a year to deal with maintenance issues before they became more serious.
When you budget to deal with problems up front, it makes for a less-impressive pro forma—but it also means that maintenance costs get significantly lower over time.
If you plow $10,000 every year into it, even a problem-ridden property will get easier and easier to take care of. It might be a painful cost to swallow in the short-term, but you haven’t lost the money that you spend on a property you own. You’ve just re-invested it.
By contrast, if you spend $40,000 in one year on rent, the money is out of your hands for good.
When you buy your first rehab, the most important investment you make isn’t in the building. It’s in yourself. You’re taking out (quite possibly) the only student loan in the world that can pay itself off in less than a year.
The most daunting part of diving into a real estate deal—the part that makes people say it’s too risky—is that you don’t just stand to lose money but time, too.
The time costs on this project would have made this a losing deal for a veteran investor. We spent untold hours painting, fixing plumbing, and (like you saw above) drilling holes through concrete when a contractor dropped the ball on us.
But we weren’t veteran investors (yet!). As Ben and I looked at the numbers together, we realized we were buying ourselves both a building and an education, too. Even if we broke even, we would come out of the project with an education that in itself was worth hundreds of thousands of dollars.
A few years ago, I sat looking at the numbers on a $400,000 real estate deal that could either set me on the fast-track for financial freedom or go completely off the rails. In the end, both things happened.
My business partner and I got screwed over by not one but four different contractors before we finished the project. One caused thousands of dollars of water damage to the floors, embroiled us in a months-long insurance claim, and tried to take us to court after he lost.
We dealt with an irascible tenant who threatened us and damaged his apartment.
Time and again, things took more time, sweat, and money than we had expected. But the age-old mantra of real estate investing held true: You make money when you buy. The numbers of the deal were strong.
And now that we’re done dealing with contractors, tenants, and renovations (at this property), we have a building that rents for $1,400 a door, water-tight with low maintenance costs, and a fair market valuation between $650,000 and $700,000.
Now we are on pace to refinance the building, fully repay our investors in the first year, and walk away with the funds to do it all over again.
Is this crazy? Fast forward and I’m sitting here, head spinning, looking at the numbers of a 20-unit deal in St. Louis.
Since starting our renovation project one year ago, we’ve used the education and cash flow we gained from it to build a 22-unit portfolio—and a high-growth startup.
Now, with a refinance underway, I am looking at a deal that could double the size of our portfolio overnight, all while working full-time.
A new project brings new unknowns. More questions we don’t know how to answer and lots more numbers to keep me and Ben busy.
Source: BiggerPockets.com – Luke Babich
A growing number of Canadians see mortgage qualification as the biggest barrier to homeownership, according to a recent study by Zillow and Ipsos.
Around 56% of Canadians see qualifying for a mortgage as a barrier to homeownership, a six-point increase from 2018. After mortgage qualification, the next top worry for buyers is whether they can afford the mortgage payment, with roughly 54% saying so.
Canadian borrowers have to qualify under the stricter mortgage requirements and stress test that took effect in January 2018. Under the new rules, borrowers should be able to prove that they can service a mortgage at a higher rate.
“The rule only applies to newly originated mortgages and is designed to prevent borrowers from taking on more debt than they can handle if interest rates go up,” the study said.
One in two Canadians said they are concerned that these new rules will prevent them from qualifying from a mortgage.
Younger borrowers bear the weight of the new rules the most, with 69% of those in the 18-34 age bracket feeling concerned about qualifying for a mortgage.
“These mortgage regulations could impact a substantial portion of potential buyers, as the survey results show a large share of Canadian homeowners get mortgages. This worry is also present for current renters who may be considering the purchase of their first home,” the study said.
A recent report by the Canadian Mortgage and Housing Corporation, however, indicated that most buyers felt there were benefits to the stress test. The CMHC survey found that 65% of buyers believe the mortgage qualification stress test will prevent more Canadians from taking on a mortgage they can’t afford in the future.
While the majority of homebuyers surveyed by CMHC were aware of the new rules, more than three-quarters said the changes had little or no impact on their decision to buy a home. This number is down slightly from 80% in 2018, but still represents a healthy majority of homebuyers.