Does COMFREE Work? – Part 2

By Heather Whyte

We’ve received some great comments on our blog post ‘Does COMFREE Work?’  that are both favourable and not so favourable towards selling real estate privately, and realtors in general. We thought we would address some of the comments that are not so agent-friendly, to offer up a different perspective.

Why pay an agent for something I can do myself?

There seems to be a belief that agents simply put an ad online, put a lockbox and sign up, and that’s all that they do. There is a plethora of other tasks going on behind the scenes to get a property listed, get an offer, and then take it through to closing. I won’t list them all here, as risk of inducing sleep. Between 90 and 95% of properties that sell, sell with an agent. I recently spoke with a real estate lawyer who does a large amount of business and he said that between 5 and 10% of properties sell privately. Do private sales happen? Yes. Is it the norm? No. The fact is,  we are the professionals, and the likelihood is that the process will be easier, and a lot of times you end up netting more working with an agent. Take an accountant for example. Can you do your taxes yourself? Yes. Will you net more money if you do it on your own? It’s possible. Do they know tax law better than you do? Certainly. I agree that there are bad realtors, bad accountants, lawyers, financial advisers etc out there. The best thing to do is to do your research and make sure that you are aligning yourself with a competent professional, no matter the task. And if after that research, you’re confident that you can do their job better than they can, and have the time to do so, then more power to you!

‘It just takes one buyer ‘

This is true, which is why we say that ComFree can work, it’s just usually more challenging as you don’t have the same access to information on the current market,  and are not advertising it on as many channels. Buyers can come from anywhere, and the more eyes that can see it, the more likely you are to get a good offer, in good time, for top dollar.

Agents put buyers on an automated search and they are bombarded with emails for properties that don’t meet their criteria:

This can happen as well, when the buyer has broad criteria. In this case, they should be getting a lot of listings. The key here goes back to that professional relationship. We set our buyers up on searches so that they can see the new listings coming in, but depending on the buyer, they may not want emails frequently, or they may not want the automated emails at all. They would prefer someone to look for them, and send them properties that truly meet what they are looking for. Some buyers have very strict criteria on neighbourhoods, price points, finishes, etc. and they will get very few listings. Each buyer is unique and needs to be treated as such. Good agents will formulate a specific plan for each buyer, and should be checking other sources for properties in addition to our system. We do not just rely on an auto-generated search with our buyers. With a large overpopulation of agents, however, this isn’t always the case. The key is to match yourself up with someone who is ethical, knowledgeable and experienced.  A professional agent will sit down with each buyer and perform a buyer consultation to find out exactly what their criteria and needs are.  We have some buyers that in the initial stages want to be bombarded with every new listing as they enjoy looking educating themselves on how far their money goes in the different neighbourhoods.  These are typically people who are new to the area and don’t really have a sense of the different neighbourhoods.  In most cases these types of buyers start out with very broad criteria and we refine as we go.  How do you dismiss a neighbourhood if you have never seen it?

Yet other buyers who have lived in the city and know the area might have criteria so stringent that it is limited to a particular street.  In these cases we typically door knock and flyer these streets to find potential sellers.  I am not sure this is a service ComFree is currently offering?

All the agent does is put a sign on the lawn:

There is a common misconception that selling real estate is easy, and the only thing an agent does is put a sign on the lawn, put it on MLS and wait for the offers to pour in. If this were true, there would be a lot more successful agents out there. Yes, there are a LOT of agents out there. In Kitchener/Waterloo alone, there are over 1,200. However, the average agent in Kitchener/Waterloo sells  4.39 homes per year. That’s not remotely enough to live off of. The perception is that real estate is easy – it’s anything but. It can be a great career, but easy? Definitely not. There is a lot that goes into representing clients on the list side and the buy side. On the list side, a lot of what happens goes on behind the scenes, and is not as tangible as a buyer’s agent that’s been out night after night showing you property, for example. When you list your home with an agent, they are responsible to represent you properly. We all have to carry insurance. If we make a misrepresentation, intentional or not, we can be sued. We take on that liability for you. If you’re selling yourself, and make misrepresentation, you are on the hook for that. We also have an understanding of contract law, and the nuances of how that applies to real estate. It’s our job to understand the ebb and flow of the local market, the neighbourhoods, the statistics, the local economy, etc. We are this resource for our clients. Additionally, there is the advertising piece. Each agent has their own marketing strategy for clients. Ask your agent for specifics on what they are doing to market your home. We also provide services to our clients such as a staging consultation to have their home show it’s best, and a pre-list inspection to find out if there any major issues that would impact price or a buyer’s decision to purchase the property. Then once the house actually gets an accepted offer, there are a myriad of tasks, as well as surprises that come up between acceptance and closing. There is much more that goes into it as well, but at the risk of boring you, we’ll stop there.

In summary, COMFREE and other private listing services can work for the right person and the right property. If you are considering listing privately, see what COMFREE and other companies offer, and interview a few agents. Will it be worth it to you to do it yourself? Make sure you fully understand what you’re getting yourself into.
We’d love to hear from you. What has your experience been with selling privately?

Multi-family Investing Advantages and Disadvantages

(6+units)

We have many investors approach us and ask which type of property is the best investment.  I always answer this question with -what are your investing goals and what is your risk tolerance?

Each type of property has its own advantages and disadvantages and for every investor the ideal property will be different depending on their goals and risk tolerance.  Below we outline some of these for multi-unit buildings.

Advantages

  • Multiplier effect-income capitalization- for every $1 of extra net income =$16 in increased value of asset
  • Low risk investment
  • Less labour intensive
  • Economies of scale
  • Lower vacancy risk
  • Personal credit does not max out –does the property cashflow?
  • Low cost of borrowing- with current interest rates

 Disadvantages

  • Not very liquid
  • More capital required
  • High personal net worth required
  • Small supply of properties
  • Longer term wealth creation
  • Little cashflow at first- stabilization period (maximizing NOI, repairs, maintenance etc.

Does Comfree work?

By Curt Knight

As a realtor obviously I have my own bias.  But this question comes up from time to time when I meet with clients who are thinking of selling their home. COMFREE has done an exceptional job of marketing themselves over the last few years and has gained some market share.  However, there are always two sides to every story and I thought it would be good for people to here from an industry insider and form their own opinions.

My wife and I actually attended a COMFREE seminar a few months ago  where you can learn “how to sell your home on your own.”  We went more or less just to see what it was all about and to learn about their model and the competition.  I thought it would be a lot of realtor bashing but they were actually pretty good.  In fact COMFREE now has many realtors on their staff.

COMFREE has developed an interesting business model.  They have come up with a wide variety of services to offer to the consumer and the consumer can pick and choose what services meet their needs and budget.  The speaker went through all the different packages but when it came to FULL package I started doing the math and couldn’t help but think- wow you are getting up there quick.  If you go with the full package this includes things like MLS listing, full signage, professional photos, support with negotiating, paperwork, legal advice etc. you are getting pretty close to $2000 plus you still have to do all the work of a realtor- showings, answering phone, open houses, advertising and so on.  The problem is they present the packages in a piece meal form that makes it seem like you are paying less.

Also the seminar we attended they mentioned an interesting statistic- they said that 70% of COMFREE listings sell by a real estate agent- and they actually encouraged COMFREE sellers to agree to co-operate with Buyers Agents (meaning pay them a commission) so more than likely you will still end up paying a Buyer’s agent 2-3% commission, on top of COMFREE’s fees.  I wondered to myself why would they tell people this- after all aren’t most people there to save paying commissions? But after thinking about it for a bit it made sense- they want people’s homes to sell- I mean if homes don’t sell then sellers are not happy- which isn’t a very good business model is it?.   They know the best way to sell a home is with a realtor- Why? Because most buyers out there are working with a realtor- why wouldn’t they? -it doesn’t typically cost them anything as the seller pays their fee’s when they purchase, so therefore they can get the support and help of a realtor to ensure they are not overpaying- which is most buyers biggest concern with private sales.

The other thing I would caution people with is that from our experience many people looking on the private for sale sites are “deal shoppers.”.  They know you are saving money on commissions and they expect some of that savings to be passed on to them. We often find the buyers are also unqualified.  When you work with a professional realtor- the first thing we do is verify that you can get the financing.  With private sales we find that in many cases buyers are not pre-qualified and therefore more deals tend to fall apart.

One of the biggest issues I find with COMFREE is they claim it will go on the multiple listing service or MLS.  This is true it does go on the public  MLS site- however I find most sellers think this means it goes on the local real estate board,  so realtors will get to see it and show it to potential clients- this is not the case.  The issue is that when posting a listing on MLS it is required that the listing must go on the home brokerages board (where the brokerage is located).  COMFREE is not located in Kitchener Waterloo or many other cities- it is in either Hamilton, Toronto or Ottawa- so when I do a search for a property on our system (the realtor system) the COMFREE listing will not show up in our search.  This is problematic because as I said above most buyers are working with a realtor so if this is the case typically we set them up on search using our system and have properties come to them via email- the COMFREE listings will not show up because they are on the Ottawa, Toronto or Hamilton real estate boards.  They will show up on the public MLS but the majority of buyers are not searching there because their realtors have a search set up for them.

It is very annoying for us as realtors because from time to time we have a client say “why didn’t you send me this property?”  I will then look it up and I can’t find it on our system- then when I check the public site it appears but as a COMFREE listing.  It’s frustrating because in essence we are not able to do our job because we are not getting all of the properties that are currently available on the market.  It is actually contradictory to our Buyers Representation Agreement that we sign with our clients which states we will make our clients aware of all properties available on the market. In my opinion it should be mandatory that all listings be posted on the real estate board where the property is located.  This is not only a problem for companies like COMFREE but for agents who are out of town unless they pay the extra fee for it to be on the board where the property is located.

Another downside when you list privately or with a company like COMFREE is it’s difficult to create the hype and urgency you get when you list with a realtor on MLS.  There are fewer bidding wars with private sales and without the realtor to coach buyers on how fast the market is moving many buyer will not step up to the plate.  Here is a testimonial that illustrates this point from one of our clients:

“Dear Curt and Erin,

We are so thankful and completely satisfied with the dedication and hard work you both put forth in helping us purchase our new home, and sell our existing home.  In the beginning we were set on using ComFree to sell our house in hopes to capitalize on a commission free sale.  Erin and Curt were both supportive in our decision, and still offered to help with anything we needed in order to help us sell quickly.  Our ComFree package was purchased, and the appointment was setup, but something didn’t feel right with Erin and Curt.  They called a few days before the appointment with ComFree and showed us a few different scenarios regarding a ComFree Sale and a Sale with Knight Homes.  It truly showed the professional experience, knowledge and hard work ethic these two both have.  We couldn’t believe that even though we had decided to use ComFree, they still cared enough to help us through the process.  After that call we quickly called ComFree to cancel our appointment and package and went with Erin and Curt and Knight Homes.  The Knight Homes sign went up on Thursday, multiple showings, and an open house on Sunday gave us multiple offers on Monday, where we accepted an offer substantially over asking that netted us more than we would have saved listing ourselves.  We are so pleased with the outcome and if it were not for the hard work and commitment these two have to their clients, I honestly believe that the outcome would not have been the same.  Thank you both very much!! We are Knight Homes Clients for life!!” 

Finally a big variable you need to factor in is your time- if you are a parent or a busy professional do you have the time to take calls, show the home, host open houses, negotiate the contract etc.  What is your time worth?  For those that have ample free time, retired or maybe just enjoy the challenge- than for sure this might be the right move for you.

In Summary, can selling privately or with a company like COMFREE work- absolutely it can!  If you have the time to do it, the right home, in the right location that shows well and you can attract the right buyer- more than likely you will be ahead of the game doing it yourself and not paying commissions. However if any of these variables is not right- you are going to find selling your home a very stressful and complicated process.  You could end  paying both COMFREE and Realtor Commissions when you switch if you can’t sell on your own- in turn netting you even less.   Remember realtors don’t get paid unless the home sells- COMFREE gets paid either way.

Comments or Questions always welcome…

Student Investment Opportunity

We want to bring to your attention this amazing opportunity.

Our office has been granted pre-sale incentives and discounts for this brand new turn-key, hands-off investment. It’s prime location- across the street from University of Waterloo and close proximity to Wilfred Laurier University make this the perfect student investment opportunity.
Our clients will receive the following promotions:

  • Two school year rental guarantee*
  • Two school year property management*
  • Two upgraded design packages to choose from + complete furniture & appliances package
  • Complimentary window coverings .
  • Complimentary locker .
  • Discount on Parking:  Underground: $5000 Savings (Reg. $15,000)
  • Above Grade: $3000 Savings (Reg. $10,000)
  • Discount on Locker : $2000 Savings (Reg. $3500)
  • Assignment fees and associated legal fees waived

More details :Email Template_01

Contact us at info@knighthomes.ca or 519-489-0313 to set up a meeting or to learn more about this exciting development

Tax tips for investors: Clearing up real estate confusion

 

Real estate has been a hot investment area in Canada for quite some time now due to favorable economic conditions, immigration, and historically low interest rates. Canadians who have taken advantage of these conditions are sometimes confused about the measures they can take to reduce their tax burden.Here are some tax tips addressing several typical areas of confusion:

To depreciate or not to depreciate

Depreciation, or for income tax purposes Capital Cost Allowance (CCA) can be an effective way to shelter your real-estate income from current taxes by transferring your obligation to future tax years. CCA works by amortizing a portion of the cost of your rental property against your rental income, generally 4% of your building’s cost on a declining basis year over year.

CCA is an election, meaning that it is the taxpayer’s choice whether or not to use it. The drawback to CCA is that it is recaptured in the year you sell your property, meaning that the historical CCA you’ve taken will be added back on income account to your tax return if you sell the property for anything more than your current un-depreciated capital cost (i.e. the cost of your property less the CCA claimed on prior tax returns).

This recapture can have a negative impact on your taxes in the year of sale so some planning around this election is required. Generally, if you plan on holding the income property for a very long period of time then taking CCA to reduce your rental profits to zero will almost always be advisable.

However, if you plan on selling your property in the near future you should attempt to estimate if your potential recapture will push you into a higher tax bracket, thereby reducing the current effectiveness of the CCA claim. You may also want to consider forfeiting CCA in years where your overall taxable income is low thereby allowing you to claim higher CCA in subsequent years when your marginal tax rate is higher. For more information on CCA see the CRA’s Guide T4036, Rental Income.

Documents, documents, documents

As far as the Canada Revenue Agency is concerned, if your expense transactions are not documented then they may as well not exist. When you own an income generating property it is your responsibility to keep adequate records and supporting documents in an organized fashion. Records would be the accounting information supporting the final reporting on your tax returns. Supporting documents would provide evidence of the transactions that make up your final accounting records.

Contrary to popular belief, simply maintaining banking and credit card statements is not always considered adequate supporting documentation. Original contracts, purchase receipts, and other documents should be maintained. In addition, if you are claiming auto related expenses a detailed log of your driving should be maintained outlining the dates of travel, the kilometres travelled, and the reason for travel (it must be to support the production of your rental income). My suggestion is always: If in doubt, save it. The more detailed your back-up, the more likely it will pass the scrutiny of a CRA review or audit. For more information on keeping records and allowable expense see the CRA’s guides: RC4409 Keeping Records andT4036 Rental Income.

Flipping a Property for Capital Gains?

Thinking of flipping a property and reporting the profit as a capital gain? You may want to think again. Capital gains are generally favorable to business or property income for tax purposes because of the fact that only half of your capital gains are subject to income tax. While the sale of a property held for the purpose of generating rental income would normally be considered a capital gain, this is not always a black and white scenario.

Use the analogy of an apple tree: An apple farmer purchases an apple tree in order to grow and sell apples. The apples are her inventory, while the tree is her capital property. When the farmer sells the apples she is generating business income, but if at some point down the road she decides to sell the tree, she is selling a capital property. If she makes a gain on the sale of the tree that would be a capital gain and taxed at only half her marginal tax rate. The same can be said for an income producing property. If you were to buy an income producing property, rent it out for a decade, profit during that rental period, then eventually sell the property at a gain, the rental profits would be taxed at the full rate and the gain on sale would most likely qualify as a capital gain (taxed at half your marginal rate).

The same cannot be said for short term property flips. When buying or selling a property on a short term basis for a profit (say buying, renovating, and then flipping) the CRA may consider the gains to be a type of business income rather than capital, thereby taxing the full gain at your marginal tax rate. Why is this? The law distinguishes between properties explicitly bought to generate rental income and those bought to profit on a sale. The former would normally be considered capital property to the taxpayer while the latter would be considered a type of business related inventory or more specifically an “adventure in the nature of trade.” While there are no concrete rules on whether a transaction is on capital account or an adventure in the nature of trade there are several indicators that the CRA and courts would take into consideration. Among these considerations are:

  • Whether the property was bought and sold in a manner similar to a dealer in that property
  • Whether the taxpayer has developed a pattern of buying and selling properties with short holding periods
  • Whether or not the taxpayer’s intentions were consistent with a business transaction or adventure in the nature of trade.

The determination of whether or not the sale of a property is a capital gain or business income is complex and has been played out in the courts on numerous occasions.

Source: Fabio Campanella, Special to Financial Post

http://business.financialpost.com/2014/01/07/tax-tips-for-investors-clearing-up-real-estate-confusion/

Fabio Campanella is a partner at Campanella McDonald LLP – Chartered Accountants. Fabio@campanellamcdonald.com

How much can I raise rent?

Ontario has rental guidelines which govern the maximum amount rent can be increased each year.  The annual rent increase is calculated based on the Consumer Price Index.  For 2013 the maximum rent raise is 2.5%.  Therefore if you are currently renting your unit out for $1000 you can bump the rent up to $1025 for 2013.

In most cases, the rent for a unit can be increased if at least 12 months have passed since a tenant first moved in, or if at least 12 months have passed since the last rent increase.  Proper notice of 90 days must be given to the tenant before the rent increase takes effect.

Rental guidelines do not apply under the following circumstances:

  • Vacant residential units
  • Residential units first occupied on or after November 1, 1991
  • Social housing units
  • Nursing homes
  • Commercial property

The second bullet point is an important one to take note of.  What this means is that any rental unit built or first occupied after Nov. 1 1991 does not fall under the rent increase guidelines.  Therefore the rents can be bumped as much as the market will bear.  Even homes that were built prior to 1991 but never used as a rental then converted to a rental after 1991- would not fall under the rental increase guidelines.

From my experience many investors are not aware of this “loop hole” and this can be a great tool to crank up the return on under preforming properties built or occupied after Nov, 1 1991.

For more information visit

http://news.ontario.ca/mah/en/2012/06/the-2013-rent-increase-guideline.html

OR

Contact  Curt Knight – info@knighthomes.ca

How do I kick a tenant out of an investment property?

How do I kick a tenant out of my investment property?

We have many clients come to us for advice on how to approach problem tenants.  There are a variety of reasons that you may need to kick a tenant out of your investment property. The best way to stop problem tenants is to do a thorough screening and reference/credit check prior to accepting the tenant in the first place- however despite our best efforts and “good feelings” from time to time every landlord has to kick a tenant out.

Over the next few blog posts we will outline a few of these reasons:

1.  notice to terminate for non payment of rent

2.  notice to terminate for an illegal act

3.  notice to terminate tenancy at end of term

4.  notice to terminate tenancy for landlord or purchasers use

5. notice to terminate tenancy at end of term for conversion, demolition or repairs

6. notice to terminate a tenancy early- because of damage, interference with other          tenants, too may people living in the unit etc.

Process for Evicting a Tenant for Non Payment of Rent from an Investment Property.

Here are the steps you must take according to the Landlord Tenant Board

  1. You need to give them the form N4 found from the Landord Tenant Board. You must give your tenants 14 days from the date you deliver the notice to pay the rent or they will have to move out.

Click here to access the first form N4

http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/_ltb/_forms/documents/form/stel02_111567.pdf

  1. If they don’t pay the rent before the 14 days or move out by that date, on the 15th  day you can then put in an application to evict the tenant and collect the rent the tenant owes.  You will need to fill out the L1 form for this and it is a $170.00 fee.  If the tenant decides to pay everything they owe and stay, they will owe you all the rent plus the $170.00 fee you paid.

Click here to access the L1 form
http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/_ltb/_forms/documents/form/stel02_111558.pdf

  1. If they still don’t vacate the house the sheriff will have to be the one to evict them.

An order issued by the Board is similar to a court order.  Most of the terms and conditions of Board orders can be enforced through the courts.  For example, an eviction order can be filed with the Court Enforcement Office (also known as the Sheriff’s office) to be enforced; or an order for payment of money may be filed with the Small Claims Court for enforcement.

  1. If you can work an agreement out with them to terminate the lease without going through the eviction process have them sign this N11 form :

http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/_ltb/_forms/documents/form/stel02_111574.pdf

  1. If your tenants tell you they wish to terminate their Tenancy at any point in the lease have them sign the N9 form to protect you from them not vacating the premises once the lease is up.  Tenants notice to terminate N9 form:

http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/@ltb/@forms/documents/form/stel02_111572.pdf

Here is a link for more info on the eviction process from the Landlord Tenant Board:
http://www.ltb.gov.on.ca/en/Key_Information/STEL02_111884.html

If you have any questions at all regarding Tenant issues please do not hesitate to call Curt or Erin.  We are happy to help.

Tip: always document your conversations, notices, and contacts you have with your tenants in case you need to reference back to it later.  You will also need to provide copies of all notices to the court if you have to go that route.

You can contact the Landlord and Tenant Board at 416-645-8080 or toll-free at 1-888-332-3234 or visit the Board’s website at www.LTB.gov.on.ca.

Advantages and Disadvantages of Rent-to-Owns

 

ADVANTAGES

DISADVANTAGES

SELLER


TENANTS TYPICALLY PAY HIGHER
THAN MARKET RENTS


TENANTS LOOK AFTER PROPERTY BETTER BECAUSE THEY MAY OWN IT IN FUTURE


DEPOSITS ARE TYPICALLY NON
REFUNDABLE IF DEFAULT


GET AN UP FRONT DEPOSIT


ON TIME  PAYMENT OR TYPICALLY NOT CREDITED
TOWARDS PURCHASE


AGREEMENT CAN BE WORDED SO BUYER IS RESPONSIBLE FOR REPAIRS AND MAINTENACE


FINAL PURCHASE PRICE IS
GUARNETEED


DELAY IN GETTING PROCEEDS OF SALE- SELLER MAY NEED $ ASAP


WHAT IF THE BUYER DOES NOT
QUALIFY FOR THE MORTGAGE AT END OF TERM? MAY NEED TO RE RENT OR TRY TO SELL


CANNOT SELL TO ANOTHER BUYER EVEN IF BETTER OFFER

BUYER


GOOD FOR PEOPLE WITH CREDIT
ISSUES OR NEW RESIDENTS TO THE COUNTRY


FORCED SAVING PLAN


GOOD FOR NEWLY SELF-EMPLOYED
AS BANKS WANT 2-3 YRS HISTORY OF INCOME TO QUALIFY


FREE TO DO RENOVATIONS OR
IMPROVE VALUE OF THE HOME


DEPENDING HOW THE AGREEMENT IS WORDED THERE MAY BE PRICE PROTECTION FOR THE BUYER IF THE VALUE HAS GONE UP SINCE THE INITIAL AGREED UPON PRICE


RENT WILL NOT BE RAISED
DURING THE AGREEMENT EVEN IF RENTAL RATES ARE ON THE RISE


IF THE BUYER CANNOT QUALIFY
FOR A MORTGAGE AT END OF TERM THEY RISK LOSING THEIR DEPOSIT


NEED TO PUT BUDGET PLAN IN
PLACE (HARD FOR MANY)


IF MARKET DROPS BUYER IS
STILL ON HOOK FOR AGREED UPON PRICE

How Does a Rent-to-Own Work?

Recently I have had many clients come to me and ask “how does your typical rent to own work?”

Rent to owns have been around for a long time but with increased exposure on the internet and lawn signs they are more visible than ever.

Here are the basics:

If a seller advertises that he or she will consider a rent to own deal, this means they will be looking for someone to lease the house with two contracts.  The first contract is a typical lease and the other deals with the purchase of the property.  It is very important that both contracts been signed.  If only the rent to own (purchase) agreement is signed then none of the rules and regulation under the Landlord & Tenant Act will apply if you need to evict because technically they are not a tenant without a formal lease in place.

The rent to own or purchase agreement will be for a period of time agreeable to both parties (Seller & Buyer) typically anywhere from 1-5 years. It is a common misconception that the seller will simply set aside some of the rental money as a down payment contribution, but this is not exactly the case. The buyer will have to pay the regular amount of rent, and in addition they will have to pay a monthly installment that will be credited towards the down payment. (Canada Real Estate Advisor, 2013)

Each rent to own agreement is structured differently but typically there are clauses in the contract that state if the buyer is late or misses any payment, the contract is null and void. As well, the buyer may be responsible for repairs and maintenance; some sellers will write into the contract that they can keep any monies and or the deposit paid toward the purchase contract if the buyer is in default.

It’s important to keep in mind that house prices are always changing. The calculations for the purchase agreement are based  prices when the contract was entered into, and it can be next to impossible to calculate what the house may be worth in the future given market conditions. (1-5 years down the road)  This can be addressed by agreeing to a certain percentage increase for each year of the term, or sometimes sellers will ask the buyer to agree to pay the appraised value of the house at the end of the term. (In this case, you may have to pay a little extra at the end of your term to meet the 5% down payment.) The seller will typically want a minimum of $5000. (Typically less than the standard 5% banks charge)

In simple terms think of a car lease.  You put a deposit down and make payments for specified period of time at the end of the lease you have the option to purchase the car for a predetermined price.

For more…

See blog post on Advantages and Disadvantages of Rent to Owns.

4 Rules of thumb for Real Estate Investing

There are number of quick formulas or rules of thumb that are common place in the Real Estate Investment world.  It is important to note that none of these should be relied upon solely for any investment decision.  They are typically used as a quick checks and if positive then further investigation would be warranted.  For a long term look at an investment property a yield capitalization and discounted cash flow approach would be more accurate.  We will outline the 4 rules of thumb below and discuss their applications and limitations.

4 Rules of Thumb

1.  Cash on Cash
2.  Payback Period
3.  Break-Even 
4.  Gross Income Multiplier

 

Cash on Cash

-is the relationship between a single years cash flow before taxes and the equity invested. (also called return on equity of equity dividend rate)

-takes debt service into account when assessing return

-useful comparison of investments assuming no change in value (purchased for annual income not appreciation)

Formula – Cash on Cash

=cashflow before taxes / equity invested

 

Limitations

-no consideration for appreciation- this can dramatically impact return

-no after tax comparison

-no recognition of significant factors that may affect income and expenses (major repairs in the future?)

Payback Period

-is the number of years required for cumulative cashflows before taxes to equal the initial investment (time needed to recoup initial investment)

Formula- Payback Period

=equity invested / cashflow before taxes

Limitations

significant limitations – similar to cash on cash

 

Break Even Ratio

-financial ratio used for property comparison based on gross operating income

-takes into account expenses including debt service but not taxation

Formula- Break Even

=operating expenses + debt service /  gross operating income

Limitations

-does not take  into account return on equity

-no consideration for appreciation of the property

 

Gross Income Multiplier

-is the ratio of sale price to gross operating income

-can be a monthly or yearly ratio (usually yearly)

-typically used as a quick check before a more detailed analysis

Formula- Gross Income Multiplier

=sale price / gross operating income

 

Limitations

-assumes high comparability of properties (most properties differ to some extent)

-does not take expenses into consideration (operating expenses, taxes, debt service etc)

-must use comparable income data for reliable results