Is Rent-to-Own the Easiest and Most “Passive” Way to Scale Your Portfolio?

Tony :
This is Real Estate rookie episode 427. So rookies, I’m sure all of you listening, want to learn how to scale your real estate portfolio faster, and that’s what today’s episode is about. My name is Tony j Robinson and welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today’s guests are a husband and wife team that went from buying one rental a year, which in and of itself is a great achievement to buying get this five a year after switching their investment strategy. And it’s even more passive than traditional rentals and it’s called Rent to Own, and it generates more cashflow and creates the velocity for them to scale their portfolio so much faster. So today in this episode, we’re going to discuss how to set up a Rent-to-own agreement. We’re going to do a real deal breakdown of this actual strategy. We’re going to talk about how to find the ideal tenants and how you can use this to five x your portfolio. So Jen Joe, welcome to the Real Estate Rookie Podcast.

Jenn:
Thanks so much, Tony. We’re so excited to be here.

Joe :
Yeah, thank you so much.

Tony :
Yeah. Now guys, rent to own, right? It sounds like there’s all these different strategies. We just recorded a podcast not too long ago about sober living. Obviously there’s all the different creative finance strategies, but Rent to Own is something we haven’t really talked a lot about from the landlord’s perspective. So could you maybe define what the Rent to Own strategy is and how it’s helped both of you in your real estate investing journey?

Joe :
Well, I got to say it’s definitely changed our lives, but Rent to Own. The fun thing about it was our renters can move into their future home now and they could pay rent until they’re able to qualify for a mortgage down the road. And the neat thing about it is if there’s many times families are maybe the landlord’s selling the house and the fact that they could actually make it their own and they do the landscaping and they love the property, we really fell in love with that.

Tony :
So you talked about helping tenants reach their home ownership, and that’s obviously a big thing, but what are maybe some of the benefits from you or for you as the landlord as it relates to maybe rent to own versus a traditional landlord tenant relationship?

Joe :
Well, I’d say we call ’em the three big paydays with a rent to own. So when our renters move in, they give us a large non-refundable option deposit. So that’s the first when they move in. And they actually have some skin in the game now too, so they don’t act like typical renters because they’re planning on owning it down the road. We get the monthly rent, cash flow as well, just like a landlord would. But with our renters, they’re responsible for all the maintenance, the repairs, utilities, upkeep, and they love it because they love this opportunity.

Jenn:
And with that, I’ve got to say that was the key for me because he worked crazy hours at dealerships. So when we had a couple of rentals, he was getting calls all of the time. I mean we were getting the calls, but he had to figure it out. And so when we did rent to own, we stopped getting all of the repair calls and all the maintenance calls, but then also we kept the money too because we don’t have to fix that.

Joe :
And then the last one’s the big payday when they finally get to buy the house. And that’s really exciting. Yes, you help somebody turn from a renter to a homeowner, which is great, and you’re helping humans on a different level, which is really awesome. You get a big backend check too, which is fantastic because you could reinvest that into buying a few more properties. So if you lose one, you can pick up a couple more. And that’s the wonderful thing about Rent-to-own.

Tony :
There’s a lot to unpack here, but before we go too far, guys, maybe just define for me what exactly is Rent-to-own? You talked about the benefits, but what does it mean to do Rent-to-own as a strategy?

Joe :
Well, we kind of did it out of necessity. And the reason why was because we had some rentals. We were doing the birth thing and Jen walked away from teaching because she used to be a teacher. I had a job at a car dealership and we married, had young kids at home and every single time we were getting a maintenance call or things like that, it really was just trying to hire it all out. And so many times, and these were beautiful homes and beautiful neighborhoods, but when you have renters and things like that, it happens. So once we stumbled upon this strategy of we can rent the house to somebody, we give them the option to buy it down the road, we come up with some really great agreements that lay out everything. So you didn’t know this or not that. It’s very clear spelled out. And what you’re trying to do is you’re trying to set up people for success. And that’s the goal. And by just really implementing the strategy that we’ve learned and doing it, we’ve learned a lot and we learned a lot of things that really are helpful. And then we’ve also seen some things where, geez, I could see why maybe it didn’t work out well for some other folks trying to attempt this and maybe if they did this, this could help. So renting until they’re able to buy, and that’s really the fun thing about it.

Tony :
So just to make sure that I’m tracking here, and I love what I’m hearing so far guys. So basically you’re taking a property, renting it to a tenant in the same way that any landlord would. The only caveat here, the difference is that they have the option to eventually at some point execute a purchase agreement to become the rightful owner of that property. And then you get paid a couple times along the way is what it sounds like. So it’s a win-win for both of you guys. Now, I think what might be beneficial is if maybe we can break down an actual example, right? Because I would assume that maybe not everyone actually executes and some people maybe just leave the property at the end of that option. Yeah, I mean, do you have maybe an example where someone actually executed that agreement and became an owner of one of your rentals?

Jenn:
We have the paperwork in our dining room right now where it’s happening, so that’s actually really exciting. So I dunno if you want to talk about that one.

Joe :
Yeah, so this was a great story we had, this was one of our first rent to own properties that we did in 2018. She was a school bus driver. He was a truck driver always on the road. They needed some time to qualify for mortgage, they had great family kids, they wanted to move into a great school district.

Jenn:
School district was really key for them.

Joe :
And so we had a great house, we had it as a rental prior and we really weren’t making that much money off the rent because anytime this happened or that happened, you had to pay for maintenance and management. And then once we help these people get into the property rent to own, they moved in, they gave us a large non-refundable option deposit. They’ve been paying rent for the last six years plus, and now they’re at the point where they’ve now finally qualified for a mortgage. They fixed all of the things and tomorrow they’re actually going to be a homeowner, which is really exciting for everybody too.

Tony :
Love hearing that. So you took someone who wasn’t in a position for homeownership and gave them the runway that they needed to eventually make that a reality. Now what about the flip side? I mean I assume you have some people who sign up, pay the deposit and then maybe for whatever reason don’t actually end up purchasing the home. Do you have an example of that maybe?

Jenn:
Yeah, we have a few. We were driving down here to Florida and I received a text one day, so this was March of 2022, and this person texted me and said, Hey, we just got a really great job opportunity in Arizona and this property they were currently living in was New York. And really no questions asked or anything. He was just letting us know. And he had given us a large non-refundable option. And so it’s just things happen, they know what they’re signing, but also if they get this great job opportunity and they have to transfer, the title of the house is still in our name, so there’s no worries about that on that end of things. And he was able to just effortlessly pick his family up and move.

Joe :
And he felt bad about it too. He is like, I feel so horrible. I wanted to own it. He’s like, you guys have been wonderful the whole time. You guys are awesome. He’s like, I feel bad. And because we set ’em up for success in the beginning, but we let him know, Hey, we’re holding this price, we’re holding this house and we want to sell it and we’d love to sell it to you because also when our renter buys it, there’s no 6% commission. They hold it more than a year. So there’s HAPS with taxes and things like that too. So our renters really, he felt bad about it. I think we even gave them a little bit of money to help with the move out

Jenn:
Too. We did. They were really great people too. So that’s a beautiful thing about owning your own business. You get to run it the way you want. And when you do right by people, it always comes back to you

Tony :
Guys. My shiny object syndrome is already kind of going off right now here. And the little that you’ve shared so far, I definitely want to dive into how much cashflow you’re actually able to generate, how you’re finding and screening these tenants and how you’re putting together this agreement in the first place. But first we’re going to take a quick break to hear a word from today’s show sponsors. Alright guys, so we are back with Jen and Joe and like I said, they’re already kind of blowing my mind a little bit with the little, they shared this strategy called Rent to Own. So Joe, maybe let’s start with you on this one. Maybe let the rookie audience in on how the rent to own strategy generates more cashflow that eventually allows you to scale your portfolio.

Joe :
The big three pay days we just mentioned a second ago, the first one is that large non-refundable option deposit. Now many times we collect 10, 20, $30,000 or more when our renter moves into our single family home. So the way you’re going to be taxed on that right away because non-refundable, which also means you could use it, you could reinvest that back in your business rather that’s marketing rather that’s down payment for another property that you’re buying. It’s your cash. And when we had some rentals and we converted them all over to rent to own that one summer was a very crazy summer years and years and years ago, but we raised so much capital from just the non-refundable option deposits that we could reinvest that back into our business to help us scale and grow. That helped us buy many more properties because we had that money. So that was the first thing we fell in love with.

Tony :
And I just got to ask something there because that by itself is just like, wow, not even for the guarantee of being able to purchase, but just for the option to purchase. People are putting down 10, 20, $30,000. Now you mentioned that it’s it’s taxable income and not to get too far in the weeds, but I do think it’s an important distinction to make from a tax perspective. The IRS treats active income like flipping or wholesaling different than income from a long-term rental property. So you know, is this non-refundable deposit, is it treated as active income as if you were flipping or since it’s coming from a rental property, is it still passive income from your real estate business? I

Joe :
Believe, I’m not mistaken. Does she count it for active?

Jenn:
I’d have to double check with the accountant, but she count it as a commission. So however that would get, yeah,

Tony :
Gotcha. Okay, interesting. And that’s what I thought because it is not necessarily coming from them renting the property, so I figured there’d be a slightly different tax treatment, but the fact you’re reinvesting it makes a ton of sense guys. And I guess the last question on that piece, how are you determining what amount to charge? Is it a percentage of the purchase price? Is it just like based on how you feel that day? How are you landing on that number?

Jenn:
Well, that’s the secret sauce. You simply ask what is the most you have to put down on your beautiful new home?

Tony :
No way.

Jenn:
Yeah, I mean because from there, if you tell them I need 10,000, that’s all you’re going to get. But if you just ask them the most, we’ve been given 30, $40,000 down. And you got to remember too, our goal is to help people become homeowners and the more they have to put down, that’s just going to help them in the long run to qualify for that mortgage. So we’re not in it to put someone in and kick ’em out and put someone else in. That’s just not our gig here. We really truly want someone that’s going to stay for a while, get their credit cleaned up, take care of the home, and let’s get you qualified when you’re ready.

Tony :
So that’s the first big chunk of cash is the non-refundable deposit upfront keyword, which is pretty crazy. But then you also mentioned obviously you get the cashflow during the life of the lease itself, but then there’s also the option component,

Joe :
But you get more cashflow per month too.

Tony :
Oh, so educate me please.

Joe :
Because now I don’t hire management, right? They’re just going to send money electronically if the toilet plugs, they don’t call us, they call a plumber and they know this and they prefer it because they want to be treated like homeowners. And if you finance a house with Bank of America or Chase the people from Chase, don’t knock on your door, be like, Hey, how’s that toilet going? So you make sure that they want this too. It’s got to be a great fit for us and them. And so you don’t have to worry about management CapEx because you got a big chunk when they moved in. So you’re actually going to capture that cashflow. And that’s why we cashflow better on those deals for sure.

Jenn:
Well, and then I was going to say there’s also a little cherry on top if you want to really see what you can get. You ask them is there anything over the rent that they can pay and that would then add to their non-refundable option deposit. And we’ve had people pay what, a thousand dollars over, so I don’t know any other rental that you can get an extra thousand dollars of cash flow straight up cash flow by just asking a couple of questions. But again, they’re going to accumulate that money to go towards that, that will be executed when they purchase the property.

Tony :
Again, my gears are spending here. So two follow up questions to that. So I want to ask about the extra thousand bucks, but first on the maintenance side, are the tenants responsible not only for contacting and coordinating, but also paying the vendors? Or is that something that falls back to you as the owners?

Jenn:
So we do have in our paperwork, which is the most important part of all of this, it does say for the first 30 days when you move in, we’ll take care of anything. So if they just move in and the hot water tank goes, that’s on us. But after those 30 days, they’re responsible for taking care of all of the things and paying for all of the things. So when we say it’s cashflow, we really mean that.

Tony :
Wow. So is there a line between maintenance and CapEx, say the roof needs to be replaced during the life of their lease and it’s after it’s on day 31 or day 365, is that the tenant responsibility or do you as the owners take that responsibility?

Joe :
If it has a roof issue going into it, they’re going to know that and they’re going to most likely getting at a big discount in order if they’re going to replace the roof because sometimes that might happen. However, when with our properties, I’m not trying to brag, but they’re all in really good shape and they don’t really need anything. I mean however the unexpected things could happen, but sometimes we find something where it’s a rent to own, but it’s kind of like a handyman special where they could do some of the work themselves and save and get a really big discount on the price, which is one of our favorite ways to do it. So with that roof, I want to deliver you the house turnkey. And then Tony’s in a beautiful home, beautiful neighborhood, you move in, life is good, right? Pay rent on time and everything works out really well.

Jenn:
I can’t think of any roof we replaced with a tenant buyer or anything. No, but

Joe :
I mean there’s a time where a hot water tank went and we didn’t even know about it. They’re like, oh, I replaced that hot water heater. It went, we didn’t know.

Tony :
And so what I’m hearing you guys say is that there’s really no maintenance cost for you within this model because your tenants are caring for the majority of what pops up.

Jenn:
If anything, they’ll reach out and ask, do you have a good request? So a trustworthy contact just in the business. And so we do have people that we can send over, but other than that, I really don’t hear from them unless they’re like, Hey, I’m ready to buy.

Tony :
And then the other piece that you mentioned, Jen, was the additional amount on top of their lease amount. And you’re saying that gets added to their non-refundable deposits. So that one when they eventually, if they do execute that purchase agreement, that a thousand dollars gets added and then decrements it from the final purchase price. Am I understanding that correctly?

Joe :
Yeah, that’s exactly what happens. So if we have a renter who pays 2000 a month in rent, and that’s just rent, we have some renters who they want to pay extra every month, they want to see it get added to that non-refundable option deposit. So we’ve had some do two or $300 a month. We’ve had some do a thousand a month. So in a bunch of our properties, nobody’s in those neighborhoods are cash flowing like we do because of the fact of having that extra option in there. And some do, a lot of ’em do actually, and they like that because they could see their account kind of grow over time. And that’s kind of exciting because once again, you’ve known, but when finally they do qualify for a mortgage, they’re going to need all the closing costs, three and a half percent down, 5% down plus attorney fees, recording fees, insurance taxes.
So they’re going to need some capital to close. And what I want to happen is at the end or whenever it is, they’re ready. I don’t want there to be a shortage of money because if they fixed their credit or did all the things, but yeah, they’re still way far away from actually having the right capital. That’s obviously not going to help anybody. So that’s the most important thing is they’re actually having that capital that whenever they do fix what’s broken, they have the money, it’s already ready to go. And that’s the last thing we have to do is just sign some paperwork and it’s that easy.

Tony :
Let’s actually go into the paperwork piece. I think that’s an important part of it as well. I guess how do you come up with the different terms and pricings that you’re putting into your lease option?

Joe :
So there’s two things. We have a lease agreement and we have a great one because our lease agreement covers they’re responsible for maintenance and repairs and they know that too. And then there’s called the option agreement. The option agreement just says they’re able to buy it at that price and it’s locked in for that long. So that’s the paperwork just of it. And you really want to make sure that you’ve got bulletproof documents because obviously you want to make sure you’re crossing all of your T’s and dotting all of your i’s. And that’s part of the key to success, and I’m a big person on making sure you have the right documents so your renter knows what they’re getting into and it’s crystal clear to them. And that’s why we have this special process where we do when it comes time to signing the paperwork.

Tony :
So are you guys going to maybe chat GPT or your favorite AI tool to generate these agreements for you? Or what’s the recommended route to get the lease agreement and the option agreement created

Jenn:
An attorney? We definitely, I mean you want an attorney approval, even if you’re not an attorney state, we’ll still have the paperwork drawn up and then we’ll have our tenant buyers go and sit with an attorney and read it line by line, make sure they totally understand both agreements, what they’re stating, what they’re signing, and they even pay for that attorney fee. So it’s basically the first closing table of the whole process. And then the goal is then to get to that second, that last closing table when they actually purchase the home and everything goes into their name officially.

Tony :
Wow. Tenant, buyer. I’ve never heard that phrase before. That’s the first time I’m hearing this, but I like the way that sounds. So I guess a few follow-up questions then. So within, and I don’t know if this goes into maybe just the option agreement or both, but how do you specify the purchase price or not specify? I guess, how do you determine the purchase price and how much time are you giving them to execute that option?

Jenn:
It’s a great question.

Joe :
Oh, this is our lifelong

Jenn:
Thing. We’ve had a few discussions over this, but I now understand it.

Joe :
So we have a theory of, we look at what areas are appreciating. We started this in upstate New York and Rochester, New York where we’re from, but now we’ve done it in multiple states. So every market’s always a little bit different, but you want to find what the flow of the market has been and if you’ve been appreciating at 5% or whatever it is for the last few years, I’m going to mark it up accordingly. Two things you got to remember, you can’t go too high because eventually the house is going to have to appraise, so you got to use reason, but however, you don’t want to go too low because the market really took off because every single time I would have a conversation with Jen and I’d be like, I think we’re going to price the house at that. And she’d like, that’s too high.
And I’m like, I don’t know, I think it’s good. And then we were both wrong and it was probably still too low. So what I always say is you can go down but you can’t go back up. So to answer your question though, we have a screening process. We have a company that we’ve been using for a bunch of years and they seem to do a great job of screening our tenants. And then after they screen it, they give us back a report that says, Hey Tony, these folks are going to be mortgage ready in 12 to 18 months, or they might be mortgage ready in six to 12 months or 18 to 24 months. So they give us a snapshot, will they actually qualify for the mortgage once they do fix if it’s credit or maybe and they mow lawns and they need to mow five more lawns every single month or week in order to have enough income to qualify. So it gives them some time to do that. And I think that’s a neat thing is just having that process in place that we usually lock it in for about two years and then after two years we don’t kick ’em out, they don’t buy, we just renew the terms at whatever market rates are and then we usually do about and we renew it after that.

Tony :
Gotcha. Super smart. So you’re only locking yourself into that purchase price for 24 months, so there’s not a massively large window for price fluctuations I guess, unless you did one maybe at the end of 2020, right? Because by the end of 2022 is probably incredibly different depending on what market you’re in. But I guess are you putting any caveats in there to account for maybe big swings as an example? There are some businesses who give lines of credit and they’ll say, Hey, the rate is variable and it’s based on the overnight interest rate plus X percentage. Do you do something like that where it’s like, Hey, it’s the median home price plus x, or are you really just kind of saying like, Hey, we’re going to hope that our numbers are close enough to be within reason within 24 months? Yeah,

Joe :
We really want to do our research and figure out if I believe that the house is worth 200 now and maybe in two years it’s worth 2 39 9 or 2 49 and we could price it accordingly. And it depends on what’s happening in the area. Maybe it’s not quite that high. Sometimes it is, but

Jenn:
The one we’re just doing, what did you set it at? I mean, years ago we had it at way lower and then we were able to titis? No, the California Drive one.

Joe :
Oh yeah, the one that they’re buying it out right now. When they first moved in 2018, we set that price for 95,000. Well obviously since 2018 the prices have changed quite a bit, so it’s gone up considerably since then. And after the first two years they didn’t buy, COVID happened just like the rest of the world, but these folks had some skin in the game, so they really wanted make sure they were always paying on time. And then after that we’ve had some price changes and they’re still getting a deal on it, which is fantastic, but obviously the price has increased significantly and they’re still thrilled because their payments really not changing from what they’re paying for rent now they own it and everybody makes out on that deal.

Tony :
Guys, so much good information. I want to recap quickly for our listeners. I feel like we’re covering a lot. I just want to make sure that the people are keeping up with this year. So first you get the big payment upfront with this non-refundable security deposit. Then during the actual life of the lease, you have reduced expenses because they’re taking care of the majority of the maintenance costs. You have the potential to get an even higher rent payment because they’re making payments in addition to their rent payment to go along with that non-refundable deposit. And then when they execute, if they execute that payment, you get a big payday at the end as well. And what I’m hearing you guys say is that there’s two documents to support this process. There’s the actual lease agreement that they sign, but then in addition to that, there’s an option agreement. Am I tracking Well so far all that. Okay.

Jenn:
Bam, you got it.

Tony :
Yeah, so cool guys. Well I’m glad I’m tracking. Well, I guess one follow up question to that is what happens if say you get to the end of those 24 months, they do not make the decision to exercise that option so they’re not quite yet ready to purchase and they just want to stay in the property. What does that process actually look like from a paperwork logistics standpoint and reworking the lease option and the actual lease itself?

Joe :
Easy peasy love and squeezy,

Jenn:
It’s so much easier than you probably think. Yeah,

Joe :
So we really just look at what the current market is, what the current rent market is, and we do a new lease with a new option agreement. We don’t charge them any more money. We’ve already collected that. So just the option agreement just renews what their price is. So if there was a price increase that’s stated on the option agreement, if there’s a rent increase that’s stated on the rental agreement, we send that ray through DocuSign and they sign up for it and just say, Hey, your term’s coming up, I’m going to send you out the new agreement to update it with the newest terms. If you’ve got any questions, please let me know. We send it over, I get the notification, DocuSign and signed and then we file it.

Tony :
Interesting. Let me ask one follow-up question to that thing guys, because say that someone just maybe continues to extend two years and they get to four years and they get to six years. Do you have some sort of mechanism for keeping track of both the initial deposit and then if they’ve added any above and beyond that? So say you get to the end of six years, they initially gave you 30 K, they were paying maybe an extra $200 per month on that first lease, maybe an extra one 50, the second lease. Do you have some way to keep track so at the end you can shore all of that up?

Jenn:
Yeah, it’s not really fancy honestly. I just track in an Excel sheet. I do keep a digital doc of the photo of the check when they exchanged at the attorney’s office of that large amount that they put on the option deposit. But yeah, you just want to have really organized notes and just every month that they’ve been paying and really let them pay. You don’t really want to have a lot of turnover, especially as a landlord and if they’re great paying tenants, we don’t want to crazy hike up the rates or anything for the rentals. We just want to keep them happy, keep them renting, and when they’re ready to buy, they buy. So just depends too, since we buy with creative, if we have a 30 year term with a seller that we get all the time almost, we let them kind of set it and forget it and let them keep on renting.

Tony :
So guys, you have a ton of experience with this strategy, the rent to own. And I want to know again what is, because this is what’s swirling out in my head right now is what percentage of your tenants are renewing versus leaving versus actually exercising that option. So I want to get into that, but first want to take another break to hear a quick word from today’s show sponsors. Alright guys, so you dropped some amazing knowledge so far in this episode and I want to get into a question that’s kind of been shouting from the back of my head right now because I think this really plays into the calculus of how well the strategy works. But Jen Jo, how many of your tenants renew versus exercising versus just leaving the property altogether, just like ballpark?

Joe :
So you’ve got a great question there. There’s a few things to unpack. Everybody who doesn’t buy in the timeframe, I would say it’s probably 80, 90% renew. It’s a very high, they don’t want to leave if they didn’t qualify yet and they’ve got some skin in the game and they love the place and they’ve made it home, they don’t want to leave unless something happened. Now we understand life in humans. Things do happen sometimes I would say out of the time where it’s coming down to the finish line actually buying it’s more than half, it’s more than half, but we have so many that are still in there still renting that number might be way higher. We don’t know yet. Because here’s the thing, like what Jen said earlier, we love the concept of set it and forget it. And when they give you some money to move in and they’re not calling you for all the stuff and you’re paying rent every single month and they’re taking great care of the property in the neighborhood, guys, I don’t want them effort to leave.
Why? Because we own real estate. I’m writing off depreciation. I’m benefit from appreciation. I’ve got all the wonderful things of why I want to own real estate and that’s why we love this method is because we still own it. We still own the property. And then once in a while, we just had a couple recently, one another guy, he felt terrible, he found love on the other side of town, I call it because he was in the property four years ago. He says, Joe, Jen, I’m going to buy this property in one year. And I said, Hey, take your time. Four years later he reaches out and says, I met this girl. We’re getting serious. I moved in with her. We’re really getting to the next level. He’s like, I’m not even staying at the house anymore. He’s like, so I feel horrible. I’m going to give you the house back.
And we had another family who their landlord was selling the property that they were renting and they didn’t want to leave the school district because this was a great school district. And so they were looking for something close by and here’s this gorgeous house, really nice neighborhood and it’s available rent to own. These people lost their mine. They were like, I want it. And it was a great thing for them too. And their kids get to pick out their rooms now and make it home because we want them to stay there for as long as they need.

Tony :
I think maybe one challenge that a rookie might have as they’re listening to this is that, well, it feels like we’re playing almost like a game of musical chairs because you’re bringing some properties in, you’re letting some properties go, you’re bringing some properties in, you’re letting some properties go. I guess what would be your response to someone saying, well, I don’t want to let the property go, or how is your portfolio growing if you keep selling the properties? What’s the counter to that?

Jenn:
Yeah, and that’s the objection we hear a lot is I don’t want to lose a door and I get it, but instead of musical chairs, I’d like you to kind of think about it like a Ferris wheel. And Joe is really the one that came up with that analogy to help me understand. Because at first I was like, what are we doing this whole rent to own thing? You get your rent to own buyer, your tenant buyer on, and they ride around, some ride around a year, some ride around for seven, eight years or more, and then eventually they might get off and then someone else will get on. But you’ll probably actually have three or four get on because now if I’m getting a really nice $150,000 backend check, how many more doors can that go and buy me or what else can I now invest in?
It’s kind of a bigger picture. Maybe you will lose that one house. And I know there’s one in particular when we say goodbye to it, we might shut a tear, but at the same time it’s like you got to grow and realize there’s more bigger, better opportunities and you’re making somebody a homeowner. And I really think that when we walked people through that process the very first time, it hit me like a ton of bricks. I was like, holy cow, we really are making a huge difference in these people’s lives. And that really just, I dunno, it’s a feeling I have trouble explaining it.

Joe :
Well, not only that too, Tony, now this is something a little bit more advanced, so I will make sure I do that easy. But if you get that big backend check, you could put that into a 10 31 exchange. So we buy with creative finance, we’ve been doing that for a long time. So I love buying properties with very little to no cash down, not using a bank, not using credit. So if I have that a hundred thousand, $150,000 backend check and tell me, he says, well Joe, I’ll sell you my house on terms, but I need 20 grand down. Well, I’ve got money burning a hole in my pocket, so therefore if I do lose one door, I could put that into a 10 31 exchange which goes in tax-free. I could have some properties already kind of lined up that I want to buy, and then I could turn that into three or four more properties. And here’s the neat thing, if I lose one door, I’m able to pick up three or four more and I bought these, now what am I doing with them? That’s right. I’m doing rent to own. So everyone who moved in, I’m also going to collect a non-refundable option deposit. So I’m just raising more capital, which now what am I going to do? Redeploy it to buying more doors. So if we lose one, the goal is to pick up four or 5, 6, 7 others reinvest it.

Tony :
That is incredible, right? Because what you said is like, Hey, and you’re almost getting reimbursed for the capital that you’re putting into these properties as soon as you get ’em rented out to someone else. So you’re able to really rebuild that cashflow back up and like you said, the disposition of one house lease to the acquisition of potentially two or three or however many more you can pick up.

Joe :
So we found this neat strategy with using buying it on terms the way we do. And then we’ve actually, with this rent to own strategy, we found a way to get paid to buy houses without using credit because we have one property, it’s in Rochester High-end neighborhood. The guy was running it as an Airbnb, really big house like swanky neighborhood, and it was almost 5,000 square feet. So he says, when I rent it out, it’s a big thing to clean, so I want to sell it. We did it with what’s called a wrap seller financing, but he had a mortgage on it, we bought it with a hundred dollars down, we paid 5,000 in closing. I even shared the statement on our channel and we put in just smoke alarms. The house is gorgeous, really nice. We even considered moving into it, but Jen said it’s too cold in New York, hence we ended up moving to Florida.
But great move. But either way, what we did was we had total out of pocket between the insurance policy and a few other things, probably about 10 grand, 12 grand. Our renters moved in and gave us 27,000 to move into that property. So what did we do? We’re up $12,000 and some change, almost 15,000 where collecting that property was I think 1100 a month in cashflow because they had a 2 7 5 rate. So we were cashflowing about that, and then our renters bought it last summer and we ended up on that one deal making over six figures with a hundred dollars investment just by this rent to owner. We got paid to buy that house and it was a cash cow. So beautiful house, beautiful neighborhood, and it works on that stuff too. So we love this strategy of rent own. It’s literally changed our lives.

Tony :
You just build a lot of minds right now, guys. The combination of the acquisition with the disposition is one that I don’t think I’ve ever seen before and it’s such an insightful and honestly simple way to really scale a portfolio quickly with a reasonably small amount of money out of pocket. So I think you’re exciting a lot of people right now, guys. That’s cool. But let’s talk a little bit about maybe the buy box, right? Because you talked about, hey, we’re in a few, how many states are you guys in right now?

Joe :
We haven’t done a deal in all 50 states, but we’ve done quite a bit of them. I think we have whole properties in four of them right now.

Tony :
Okay, gotcha. Okay, so you guys are a little bit all over the place, right? So I guess what is the buy box, I guess, does this work on any single family property or is there a specific box that you’re looking for to know that this strategy will actually work?

Jenn:
It works everywhere and on anything. I think we kind of have our sweet spot as far as the type of property. It just seems to be the kind of starter home is one of my favorites where it’s in a good school district and everything’s turnkey, ready to go. So in upstate New York that’s around the 150, $200,000 range, but the one we were just talking about was a little bit more. Florida market’s quite different. So obviously starter homes down here are a bit more, but it works out on all of

Joe :
’em. Yeah, and the one thing I think you touched on too, it’s like we love great school districts. A lot of times what we’ve found is you find that family a lot of times who they want to get into that great school district. They want to get their kids into a great school, but maybe they just don’t qualify for a mortgage quite yet. And that seems to be our favorite. However, we’ve done high in homes too, different animal. So I would say what is my favorite? I love that single family home that is anywhere between 1200 square feet to 2000 ish, and it’s usually that first home that’s for a family in a great school district anywhere across the us. It works in high-end stuff. It works in the tougher neighborhoods too, because everybody’s looking for an opportunity.

Tony :
Yeah, that is so amazing, guys. So I guess what’s your rookies look out for when maybe venturing off into the Rent-to-own strategy for the first time?

Jenn:
Well, the first thing, look at your own portfolio. Do you have a single family home where you’re just kind of tired of getting the calls on and you’re like, gee, if I could just find someone to move in, give me some money, even if it needs a little bit of work, turn into handyman special, maybe get $8,000 nonrefundable option, but then set it and forget it. Or maybe someone who’s gotten into the Airbnb world and they’re realizing how much of hospitality and very, if you don’t have systems in place, it’s a lot of work to run those and to furnish them and to keep up with it. So I’m definitely having some success talking to Airbnb owners who are just like, Hey, I’m ready to walk away, take over my payment monthly, buy it with creative, and then you put in a rent to own buyer. I mean, gosh, now you almost can even offer it furnish, get even more for it. So there’s lots of opportunities out there and it is just a beautiful way to set yourself up and tenant buyers for success.

Tony :
I guess. Are there any potential downsides with this strategy that a rookie should look out for?

Joe :
Yeah, the big one I would think is not collecting enough money upfront. So where I’ve seen Renton go bad and I’ve seen other people online and you put anything on the internet and they’re like, it’s whatever. The big thing is not collecting enough money down. So if somebody moves into my house and they only give me $3,000 to move in and they’re paying rent every month and they do all of the right things, I got my credit fixed, I got more time on my job, I mowed the more lawn like I talked about, I’m ready to go. They get in front of the bank loan officer and the loan officer says, green light, you need $15,000 to close. And they’re looking back at their $3,000 that they gave you, where are they going to get the extra 12,000 from? So you almost set ’em up for failure by not collecting enough money upfront.
So for me, we’re from upstate New York where also in New York, their landlord laws could be a little bit more tough, especially during Covid. If you didn’t pay, they let you stay. And so our renters performed and behaved being behaved because they love the house, so they always want to pay. And some got a little bit like I lost my job, but they’re doing things to make sure they pay on time. So I think that’s really the key is collecting enough money upfront, making sure that they want to be the homeowner eventually, because so many people reach out and say, I just want to rent it. Well, that doesn’t work for us. So if you have enough money and if your credit is banged up, I’m okay with that. We have one, she’s moving in this weekend actually in one of our other properties, and she got a divorce recently.
She got a great job, lived in a great neighborhood, she’s getting divorced and I don’t know who did what, but her credit got tanked because of the divorce. She blames whomever, but whatever. Either way, she’s able to move into a beautiful house, beautiful neighborhood with her kids and she absolutely loves it. So her credit right now is banged up and we know it’s going to take her time to qualify for a mortgage, but she’s happy because she’s giving us a big chunk down. She’s prepaying for six months worth of rent and she couldn’t be happier to call this place at their home. So having that big chunk upfront gives you some skin in the game, it gives them the best opportunity to eventually buy. And I think that’s the biggest thing.

Jenn:
Then I would say paperwork and then making sure you properly screen your person. You got to put the right person in the right house. So screen the tenant.com is who we use, absolutely love them. They really help out with all of that backend, they do all the repair or the tenant screening, paperwork, all of that.

Tony :
Now, you mentioned the screening piece, but I guess one thing we didn’t touch on is where are you going or how are you actually advertising to find potential tenants? Are you just going on Zillow and you’re marketing this as rent to own? Or are there specific places you found online that are best to market rent-to-own opportunities?

Jenn:
Yeah, so I will say you will rent it or you’ll advertise it like any other rental. So you’ll want to put it out there. Facebook marketplace, Zillow, this is a mistake I see. You don’t want to put it on Zillow as a for sale by owner because you’re going to attract the wrong person that’s attracting a homeowner. We want renters who want to become homeowners. So you put it on as a rental, but then everywhere on your photos or in the description, you’ll say, this is for rent to own. And then in your screening process, you’re going to clarify you’re interested in rent to own, right? And then from there, Facebook groups, oops, we have used signs in the past. I know there’s mixed feelings on signs, but sometimes the signs work. You can hold an open house, have people come and what else am I forgetting?

Joe :
I don’t know. But all the ones that you’ve already talked about be warning because we’ve done this before. Every time we put up a property in all of those places that Jen just said, you’re going to have more people reaching out to you that it’s overwhelming. It’s like you’re giving away free hundred dollars bills. How many people will start messaging you and be like, is this available and calling? So just be understanding that you’re going to get a lot of calls. Not everybody has money, that’s fine. But here is a statistic I didn’t realize was 18% of the population can qualify for a mortgage. So that means our audience is the 82% of the country. Now, don’t get me wrong, not everybody A wants to own a home, B, they don’t always have the money, but there’s still a lot of folks out there who do have money, who do want to own a home, but just don’t qualify. And they could be self-employed with great credit or other things like we talked about. So our audience is huge. So when you put it out there, you’re going to get a lot of calls and I’m going to drop a little golden nugget right now. Yeah,

Tony :
Please.

Joe :
The way to get the most amount of calls, your renters aren’t really concerned about the pricing of the property. They’re really concerned about the monthly payment. So just like anything else where payment buyers, I could sell you a $2 million house if your payment was a thousand bucks a month and you’d be like, sign me up. It’s the payment. So long as you’re going to keep the payment in a good, safe range of what the area rents for and you don’t go crazy with it, you’re going to get a lot of calls,

Tony :
Guys, so much good information. And I truly believe that you have the ear of every person who’s on the other side of this podcast right now and probably thinking about how to leverage this strategy. So just to kind of put it all together for our rookie audience. So first we talked about what the rent own strategy was. And again, it’s a win-win situation. It’s a win for you as a landlord because you’re generating more cashflow than a traditional rental. And it’s a big win for the tenant because they’re being put in a position to become a homeowner that maybe otherwise wouldn’t be there for them. And just a quick sidebar for myself, I really do believe we’re all seeing the headlines of how there’s an affordability crisis in America right now. And I think the real estate investors who can solve that crisis are the ones who are probably going to make the most in the long run. Because if you can offer more affordable housing options, like you said, it’s a feeding frenzy of folks who want that opportunity. So it’s a win-win situation there. And you guys broke down what actually goes into the agreement, how to protect yourself, how to make sure the tenant understands what’s going on, and how do you actually put that tenant in place and eventually cash a check guy. So Jen, Joe, I guess any final words of advice for Ricky’s who want to venture off into the world of Rent to own?

Jenn:
I would say if it’s something that is interested, interesting you and something that you feel like you could really help people out, you have the time to put in to learn about it properly and take some education pieces and plug them in the right place and know that it’s not something you can just do overnight. It’s going to take a little bit of time to truly implement it. It’s just like anything that becomes successful, you’ve got to make sure, like Joe said, you have all of the small details in place because you are helping people become homeowners, which is a huge feat in and of itself. So you always want to do everything really correctly. So I would say just make sure you do your due diligence and that you are surrounding yourself with the right help to get there.

Joe :
Well, and I think you’re spot on. And the one thing I was going to piggyback off that is do you have that one rental or some rentals and you’re really not making that much money by the time you add in all of the factors and you’re like, okay, because what happened to us in the very, very beginning, we had some rentals, it looked great on paper, but we really weren’t making any cashflow. And this is where I realized if your business isn’t healthy with cash and you’re generating cash and making money while you’re sleeping, you got to look into do that. Because if something does happen, you’re going to want some reserves for that. So bigger margins when they move in, not just a first month’s rent and security deposit anymore, now I’m getting 20, 30 grand more cashflow every single month without the phone calls. And then once in a while, you do have that big backend check. And I think with learning that strategy, I always have this one saying, if it don’t make dollars, it don’t make sense. And so you’ve got to make some money, and that’s the whole point of it. And if you could make a bunch of money and to help a bunch of people at the same time, that perfectly aligns with what we love to do. So go out and help people, and if you could help ’em own a home eventually, that’s really cool.

Tony :
Jen Jo, so much good information coming out of this episode, and I appreciate both of you for breaking this down in a way that our rookie audience can not only understand, but get excited about because there is a stretch there when I could literally feel people jumping out of their seats with excitement. So Ricky’s, if you guys want to learn more about Jen and Joe, they were actually guests on the Real Estate Podcast, episode 7 9 4. So 794, you guys can go back and listen to that episode to give more of their backstory. What they gave us today was a masterclass on what the Redown strategy is. So guys, appreciate you both coming on today. If you enjoy today’s show, please hit the follow button on your favorite podcast player, whether it’s Apple, Spotify, for listening on YouTube, subscribe and follow because that does support us in both reaching new listeners, but also hopefully getting more amazing guests like Jen and Joe. So Jen and Joe, thank you both for hopping on today. I appreciate you both so much for taking the time. Thank

Joe :
You. Thank you so much for having us.

Tony :
Alright guys, that is it for this week’s episode and we’ll see you on the next episode of Real Estate Rookie. This BiggerPockets podcast is produced by Daniel ti, edited by Exodus Media Copywriting by Calico content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony :
And if you want to be a guest on a BiggerPockets show, apply at biggerpockets.com/guest.