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By Allistar Trent
Even with low interest rates, 95% insured mortgages and various government initiatives, many young families and would-be homeowners still find saving for a down payment the single largest barrier to homeownership. For these individuals “Rent-to-Own” and equity participation deals can form creative solutions, allowing them to move in to the house of their choice now and use rent payments to build equity toward a future purchase. The deals can take two basic forms:
1. Rent with Option in which the resident has the option to purchase for a fixed price at the end of a fixed term rental.
2. Equity Participation in which the resident and investor agree to split various gains over the term of the fixed term lease (for example the resident may get credit for the mortgage principal they have paid down and a percentage of the increase in value).
So why would a landlord/investor agree to give the resident a portion of what would otherwise be entirely theirs ? Actually, there are a number of very attractive reasons.
Consider that most small property investors would prefer to be precisely that – investors. “Landlording” in the sense of dealing with tenants, vacancies, leasing and repairs are not their regular business. By reducing or eliminating these “necessary evils” you can make their investment considerably more palatable to them.
Stable Cash Flow: Fixed (long term) lease – Generally speaking equity participation deals need to last between 3 and 5 years to make practical sense. The cost, risk and inconvenience of leasing and vacancies are eliminated during this term. In addition the resident is far less likely to default on payments so as not to cause a forfeiture of their equity.
Hands Free Investment: In most cases rental laws do not apply to situations in which the resident has a “co-ownership” in the property. This allows the investor to make residents responsible for maintenance and property expenses, making for a virtually hands-free investment. If the expenses go up the resident an be made to pay them without running into difficulty with rent control laws. Of course, because the resident has an interest in the value of the property they are likely to take far better care of it or may even carry out improvements (with the consent of the investor), for which they receive additional credit.
Reduced Exit Cost: Lease options can also save investors considerably on the exit cost of their investment from reduced (or no) real estate commissions if the resident exercises the option at the end of the term. While critics point out that the investor gives up control of when to sell, any temporary market variance should be more than accommodated by the commission savings.
Of course these deals will not appeal to every landlord/investor and it may be considerably harder to find a match of property and landlord that suits your requirements and taste. If successful, however, a properly structured deal can be a barrier-free way to enter the housing market and a vastly improved experience for all concerned.