I usually don’t really like rent-to-own (R2O) models either from an investor’s POV (point of view) or from a client’s POV.
From a client’s POV, it’s an expensive way to buy property; they have to pay all of the costs of the property including mortgage payments, property taxes, insurance (tenant and landlord insurance), all repairs/maintenance, utilities, etc. In addition, they pay a premium for the landlord’s administration and property management not to mention legal fees too. It’s as if they owned the property except, they don’t. And if they miss a single payment, they forfeit all the money and time they have put into it including a monthly amount over and above all the costs described above, which is credited towards their down-payment when (and if) they ever close on the place and it gets transferred into their name(s).
From an investor’s POV, they have to find and then depend on folks who (mostly) have the ability to generate decent income but have bad credit for some reason. It’s a competitive market, decent clients are hard to locate and many of these deals don’t complete, leaving investors in the deal longer than they expected and sometime with vacant real estate to boot.
But there is one exception. I am all about giving “a person a fishing rod not a fish” so what if you were the DM (deal maker) representing a group of investors who like the R2O model but you want to de-risk it (not just for your investors but also for your clients). How would you do that?
My take is that you might purchase a property and animate it. “Animate” is my word for adding new revenue streams like say a basement or sideyard apartment, a backyard workshop, a storage shed, a tech package and so forth.
In this way, when a R2O client comes to you, s/he will have some embedded income, already baked into the deal. So, if your R2O client’s costs for all the stuff I described above is $2,500 a month and there is $1,500 a month coming in from a legal basement apartment, well, you can see how this would help them.
This is called an augmented tenancy, which a client of mine (Alex Colligan) defined this way on Urban Dictionary ( https://www.urbandictionary.com/define.php?term=Augmented%20Tenancy):
A real estate leasing technique whereby the landlord and tenant cooperate to sublet a portion of the property or unit, and split the rent revenue (and responsibilities) of the sublease. Unlike traditional subletting, the tenant remains in the unit/property along with the subtenant. Unlike just getting a roommate, there is a hierarchy between the tenant and subtenant. The tenant assumes some (but not all) of the landlord’s responsibilities, effectively becoming more than just a tenant. He is an Augmented Tenant. Hence the term Augmented Tenancy.
How could a Stacey, a single mom with three kids, afford to rent such a large house? She signed an Augmented Tenancy lease with her landlord, which basically reduced her rent in half. Now THAT’s real affordable housing!
December 17, 2018
Going back to our example, maybe the additional income from the basement apartment is split between the landlord and the R2O client, where the landlord receives a percentage of the sublet income– this is called a percentage rent. Basically, the landlord gets more monthly rental income but does no work– the R2O client is responsible for all aspects of managing the subtenant.
Plus, if the deal does go sideways, the DM and his/her investors have some income coming in from the basement flat rather than zip.
This is also part of what Quebec-based architect Isabelle Bradbury calls the FEHAJ (for every home a job) movement– the R2O client has a home-based job: taking care of the subtenant.
Here in point form is the basic model from the DM’s POV:
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