Rent To Own Investing Book Review

January 27th, 2011 · 22 Comments · Book Review, Buying or Selling Your Property, REIN, Rental Property

I got a free copy of Mark Loeffler’s book Investing in Rent-to-Own Property: A Complete Guide for Canadian Real Estate Investors“. I asked for the book during the last Canadian Real Estate Blog Carnival A few days later I gratefully received it and read it right away.

Rent To Own Is Great For Investors

To summarize, Mark tells us to find the tenants first then make a rent to own deal with them, decide how long it’s going to take for them to clean up their credit and make a rent option to buy with them. It’s only at this point that the tenants go out with their real estate agent and buy whatever house they like as long as they qualify for it. This eliminates the problem of finding tenants for a place you already have.

Steps To Rent To Own

  1. Find Tenant
  2. Qualify Tenants
  3. Buy The House the Tenants Like
  4. Tenants put down 2% to 15% for the “down payment”
  5. Investor Factors in 6% to 9% for appreciation
  6. Tenants pay “Rent”
  7. Tenants pay “Option Credits” to grow their “Down Payment”
  8. Tenants work on their qualifying for their mortgage by fixing their credit
  9. In a few years the Tenants buy the house

In the meantime the investor gets the best of both worlds because he doesn’t have to fix or maintain the place because the “tenants” own it. I can see the point of it.  I also want to point out that in his book Mark discusses extensions of the lease option, which can happen.  Rent to own is very good for investors.

I Didn’t Like The Book

I wanted to like it and the book was highly recommended.  It seems like it’s a prerequisite these days to advertise for networking with other real estate investors and in particular the Real Estate Investment Network. I’ve read the entire series of REIN books and the only one I liked was 81 Financial and Tax Tips for the Canadian Real Estate Investor: Expert Money-Saving Advice on Accounting and Tax Planning. I know too much about this business to stomach the happy, happy, joy, joy and “lifestyle” propaganda. There’s actually a decent amount of necessary information in these books, it’s the way they are written I take exception with. Still if you like Don Campbell’s books you’ll like Mark Loeffler’s book as well.

First of all these books make way too much use of third party anecdotes which I hate. Please tell me your story and own it. Second they are fomulaic. Like a Harequin Romance is predictable, these books seem to follow the same “plot”.

Rent To Own Investing Is Subject To Abuse

Although it is great for the ethical investor and can help certain people get a home, rent to own goes contrary to what I’ve learned about personal finance and my own ethics. The target market for this investment strategy is a “get it now” high income earner that has lived beyond their means and messed up their credit. Another potential rent to own tenant would be someone who has just had a financial windfall and wants to buy a house but again doesn’t have the credit. Divorced people and people who have suffered a bankruptcy are also prime candidates.

I’m a live in a basement apartment and save kind of gal. Furthermore, I haven’t exactly hidden the fact that I believe that the real estate market is headed for a correction. While Mark does address this issue a little bit by proposing to extend the term of the option period, it doesn’t address any significant price corrections. This is how the math would work for a sample house.

Price Paid By Investor $100,000
Appreciation over 2 years $18,000
Tenant pays 10% down -$10,000
Tenant pays usually above market rent
Tenant pays option credits of -$4800 ($200 per month)

At the end of two years the tenant has put down $14800 plus has paid rent but has $-3200 equity. If the market is flat it will be very challenging to get a mortgage. If the investor is a nice guy and I mean very nice, he’ll extend the option to purchase. There is no requirement to do so. In fact if the investor kicks the tenant out, she/he ends up $14,800 plus mortgage paydown over the two years to his/her benefit.

The rent to own investors I’ve known in the past do not employ the tenant first strategy. Some bought houses and did very nice cosmetic repairs, one didn’t even bother to do that and the entire back wall of the house had the brick veneer removed, and the previous tenant had also removed the back wall of the garage to allow a drive thru to the back yard. The “price” proposed for the house was well above market value. A great number of their deals fell through – on purpose I felt.

My Personal Issues

I can’t stand rent to own furniture, rent to own computers or even rent to own cars (most people would call this a car loan) I think these kinds of businesses take advantage of the financially vulnerable among us. I’m aware that my views on this are very unusual. It speaks to the “have it now” mentality in all of us. I don’t have any lack of entrepreneurial spirit however and for investors this may well be a way to have your cake and eat it. It’s certainly a better deal for investors from a management perspective than a buy and hold strategy in many cases. If you have no problems with the whole “rent to own” scenario as a whole, then this book will get you started. Everything you need is in there including the forms although I suspect that each province would require different documentation so you’d want to get a lawyer to look the contracts over. (Also mentioned in the book)

Affiliate Link Advisory

If you click on the picture of the book in this blog posting and go buy the book on Amazon, I will make about 4% of the book price or about $1. I’ll take all my earnings and buy myself something nice like a pack of gum. I give these nice reviews because I want to encourage you to buy stuff. Also if you click on the link and go buy other stuff at Amazon…(like a new car) I get 4% of that too. So if you’re going to buy something on Amazon, feel free to buy it through my link to help support my writing efforts.

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22 Comments so far ↓

  • Jordan

    Thanks for doing this “dissection”, Rachelle. I’ve always thought that rent-to-own was a little suspicious, bordering on unethical. I recently had to dissuade a friend (a friend with a wife and three kids who live very frugally, but would like to buy a house) from this route. My reasoning then was “if it is such a great idea, why isn’t EVERYONE buying this way?” Nice to have some concrete numbers to back it up.

  • Potato

    For what it’s worth, as a tenant, as soon as a potential landlord started to push hard on rent-to-own, I walked away.

    • Rachelle

      It seems like a good idea, it certainly works well for investors, after all there’s no shortage of rent to own, cash your check kind of stores. It’s really a personal kind of decision for me, some people won’t invest in cigarette or oil companies, I have no problem with that…

  • Rachelle

    Thanks Jordan,

    I feel better about it, sometimes I forget why I’m doing this 🙂

  • Jesse

    I agree Rachelle, this is borderline predatory. People spin it any which way from Sunday but ultimately you’re finding someone desperate willing to give you a free lunch.

    • Rachelle

      If the investor is ethical it can be a way for some people to own their “dream house” now. Personally I’d wait. I don’t believe in dream houses anyway. Every house is a dream house compared to living in a cardboard box. Other than that you live where you can afford and the least you pay and the faster you pay it off the better off you are.

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  • Lonely Limey

    Hi Rachelle

    I have helped in reviewing the credit history of potential RTO tenants on behalf of investors and I can honestly say there is definitely a need for this kind of offering. I also put in place an action plan for the tenants to follow during the term of the RTO program which will result in them hopefully qualifying for a mortgage.

    The tenants realise their options for ownership are limited and the RTO program gives them a light at the end of the tunnel.

  • Rachelle

    I can see there being a market for it Lonely Limey, and more coming up too as the rules get tighter. Min Credit of 620, and so on.

  • Financial Uproar

    Two years is an awful short time to just assume a 6-9% capital gain. There’s problem #1 with this strategy.

    Problem #2 is that people who have bad credit or are recovering from a bankruptcy generally don’t have 10% down.

    Problem #3 is that, as a former mortgage broker, I know lenders just hate deals like that.

    I’d only be interested in this kind of thing for a very select group of people. If the prospective buyer was so good, they’d buy a place themselves.

    Those REIN guys must really hate you now!

    • Rachelle

      I don’t think they hate me…I’m more like an annoying flea. I’ve heard that lenders hate those kind of deals as well a few times. The 10% down is a big problem too. Quite frankly anyone considering a rent to own who has 10% down or more might want to consult a shady mortgage broker. 🙂

  • Dana

    Like you, I wasn’t overly impressed by the book. He gave very good technical information, but it was to cheerleader-y for my liking. It read like an informercial. I have heard Mark speak and he does sound like a cheerleader for his cause.

    That being said, as an investor I am not against RTO, but try to find a qualified candidate! They are very few and far between with lots of potential investors trying to woo them.

    I have tried three times to put one of these deals together and they have all fallen apart (at our discretion) during due diligence. Twice because of issues with the property (zoning in one case and the fact that the tenant disclosed that he would move his business premisesto the home in the second case -it made us nervous to have a tenant operating a business from a property we own) and the third time because the potential tenants didn’t seem to *get* the changes they would need to make to qualify for a mortgage at the end of the tenancy. They were scooped up by another investor within a day.

    There are way more investors than there are qualified, well-informed tenants.

    • Rachelle

      Well, I can see there would be a bit of a shortage of qualified well-informed tenants. Glad to hear it stopped you. I worry about the investors it doesn’t stop. I can see that the new mortgage rules will increase the popularity of this system

  • Mr. Cheap

    I was worried when you said you were waiting for this book to review. I read through it at the bookstore and, like yourself, I did *not* like it.

    Years ago I looked into rent-to-own extensively, and there were MANY pitfalls (none of which were covered in detail, if at all, in this book).

    • Rachelle

      Hi Mr. Cheap,

      Good to see you again! I lobbied hard to get the book so I felt really bad when I didn’t like it. You know who could really benefit from rent to own is the self employed, but it would have to be very long term deal and forget the crazy appreciation. No one has more problems qualifying for a mortgage than the self employed. There’s no way that they would make it through the proposed screens unless they are honest on their income taxes…

  • Mark Loeffler

    Well to say I am having a hard time coming up with a comment is to say the least. I understand RTO is not for you. That is fine. The fact is there is a need for the product in the marketplace. 6-9% are examples not what is used. Today we are using more like 4 – 5%. The book was written because there are a lot of people using RTO not ethically. This was to train people to take the actual steps needed to ensure success of their tenants. A RTO gives a tenant much more options than they might have otherwise and sometimes the best option is to stay a renter. Or just get a mortgage.

    Anyways last I will say on the subject matter.

    • Rachelle

      I do have a significant bias against rent to own houses simply because I personally am very frugal, I would never even lease a car or buy one on payments.

      Not every one is like me and that’s a good thing. It’s certainly true that more emphasis needs to be put on tenants completing, and in the book renters are given extentions, but there is no requirement to provide extensions as far I can tell.

  • Dave Peniuk

    I had to jump into this discussion, which I rarely do, because I feel that a “trashing” is going on.

    Rent To Own’s as a real estate investment strategy are no different than doing a flip, assignment, wholesale, or even buy and hold. They all serve a purpose as an investment vehicle. How they differ is based SOLELY on the individual who is the investor. In other words, a crappy slumlord that owns rat infested buy and holds is an unethical investor. It’s not the strategy that sucks – it’s the landlord/investor!

    There are unethical Rent To Own investors, Buy N Hold, flippers, assignment investors and every other type of strategy used.

    As Mark mentioned in his comments above, they are now using 4-5% appreciation. Likely when he wrote the book the market was increasing at 7-15% annually (yet he was appreciating about 6-9%). I know several Rent To Own investors that left literally a hundred thousand on the table for the Tenant Buyer to obtain because the market went up 20%+ (annually) over the 2 year term yet their agreement only was at 5% annually. Did they “screw” the Tenant Buyer out of the deal because they lost all that appreciation? No. Why? Because they were ethical investors.

    Don’t blame the strategy, blame the greedy investor.

    • Rachelle

      Agreed… as you have seen in the comments Dave, I have a very distinct bias towards frugality that I practice in my life. I also mention that this is a good strategy for investors but not for me.

      I have seen my share of greedy investors of all kinds 🙂

      • Frank

        I suppose one worry for Kevin is that he doesn’t want to lglleay force’ his way into the property because that would be just about as bad a start to a tenancy as is possible! Plus he may not be able to in any case, as I guess it’s quite likely that the Landlord has given the tenancy to someone else.If either of those circumstances are true, then I guess compensation would be the only alternative. What would Kevin have to prove to claim compensation for higher rent? Presumably he can’t just go and rent a penthouse flat somewhere and claim the additional for that?!Nigel

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