Real Estate Blog
Dominican Republic Real Estate Blog
Here are tips and strategies for real estate investors in the rent to own homes arena.
The article discusses to to buy low, sell high, achieve a positive cash flow and use as little out of pocket cash as possible.
rent to own homes, lease purchase homes, rent to own real estate properties, for sale by owner
First and foremost, this article is for investors. As an investor, you should not (must not) have any emotional ties to any of your properties. You are in this business to make a fair and honest profit, and you will sell your home(s) when it makes sense to do so. Your goals should be to , generate a positive cash flow while you own the house and use as little of your own money as possible. OK, so now how should you go about buying a house for your rent to own inventory of homes?
Location: Stay in your comfort zone. If you are not familiar with the laws and regulations in other states, stay in your home state. If you must “touch and feel” (see) your properties, stay within a comfortable driving range. If you are not comfortable with certain types of neighborhoods, whether it be an urban blight area or upscale posh area, don’t go there. There are plenty of opportunities in your comfort zone. All you have to do is find them and BE PATIENT.
Buy low: The best way to do this is to find a motivated seller. Here are some obvious (and some not so obvious) ways to find that seller:
1. Search the listings in your preferred location(s) for properties that have been listed for more than 90 days.
2. Check public records for foreclosures and/or tax delinquencies.
3. Read the obituaries in your preferred location(s). There might be a house in the estate that must be sold.
4. Check public records for divorce filings. Many times a house must be sold to satisfy a Judgment.
5. Advertise in local newspapers and on the web (for example, place a free wanted ad on
6. Look for a high growth area where builders are extremely active. You will discover there will be people who are unable to sell their home because the builder incentives are capturing all the qualified buyers. These neighborhoods are usually very desirable, and there are motivated sellers unable to sell. That sounds like an opportunity, doesn’t it? Here is your advantage. The person that you will try to find to rent the house after you buy it probably is not a qualified buyer to the builder. Builders want bank qualified buyers. Typically, people who are seeking a rent to own opportunity do not qualify for a mortgage with a bank. All you have to do is have a good renter/buyer lined up to move in to that desirable neighborhood
7. Let your good renter/buyers find their own rent to own home. If you have a good prospective renter/buyer that is asking for your help (and you will if you do your job properly), give them the opportunity to find their own rent to own home. You have to set the ground rules, and they will think you walk on water. It is strongly suggested you develop a relationship with a good realtor who will follow your ground rules, take your renter/buyers on showings (most homes are listed anyway) and save you the time of doing this yourself.
Bottom line – If you find a motivated seller, you should be able to buy the property below appraised value.
Sell high: In this scenario, sell high refers to the option price you will set with your renter/buyer. Keep this in mind – If your renter/buyer was able to qualify for a mortgage today, he/she would probably not be your renter/buyer. He/she would simply buy a house without your help. Furthermore, the renter/buyer is probably a frustrated renter who wants to be a buyer. In other words, you have a motivated prospect, and that prospect should understand that you are a business person who is entitled to a FAIR profit in exchange for the risk you will take to help them. Bottom line – your prospect is probably not very price sensitive, and he/she will probably accept any fair number. In my opinion, a fair option price should be the current appraised value (not necessarily what you paid for the property) plus an amount equal to the average annual rate of increase compounded annually for each year of the option term. Allow me to explain by way of example:
First, try to keep all of your option terms to one year. It’s to the seller/landlord’s advantage. So, assume you own a house with an appraised value of $150,000 and prices have been increasing an average of 8%. For a one year contract, you should set your purchase price at $162,000 ($150,000 + 8% of $150,000 or $12,000); a two year contract, $175,000 ($162,000 x 1.08 = $174,960).
Positive cash flow: Cash flow is defined as the amount of money you receive per month minus the amount of money you spend per month. Obviously you want that to be a positive number.
1. First let’s look at how to minimize the amount of money you spend per month:
Your mortgage loan: You could put a large amount down to minimize your monthly payments, but that would not be wise. The best thing you can do is find a good lender who is willing to work with you. They are out there. A good lender will realize that you will bring in many deals, and most up front fees should be greatly reduced if not eliminated. Ideally you should be able to borrow up to 90% LTV amortized over 30 years without having to purchase mortgage insurance. You should avoid high interest fixed rate loans. You plan to sell the house in a short period of time so a 30 year variable rate loan with a fixed interest rate period of 3 or 5 years will be much better. In our example, we borrow $135,000 at 5% amortized over 30 years. That is approximately $725 per month (principle and interest) Furthermore we use an additional $300 per month for taxes and property insurance.
The lease: Your tenant is not just a lessor. Contractually he/she has the right to become the owner of the home. As such the tenant should develop a "pride of ownership" attitude and be responsible for most of the minor maintenance issues that arise with any home.
Ownership: Get a good real estate attorney and an accountant. They should be able to explain the advantages/disadvantages of personal versus LLC ownership including liability issues. This will help you determine the extent (and cost) of insurance you will want to have.
2. Now, let’s look at how to increase the amount of money you receive every month:
Here’s a little known fact – Over 90% of all people who enter into a rent to own agreement fail to exercise their option after one year! Do you remember I said to try to keep all of your contracts to one year? Besides maintaining better control of your investments, this little known fact can be hugely advantageous to you, the business person. Now, PLEASE keep this in mind; if you have a GOOD tenant who is unable to exercise his/her option, WORK WITH THEM. You should renegotiate a second year to your advantage, but not one that would force a good tenant to leave.
OK, here’s what you should consider (by way of example).
Using the above example, a reasonable contract might stipulate an option consideration of $8,000 (to be fully applied toward the down payment upon exercising the option) and a monthly rent of $1,100 per month of which $100 will be applied toward the down payment providing that monthly rent payment was made on time. After one year, assuming all rent payments were made on time, the tenant/buyer will have accumulated $9,200 in credits ($8,000 plus $100 per month). One can view the actual monthly rent as $1,000 assuming the option is exercised. If the tenant/buyer fails to exercise the option for any reason, That $9,200 is forfeited by terms of the contract.
To increase your cash flow, offer the tenant/buyer greater credits in exchange for a higher monthly rent. For example, in exchange for $1,300 per month, offer the tenant a $400 rent credit for every on-time payment received. Now, it can be viewed as a monthly net rent cost of $900, and the total equity built would be $12,800. If you present this properly, you can let the tenant negotiate for higher rent payments! You will have a much better cash flow, and there will still be a nice profit if the option is exercised provided you properly purchase the house. If the option is not exercised (90%+ odds it won’t be exercised), you keep all the rent monies paid. But, again, PLEASE keep this in mind; if you have a GOOD tenant who is unable to exercise his/her option, WORK WITH THEM. You should renegotiate a second year to your advantage, but not one that would force a good tenant to leave.
<B>Use as little of your own money as possible: With diligence and patience, you will be able to buy a home for less than appraised value. Rather than buying the house at the reduced amount, pay the appraised value and take the difference as an allowance for, say, remodeling. Take this money in the form of a bank check. Using the above example, assume you are able to negotiate a purchase price of $140,000 (this is possible, in fact, doable if you do your homework). Tell the seller you will pay $150,000, and they must give you a bank check for $10,000.
Now you will finance 90% of the purchase price of $150,000 which equals $135,000. You need a down payment of $15,000. Your actual out of pocket cost is $5,000 because of the $10,000 allowance.
Summary: We will assume the tenant/buyer takes advantage of getting additional rent credits, makes all rent payments on time and the option is exercised after the first year. Using the above example (which is based on a composite of actual deals) and not accounting for miscellaneous costs (for simplicity purposes), here is the deal:
1. Cash spent – $17,300 ($5,000 out of pocket down payment plus $1,025/month P.I.T.I.)
2. Cash received – $23,600 ($8,000 option consideration plus $1,300/month rent)
3. mortgage obligation: $135,000
4. Received from sale – $149,200 ($162,000 minus $8,000 option consideration minus $4,800 rent credits)
Profit from cash flow = $6,300 ($23,600 minus $17,300)
Profit from sale = $14,200 ($149,200 minus $135,000)
Total profit = $20,500
$20,500 profit divided by $5,000 out of pocket = 410% RETURN IN ONE YEAR!!!
If the tenant does not exercise the option, it can only get better.
Is It Time To Buy A House?
At some point as you’re writing out your rent check, you get to the point where you look at the amount and think to yourself – at this rate, I could BUY a house. If you’re fed up with paying rent every month that’s high enough to finance a mortgage, it may be time to take a serious look at what it would take for you to get a mortgage loan and buy a home of your own.
loan, home loan, mortgage, real estate, buy, home owner, home owner loan, secured loan, home improvement
At some point as you’re writing out your rent check, you get to the point where you look at the amount and think to yourself – at this rate, I could BUY a house. If you’re fed up with paying rent every month that’s high enough to finance a mortgage, it may be time to take a serious look at what it would take for you to get a mortgage loan and buy a home of your own. How do you know if it’s time to stop renting and time to start investing your monthly payment in a house of your own?. Are you planning to stay put in the area? The first question to ask yourself is how long you are planning to stay in your new home. If the answer is ‘less than two years’, then it may be to your advantage to continue renting for a while longer – and use the time to build up your credit more strongly. If, on the other hand, you’re planning to stay in one residence for more than a few years, buying makes more sense. Owning a home puts down roots, and makes you a more stable member of the community. It also makes more financial sense to buy if you’re going to hold onto the property for more than two years. Unless you ‘flip’ properties – buy cheap, make repairs and sell high – it’s nearly impossible to recover your investment if you own a house for less than two years. How’s your credit? If you’ve never checked your credit score or read your credit report, this is the time to do it. The higher your credit score, the easier it will be for you to qualify for a mortgage, and the better the terms of the mortgage for which you’ll qualify. If you find problems in your credit score, you can take steps to fix them before you apply for a mortgage. This includes erroneous information on your credit report or extenuating circumstances that may have led to a missed payment or two. In many cases, minor credit problems can be repaired with no more than a few months of on-time payments. How much house can you afford?Figuring out how much of a mortgage you can take on can seem almost like some sort of voodoo. You know how much you can afford to pay per month for a mortgage payment – but how does that translate into how much you can afford to pay for a house? The easiest way to work it out is to use an online mortgage calculator. Many web sites that offer credit and loan information have mortgage calculators available that will work in either direction – plug in the asking price of a house and your expected interest rate and the amount of your down payment, and the calculator will tell you an estimated monthly payment. Or plug in your income and expenses, the amount of the monthly payment you can make and the length of time you want to repay it – and the calculator will tell you the most expensive house you can comfortably buy.
Making Money in Real Estate
This single step can double your real estate investing income in the next 90 days.
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WARNING: This single step can double your real estate investing income in the next 90 days.
Decide on your target market
Determine what your target market will be. I know from experience that it is really easy to want to do EVERYTHING: Foreclosures, probate, absentee owners, abandoned properties, tax liens, lease options, and the list goes on and on! But, to be a successful real estate investor and to really make money in real estate, you’ve got to focus! Drill an inch wide and a mile deep!
Let me guess, you heard a inseminate on short sales and you wanted to dive in! Then, you buy the probate home study course you just found online!
I am guilty of this! I went to a 3 day real estate training several years ago. Every single strategy, technique or tactic that was taught was “it”! So, promptly upon leaving, I decided to try everything all at once… The thing about this is that we’re so often looking for the magic pill, and unfortunately, no such elixir exists in real estate.
Believe me. I understand your frustration when everything seems to contradict everything else. So, I’m going to clear things up for you! You don’t have to do everything in real estate. You have to do one or two things well. So, perhaps you work with foreclosures and within the probate system for your real estate investing focus. You become the expert in those areas.
You learn one market and how to negotiate, overcome objections, solve problems that come up and so forth. I systematized it and then move on to the next market and let the system run on autopilot.
So, first things first…
1. Pick your niche:
Foreclosures, probate, absentee owners, abandoned properties, farming neighborhoods, tax liens, code violations, etc.
2. Determine your method of communication:
Direct mail, driving for dollars, telemarketing or mass media advertising
3. Set your real estate marketing budget:
Figure out how much you are going to spend per campaign. A campaign is not a monthly budget. Keep in mind a real estate marketing campaign is not necessarily a monthly budget. You may spend $100 one month and $500 the next simply because of what marketing tactics you are using.
Implement your plan – and stick to it! You’ve got to commit to your real estate marketing or else you’ll be throwing money out the front door rather than really making money in real estate! Be patient and stay in for the long haul and the deals will come. Just remember that real estate marketing is an investment into your real estate business and constant investment results in a constant stream of income.
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