Rent-to-own, lease-to-on, lease-option: they all mean the same thing. Bring in a tenant who pay an upfront fee to get into the property, make monthly payments over an agreed upon period of time, and eventually buy the property. Real estate investor Jon Simcoe has put a new spin on this standard rent-to-own strategy, and in our recent conversation, he explained the two strategies he implements and the big paydays that come as result of his creativity.
Rent-To-Own Strategy #1 – Tenant First
The first, and strongest rent-to-own strategy that Jon implements is “tenant first.” For this strategy, he starts with the tenant and then finds a property. Tenants will work with Jon for one of two reasons: (1) they don’t have a high enough credit score or (2) they don’t have a large enough down payment to qualify for a bank loan. So, they come to Jon and he helps them buy a house of their choosing that aligns with their financial situation and one that they will be able to purchase after two to three years.
In return, Jon requires the tenant to provide a non-refundable down payment to initiate the contract. This goes towards the down payment that can be used to purchase the property at the end of the contract. But if they decide not to buy, Jon gets to keep the money. The tenants are also responsible for paying monthly rent, plus an additional fee. The rent is not applied to the purchase price, but the additional fee gets added to the non-refundable down payment so that at the end of the contract, the tenant should only have to bring a small amount of funds, if any, to the closing table.
Allowing the non-refundable down payment and the added fee to be applied to purchasing the home is one of the ways that Jon sets his tenants up for success. Another service he provides is a credit specialist that meets with the tenant every three months to make sure they are doing everything they can to get their credit score to where it needs to be.
Rent-To-Own Strategy #2 – Property First
The other rent-to-own strategy is “property first,” which Jon follows when the market and economy is trending downward. Jon will find properties from distressed owners. Then, he finds someone to rent-to-own the home off of the current owner. Unlike “tenant first,” for this strategy, Jon doesn’t need to buy any of these properties. He just finds both a motivated seller who will keep the existing financing in place and a capable rent-to-own buyer and facilitates the transaction between the two parties.
How Jon gets paid for this “property first” strategy differs from the “tenant first” approach. Since he isn’t purchasing the property, he keeps 10% of the rent paid and sends the rest to the owners. Part of that 10% goes to Jon’s credit specialist who, like “tenant first,” makes sure the tenant’s credit is moving in the right direction. He also charges the original owners an initial set-up fee, as well as a $10,000 “successful outcome” fee after the tenants purchase the property.
Rent-To-Own Strategy Comparisons
Strategy #1 – “Tenant First”
- Income – Non-refundable down payment + monthly rent + profit when tenants purchase
- Required to purchase the property – Jon leverages bank financing and OPM (other people’s money) to minimize or completely eliminate his money out-of-pocket + Jon benefits from the mortgage getting paid down
- Higher profits – $50,000 to $70,000 per deal on average, but sometimes $100,000 and up
- ROI – 40% to 60% on average, based on down payment. If using OPM, Jon has to pay 10% to 15% to partners and then the rest is his.
Strategy # 2 – “Property First”
- Income – Initial set-up fee + 10% of rent paid + $10,000 at closing
- Not required to purchase the property – current owners keep existing mortgage + Jon doesn’t benefit from mortgage getting paid down
- Lower profits - $25,000 to $30,000 per deal on average
- ROI – Infinite since no money out-of-pocket
As you can see, with a little creativity and resourcefulness, you can implement both of these strategies with little or no money out-of-pocket.