by Rachel Oliver (Contributing Blogger for Canadian Real Estate Magazine)
It’s no surprise that investors who have rent-to-own or lease option properties in their portfolio make most of their profit on the difference or appreciative value between today’s purchase price and future selling price. The higher the future price tag – the bigger the ROI.
Many areas across Canada have been seeing consistent upward trending appreciation rates. For rent-to-own investors, this means the potential for higher returns.
The City of Barrie, Ont. comes to mind. Recent CMHC stats showed that the appreciation rate in Barrie grew by four per cent, to seven per cent, last year due to economic factors. But if you base the higher future sales price on a one-year increase, it can bring along a few unforeseen challenges as well.
Fast-forward three years. What if the bank appraises the property more conservatively than the price tag you set out in the rent-to-own deal? Imagine how devastated the rent-to-own family will be if they can’t get a mortgage because the future purchase price was too ambitious? After all, they have been paying you faithfully each month.
Plus, they have poured their heart and soul into taking care of the house over three years while you did the happy dance as you deposited their monthly cheques and enjoyed extra cash flow.
This happened to me once when I first started investing and it taught me an important lesson: when doing a rent-to-own investment, make sure your property appreciation values are based on proven trends, not on temporary flux.
So when setting an exit price that a rent-to-own tenant will pay at the end of the rent-to-own term I now look at how home prices have grown over the past three or four years.
It is key to figure out what rate of growth is consistent for the area, in order to set a realistic price that will help a family exit the rent-to-own as planned and to collect the forecasted ROI. No surprises.