Patrick Mackaronis – New York City
Before we get started, let’s jump into the way back machine and take a trip back in time. We’re going to visit the time frame of 1983 to 1989. Why did I pick this time frame? Interest rates were in the low double digits during those six years, and it was difficult to sell real estate. As ironic as it may seem, mortgage interest rates are in the low single digits today and it is again difficult to sell real estate. The following is a post by Brabble CEO Patrick Mackaronis, a thought leader in the field of entrepreneurship in New York City.
I entered the real estate business on my 21st birthday in 1989. Two years after graduating from high school. Upon entering the business it was tough for real estate agents to sell homes with double digit interest rates. But my mentor and the seasoned real estate agents in the office taught me how make it happen. It called for as much creativity then as it does now. One of the techniques that I would soon learn was the rent with option to buy method and it worked well. I made a lot of money utilizing this technique.
I’ve talked to many clients and friends over the years about making money in real estate and real estate investing. There seems to be some common confusion about terms when in comes to creative financing. In a brief explanation of each I will define the common terms associated with creative financing.
It should add to your existing real estate knowledge base and help you to become more successful. Each of these techniques can be used to establish win-win situations for you and your tenants. At the same time it will increase the value of your real estate investment. Let’s get into it.
Rent with option to buy
You are renting real estate with the option to purchase at the end of the agreed upon term. Typically a portion of the tenant’s rent is set aside by the property owner. These funds are generally applied toward the tenant’s future downpayment on the real estate.
If you exercise your option to buy the property you typically do so by obtaining a mortgage from a bank or mortgage company. If you don’t exercise your option to purchase, typically you will vacate the property per the terms of the agreement. Rent with option to buy is synonymous with rent to own, lease with option to buy and lease with option to purchase.
You are renting to buy real estate WITHOUT the escape or option clause of not purchasing the real estate. OK, I’ll say it again in English. You rent the property for an agreed upon term and purchase the real estate at the end of the term.
Again, typically a portion of the tenant’s rent is set aside by the property owner to be applied toward the tenant’s future downpayment on the real estate. Rent buy is synonymous with rent purchase, lease purchase, rent to buy, lease to buy.
Now that we have some clearer definitions of the rent with option to buy & rent buy, what did you notice? If you said it’s the option, you’re absolutely correct. For the most part, you’ll use your standard rental lease and have an addendum with the rent with option to buy terms spelled out.
Some of the key terms that should be covered are the tenant’s monthly set aside from the rent. If it will be deposited into an interest bearing account, how it will be disbursed if the option is executed and how it will be disbursed if the option is not executed.
No matter what terms are used, the option can make or break the deal. Be careful and remember your goal. It’s to make money in real estate right now! These techniques allow you to do just that.
By renting your property to a tenant with rent buy or rent with option to buy terms, it gives someone the option or ability to potentially purchase what they otherwise wouldn’t have. It allows a tenant with a job but poor credit the ability to pay off bills and reestablish credit all while living in their future dream home.
So again, we have established another win-win situation for you and your tenant. You may also extend these terms to a younger person or couple that may be working but has never established credit. The options are limitless. As always, use your better judgment when screening tenants and consult with legal counsel if necessary.
Patrick Mackaronis is the CEO and Founder of social media company Brabble. For more information, visit Patrick Mackaronis on Twitter at @pmackaronis.