Rent To Own?
I bought a fixer upper about 6 months ago that was too good to pass on. 19K for a 3 BR brick on an acre..structurally solid 25 years old. This place needs gutted and the neighborhood is not real desireable for a rental. I have done most of the work but I bought 3 other homes this year and have one of those left to rehab then back to the "ghetto house" as it's commonly referred to as now. I don't want to flip it but I am worried about the type of tenants I am going to have in such a place. I usually rent middle class stuff. This isn't going to appeal to them. My thought is this...It's going to be real nice once completed inside...I did a whole new kitchen, new doors, new heatpump and going to do windows,etc. so it will appeal to a buyer. Doing all the work myself I only have to pay materials. I could sell it but I'd like to do a rent to own to possibly negate the chances of someone not taking care of it. What percentage would you typically apply from the rent to the actual buying of the property? How long do you go with something like this and is there another option that might work better for me in this case?
If you are really saying that you want to own it long term then look at things this way...
What is the possibility that a lease/option (rent to own) deal will result in a sale vs. the possibility that the wrong sort of tenant will tear the place up?
Take the view that a good tenant who is serious about wanting to own it will likely buy it. I have heard half the time the deals come together. I tend towards seller financing so my numbers would not tell you anything.
Price the place correctly. Be happy if you get the payments on time and then they do buy. As you obviously can find more deals that you want to hold as a long term rental assume that this one is not part of that portfolio and that any profits you receive can easily be recycled into another deal.
Two suggestions.
1. Set up the deal so that they do not purchase within your 1st year of ownership. This way you can treat the deal as capital gains.
2. If you like, put in the contract with them that this will be a 1031 exchange if they exercise the option. They work hard when the time comes to get a 1031 done. Tax wise it will feel like you never sold though you will have some transaction costs. If you do not successfully complete a 1031 then you can just pay the capital gains like in #1.
Learn from this one. Either you bought the risks of a rental in an area that you are not comfortable with or you bought to resell and just too a while to recognize it. Maybe you would not buy the same place again or you might figure the profits differently if you did going forward.
Oh, talk with some property managers who manage in the area of the home. Get their views as to turn-over, maintenance and cash flow. Maybe the solution is to have a successfully property manager handle this one. They need experience with this class of property and should be able to explain their screening process to you.
I used to manage 7 homes in what might be the same sort of area. I never had a tenant do any damage. I had some late pays and a few evictions. I have a completely legal but very strict screening process. I learned that the returns were no worth my actual time but I did not suffer losses over the few years I did the management.
John
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