I am thinking of buying properties and them for “rent to own” to possable clients. I would buy a home for say 50k finance on an intrest only loan @ 6% for 3 years. I would sell to tenant for 60k I would ask the tenant to pay a 1,500 down payment…they would also pay a 500 security deposit…so 2k up front pluse i would rent it to them for say 650 this paying the note and giving me a cash flow of say 350 a month note that the tenant is rent to own…there for… responsable for all repairs Balance do in 2 1/2 years…this giving me 1500 upfront plus 4200 cash flow a year and finally giving me 10k when they refi. total of 22,000
is this possable or does anyone have a diffrent way they would do a “rent to own” ohhh I would not charge the tenant any intrest because the ballance of 60k would still be do in 2 1/2 years
Let’s clarify your numbers. You may have overlooked a few things.
You propose to purchase a $50K property with 100% financing, interest only at 6% for three years. Your monthly interest only loan payment will be $300. Let’s say that your annual property taxes will be $800, and your annual hazard insurance premium for your rental dwelling policy will be $250. Your one year cost of owning this property is $4600 assuming you have no maintenance or your tenant does it all out of his pocket.
You rent the property to your tenant for $650 monthly rent. Additionally, you give the tenant an option to purchase the property anytime in the next 30 months for $60K, for which the tenant pays you an option consideration of $1500. In the first year, you have collected $1500 option consideration and another $7800 in rent.
Let’s say the tenant exercises his option to purchase the property at the end of the first year. Your backend profit on the sale is $10K, but since you already collected $1500 of your profit up front as option consideration, you only get the $8500 balance of your profit at the settlement table.
Recap the numbers for the year. You collected $1500 up front in option consideration, $7800 in rent, and $8500 in profit at the settlement table, for a grand total of $17,800. Subtract your $4600 cost of ownership in that year, and your net income from this deal is $13,200.
Any security deposit you may charge is not yours to keep. It must be refunded to your tenant (could that be why it is called a “deposit”), so the security deposit can not be counted in your total income unless it is actually forfeited.
Furthermore, since the tenant is only paying you rent until the option is exercised, you can not charge the tenant any interest – after all you are not providing financing. Some state landlord-tenant laws may also require you to pay the tenant accrued interest on his security “deposit”. Check your landlord-tenant laws to see if this applies in your location.
I totally agree with Dave T. The number he came up with $ 13,150-$13,200 is your possible profit for one year as long as the interest, prop taxes and insurance numbers are listed as above. If you want to know total income for the 2 1/2 years the break up would be as follows:
At the end of 1st-year: $13,150 ($7,800{rents}-$800{prop taxes}-$250{insurance}-$3,600{interest}+$1,500{option consideration}+$8,500{$10,000-$1,500}
At the end of 2nd- year: $16,300 ($13,150+$7,800-$800-$250-$3600)
At the end of 2 1/2 year: $17,875 ($16,300+$3,900-$400-$125-$1,800)
So your profit in 2 1/2 years would be around $17,875 and not $22,000 as you have calculated.
thanks for the reply but even if i could profit 17k every 21/2 years and i had say 10 properties that would be close to 170k in to years or 85 or so in a year huhhhhh but i would rather make 6 figures in a year i will try something else…thanx you 2