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This report describes how you can invest in residential property using a strategy that is fast becoming widespread. It’s known as “rent to buy” or “rent to own”. Sometimes it’s also called a “lease option”. They all mean the same thing, and operate in same way. For our purposes we’ll just call it a “rent to buy” strategy.
What do we mean by an Investor?
Firstly, we’re assuming that as an investor, you can raise the funds (either from a lender, or perhaps your own funds) to finance the purchase of a residential property.
You will then sell this property on a “rent to buy” arrangement to a buyer.
What is a Rent to Buy property?
If you offer your property for sale on a “rent to buy” basis, you’re simply saying to the market:
“I’ll let you buy my property, but instead of giving me all the money now, you can start off by renting my property, and then buy it further down the track.”
The “further down the track” period can be whatever period you negotiate with the buyer. Typically it’s a period of 1-3 years, but could be longer if it suits both parties.
The investor also sells the property at higher than normal market price, because the buyer gets the opportunity now to buy their own home without having to put up all the funds now. Thus there is good (and locked in) capital gain for the investor.
Who will be the buyer?
This buyer will be someone who can’t raise the full finance to purchase a property at the moment, but who can raise the finance to buy the property at a later date. In the meantime they will rent the property from you on a “rent to buy” basis. The weekly “rent to buy” money they pay provides you with positive cashflow. Plus, when they buy the property further down the track, you also make an excellent capital gain.
Is this a legal way to sell a property?
Yes – absolutely!
It’s becoming increasingly popular to sell a house using this type of arrangement. It’s all done using legally binding documents with the involvement of solicitors.
What legal documents are used in a Rent to Buy arrangement?
There are 2 documents that comprise a Rent to Buy agreement:
1. A Residential Tenancy Lease
2. An option for the buyer to purchase the property at an agreed price by an agreed date
The Residential Tenancy Lease is a normal Lease Agreement used in everyday rental lease agreements. This is the document that the buyer will enter into to rent the property during the period before he actually purchases the property. During this time he will rent the property as a normal tenant.
The second document (called an Option agreement) gives the buyer the right to buy the property at an agreed price, by an agreed date. As mentioned before, this is typically within 1-3 years, but is negotiated by both parties. The Option agreement is attached to a standard Contract of Sale.
Do I need a Real Estate Agent to sell my property in this manner?
No – you don’t need the services of a real estate agent to sell your property on a rent to buy basis.
Do I get any deposit from the Buyer?
Yes – the buyer pays some upfront or deposit money to the investor as part of the arrangement. This is whatever the buyer can afford to pay. The more deposit they pay, the better obviously. There are no hard and fast rules regarding the deposit amount. As a general guide though, you might expect somewhere in the range of 2-5% deposit money from the buyer. Each case is different, and it’s up to the investor and buyer to agree what they are both happy with.
This deposit is actually part of the “option fee” that the buyer pays for the right to buy the property further down the track.
What happens to this deposit money?
This money is paid directly to the investor, and is not held in a trust fund.
If the buyer purchases the property within the agreed timeframe then this deposit is credited to the purchase price at settlement.
If the buyer decides not to proceed and buy the property within the agreed time period, then the buyer forfeits this deposit money.
How much rent does the Buyer pay during the rental period?
This depends on what you negotiate with the buyer. You would want to try and cover your holding costs of the property during the rental period. So you would calculate your holding costs (mortgage repayments, insurance, rates, maintenance etc) and work out a weekly figure that you would be comfortable with.
This figure would be the minimum weekly rental that you would look to charge. However, you negotiate a higher weekly rent than this, and thus generate positive cash flow. Of course, the positive cashflow generated depends on what your holding costs are, what the market rent is in the area, and what the buyer can afford. In all cases, you will find that buyers who enter a rent to buy arrangement are willing to pay a lot higher than market rent in order to get the opportunity to purchase their own home.
It’s also common to offer the buyer a credit for a percentage of the rent they pay, against the purchase price of the property. For example, you may agree that 10% of the amount they pay in rent will be credited toward the purchase price of the property, if they follow through and exercise their option to buy the property. If they don’t end up buying the property then they forfeit any credits.
What if the Buyer decides not to purchase the property by the agreed date?
If the buyer decides not to exercise their option to purchase the property by the agreed date, then the following happens:
• The rent to buy Agreement is terminated
• The buyer forfeits any deposit monies they have paid to date
• The buyer forfeits any “rent credits” they have paid to date
• If the investor wants to, they can negotiate a new rent to buy Agreement with the buyer. This can include a new sales price, option fee and option period.
The worst case scenario for the investor is that they get the property back. They can then decide if they want to do another rent to buy Agreement with the same buyer, or look to find another buyer for the property. Or the investor may decide not to sell at the moment, or just rent the property for the time being.
Note: At all times the investor retains 100% ownership and title to the property, until there is a settlement sale with the buyer.
We bring Investors and Buyers together
Where do we, Fast Action Property, come in on this?
We work with investors to explore the return on investment of using this strategy.
This includes a full financial analysis of the investment opportunity that could result from investing using a rent to buy strategy. This includes a detailed cashflow and profit analysis that would determine the weekly cashflow and anticipated capital gain to the investor, looking at various “what-if” analyses.
Assuming everything looks positive, we then need to find a buyer!
Rather than the investor just buy a property somewhere and then look for a “rent to buy” buyer, we first source a suitable buyer who wants the opportunity to purchase their home in this manner.
Once we source a suitable buyer (and they have to meet specific criteria), we get the buyer to suggest properties that they would like to own. The price range would have been agreed with the investor beforehand as part of the financial analysis. Once the buyer has identified (usually up to 5) suitable properties they would like to own, we then get the investor to purchase one of these property in the normal manner. We would assist the investor in this process to get the best purchase price possible.
We would next work with the investor to prepare the rent to buy contract with the buyer, and set everything up. After the buyer moves in to the property, and the investor is enjoying the benefits of a positive cashflow investment property, we are still on hand to make sure everything runs smoothly.
Fast Action Property charges a fee to set all this up on behalf of the investor. This is discussed on a case by case basis, after an initial financial consultation with the investor to determine if this is a suitable investment strategy. Please note this initial consultation is at no cost to the investor.
Will this style of investing work for me?
Investing in residential property on a rent to buy arrangement doesn’t suit everyone. However, it can offer a very good investment opportunity to savvy investors when the right property is identified in the right location.
Some of the main reasons investors are attracted to this style of property investment are:
• You get a higher sale price for the property when you sell it
• You get positive cashflow while you wait for settlement
• You sell your property faster
• You get many more interested buyers than you would from a traditional sales process. More buyers mean a higher sales price.
• You don’t have to deal with a real estate agent
• You can turn a negatively geared investment property into a positively geared one
• You get a high quality tenant in from day one – someone who wants to buy the property
Are you interested and would like to know more?
Are you interested in exploring this method of property investing?
Do you have other questions?
We’re happy to discuss any questions you might have about this strategy.
Just contact us via our contact form. We’d love to hear from you.
If you want, we can also arrange a time to chat on the phone.
Thanks for your time
Hugh Pate
Fast Action Property