Why we invest in Rent to Owns..
August 26, 2010
I really wanted to thank everyone who emailed me or called me about my blog post last week. The positive feedback was greatly appreciated and it was nice to hear from many of you. I actually got some great questions from you, which has inspired me to write more about these topics in future posts.
I had a pretty eye opening week this week. Call it an “A-HA” moment, if you will. I know each of us have our specific reasons for investing in real estate. Whether that is to retire early from our day jobs or help build a nest egg for our kids or help buy a cottage for the family enjoy. We all have our reasons for investing and the specific goals we are trying to reach.
This week I wanted to write about why we invest in rent to owns, specifically. I am not going to give you the “rah-rah speech” as to why rent to owns can be a good real estate investment and all that… This may sound strange to some of you, but I actually lost sight of why I invest in rent to owns. Being a little bit of a numbers nerd, I find I focus a little too much on stuff like return on investment, cash flow, or net profit. (I don’t know, maybe that’s the MBA in me). Don’t get me wrong – these are very important aspects to consider for every real estate investment you make – but the point I am trying to make is sometimes I focus on this, a little too much. Let me explain.
This week, I had a phone call with one of my rent to own tenants. They’ve been rent to own tenants of mine for almost 2 years now and they are now approaching the end of their term and are ready to buy the house. So, naturally I called them to go over some of the paperwork they need to sign and how the mortgage process will work. About 5 minutes into the conversation, Jenny started to cry. My first reaction was: “What’s wrong? Is everything ok?”. She paused for about 30 seconds and said that everything was definitely more than ok. She was crying because she was completely and utterly grateful for being in this position today to own their home. She never thought after all they had been through that they would own a home… ever. This is when my “A-HA” moment came… and I finally realized why I invest in rent to owns. I helped this family achieve their goal of home owner ship while they helped me get closer to my goal – it’s an amazing thing and a very powerful moment that is unique to rent to owns. It’s just not the same feeling when I rent out one of my apartments out to a regular renter. Not even close. That phone call with Jenny really hit home and reminded me of why I invested in this couple two years ago.
I know many of you are in the midst of doing your rent to owns and haven’t got to this stage yet with your rent to own tenants. But when that moment arrives, words can’t really describe the feeling you get when you have such a big impact on a family’s life.
Here’s to building wealth one family at a time…
Alex
A few thoughts on tenant defaults…
August 18, 2010
One of the first questions I usually get from a new real estate investor is: what is your track record with tenant defaults? I think this is a great question to ask and everyone should ask this question.
As many of you know, we’ve been in business for over 4 years now. In the beginning, we made a lot of mistakes. Since rent to own was practically a non-existent industry in Canada, we made up the rules as we went along. Not many of you know this, but I actually was the investor in the first two rent to own tenant deals. And, boy oh boy, did I pick the wrong tenant… (I actually lost money on both deals). Hindsight is 20/20 and I had to use this as a learning experience and not dwell on the negative side of things too much.
I know I am getting a little off topic here, but I think it’s important to provide perspective when looking at this topic. So, what are our default rates? I define a default as a tenant who is behind in rent payments, equal to one month or more.
So, here is, in percentage, the number of tenants that defaulted in each of the following years of being in business:
Year 1: 46%
Year 2: 38%
Year 3: 21%
Year 4: 15%
Last 6 months: 6%
So, what can we grasp from these numbers? In the first two years of business we made a ton of mistakes. We took in tenants with 2-3% deposits, income was so-so and our policies and procedures were terrible.
I was sick and tired of taking in the wrong tenant, so I took it upon myself to analyze what went wrong with each default. The results were staggering – there was an identifiable pattern with over 90% of the defaults! With this information, we made some drastic changes to how we underwrite each deal. While our number of defaults dropped significantly, our default rates were still too high for my liking.
So, about 8 months ago, we want back to the drawing board. We spent a lot of time analyzing and identifying who was the ideal rent to own tenant was. At the same time, we streamlined our internal processes to make sure no steps were missed and all checks and balances were in place (btw we’ve got a super admin team in Emely, Rachel and Parm).
So if you look at the last 6 months, we have a default rate of 6% (or a success rate of 94%, depending on how you look at it). I am really proud of this number. Some of you skeptics are probably thinking… “Yeah… but 6 months is such a short amount of time”. While, that is true, in my experience a default is most likely to occur within the first 6 months. I really do believe that a tenant’s payment patterns don’t really change.
So there you have it, these are the numbers. While we can never guarantee success, we work very hard behind the scenes to get it right and it is my goal by the end of the year to have a default rate of less than 5%. There, I said it.
I hope you enjoyed my little blog here – I’m also going to post this on our investor site: www.RentToOwnInvestor.com. You’ll be hearing more from me next week!
To investments that change lives,
Alex