We were already buying, renting and flipping properties by the time we stumbled into trying out Rent-to-Own as an investing approach. When we did the first one, against everyone’s advice, we though we may have saturated the entire market. Little did we know that we’d go on, with the Rock Star team, to help hundreds of investors with well over 1000 rent-to-own’s over the next ten years. In this episode we share some of our first stories, the structure of this approach and the lessons we’ve picked up along the way.
Tom Karadza: Today at Rock Star, we work with investors who buy all sorts of properties, straight rental properties, either single family homes, or condos, student rental properties. Properties that they turn from single family rental into a legal second suite or like a duplex and increase the cash flow on those. Multi unit buildings, so anything from like a fourplex, or fiveplex or sixplex, 18 units, whatever that may be in all different communities right across the Toronto area.
But it all started with one of the least understood investing strategies even to this day, which was rent to own investing. And on this episode, Nick and I break down over a decade of experience on rent to own investing and working with investors. We’ve done well over 1,000, we think it’s closer to 2,000 of these, but we haven’t run the numbers recently and we’ve done them in communities right across Toronto, all over the Ontario area, specifically the Greater Golden Horseshoe.
So I think in this episode, hopefully you’ll find some of maybe the misconceptions of rent to own investing exposed, some of the lessons we went through. When we started with this, no lawyers understood it, no bankers understood it. People thought we were crazy. But it’s turned out to be a really good investing strategy, even to this day. So with that, let’s get started.
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Tom Karadza: We are live. Nick, when did we do the first rent to own? Was in 2006?
Nick Karadza: Yeah, I think it was 2006. I heard about it, I’m sure you did too, but I think for I think a few years before that. But it was always lease with the option to buy, it was never rent to own. That was the first biggest breakthrough for us, at least.
Tom Karadza: Yeah, what do you mean? Not advertising with lease with the option to buy?
Nick Karadza: Because we were like, “Well, what the hell’s that?”
Tom Karadza: Yeah. What is lease with the option to buy? I thought that was really clear though?
Nick Karadza: It is, but the response that that generated versus rent to own-
Tom Karadza: Was zero?
Nick Karadza: It was different, it wasn’t even close.
Tom Karadza: Where I heard about it first was, I think, eight years before that when I took one of those boot camps, you know, that you spend like $8,000 to go to two days to learn how to become a millionaire, because I know you’ve been to them. And it was taught as sandwich lease option, as a way to invest in real estate with no money at all. And what you were taught to do was you called landlords and you said, “Hey, can I lease your property and I will also want an option to buy your property after the lease? And I want the right to sublease it too.” And if they agreed to all that, which is a miracle in and of itself, you then went and advertised the property to someone else to lease with the option to buy it from you.
So you were like this middleman. And then you rented out the property. So, if you managed to negotiate from the landlord to rent that out for $,1500 a month, you rented it out for like $1,900 a month and you made $400 a month in cash flow with no money down because you didn’t buy a property, you are just the middleman here, and you sold the property to this person higher than you agreed to buy the property at the end of the lease.
And I thought it was this brilliant way to do real estate investing, and I thought it was going to save the world. And then I remember trying to so many legal difficulties, and to convince a landlord to … It was a disaster.
Nick Karadza: I think a lot of people started doing it. They didn’t ask the landlord for the right to sublease. That was the first thing that happened. I know in the States, a lot of states actually outlawed that practice. It became a illegal a number of years ago. I don’t know if that changed, that updated again, but when they were going through, was it the housing crisis, when they went through the recent one? Like the financial crisis then?
I remember at one point in the not too distant past, that some states had made it illegal. Texas comes to mind, I could be wrong.
Tom Karadza: You are right. I remember seeing that, I don’t remember where either though.
Nick Karadza: Because there was all sorts of problems doing people doing crazy … It’s like anything, you give people an interest, and…mile. It just gets totally crazy. People do all sorts of crazy, crazy stuff.
Tom Karadza: Blown out of proportion. The reason, and I just want to start with the reason that we were even interested in rent to own to begin with or I remember a conversation having in my own head, I don’t know if I had it with you or not.
Nick Karadza: Go ahead. I’ll let you finish and I’ll tell you what came to mind for me.
Tom Karadza: Was just to try to get a little bit more money upfront. Like I remember when we were flipping properties, we were like, “Okay, I can see this payday at the end.” But with the straight rentals, it was like this long term gain. And when you’re younger trying to make money, it seems like five or 10 years sounds like an eternity to get a return.
Nick Karadza: You put way more thought into it than I did.
Tom Karadza: Oh, I know. I always over analyze things.
Nick Karadza: Mine was pure greed. I remember I had this report that I’ll never forget. Well, here look, the report was sitting in a drawer in the bathroom of our parents’ house for a long time, because it was there to read and it never got red. And I remember seeing this report there for so long. And finally, I read this report, and it was about this thing called lease options. I didn’t know what … I’m like, “What the heck is this lease options?” I couldn’t even understand it.
Tom Karadza: Who put the report there? Me?
Nick Karadza: No. It was something I got when I went to one of those bootcamps.
Tom Karadza: Oh, and you left it there by the toilet?
Nick Karadza: Yeah. Actually, it was something I researched because I think the internet had still existed back then. I’m getting old, so I don’t know. Remember we’d get a dial up. I’d mimic the modem sounds, but I couldn’t. But you would dial up and I could actually research a couple of things, and I saw this thing called … it was about lease option and how much money was made in lease options, and I didn’t understand them. I’m like, “Well, all this money.” I saw this in a couple of places, I’m like, “All this money made in lease options, then it must be the next best thing.”
So I finally got around to reading it after all this dust was on the report, after it’d been there for probably years, I don’t know, and then that piqued my interest. I don’t think I ever did anything with it until that point, probably until after you took that, maybe-
Tom Karadza: I think I took a two day weekend course on lease options after another course I’d spent money on.
Nick Karadza: And then maybe that’s what triggered my interest again, because I definitely didn’t do anything with it, but when you brought that up again, I was like, “Oh my gosh, I remember I read that report, and that’s like real estate riches was lease options.”
Tom Karadza: We can get rich with real estate? But the thing that really intrigued me was that instead of a straight rental, instead of getting first and last months just by itself, because in Canada and Ontario, you’re going to get first and last month’s rent, with a lease option, you could possibly get this like option money, and maybe it was going to be like $5,000, $10,000 extra, really on in the life cycle ownership of the property, and I thought, “Oh my God, that’s brilliant. You get first and last month’s rent, and you get this other money. So there’s this quick return on your investment and you can use that money to go do other things with.”
And that’s was like the big appeal to me. But anyway, we’ve learned a lot since those days.
Nick Karadza: Yeah. Well, remember the first one?
Tom Karadza: The first one was a disaster.
Nick Karadza: So, we started researching researching-
Tom Karadza: That was when the guy ripped me apart and I cried.
Nick Karadza: Yeah. Did you actually cry?
Tom Karadza: You know what, when I went upstairs after the guy left because you didn’t show up to that property, and I went up and I think I had convinced you to try this strategy and you agreed and we bought this property with the sole intent of doing a rent to own, and to us, it was a lot of money to buy a property, let’s face it. We were in our 20s.
Nick Karadza: Oh, yeah. And it was a whopping 220,000. We laugh now because looking back-
Tom Karadza: I think it was 224. But that was huge. But when the guy ripped me apart because I didn’t know what I was talking about, or actually you know what, he didn’t really know what he was talking about either. I didn’t know what was going on. I just went and I just remember taking a deep breath, and I don’t know if a tear came from my eye but I felt like it did, and I just thought, “I think I’ve ruined our lives because I bought this property and thought we’d do a rent to own on it, and it wasn’t really a flip, and it wasn’t going to be anything else other than this,” and I had let us down and I was beating myself up bad, looking back.
Nick Karadza: I remember, because I when I walked in, you looked pretty beat down. But you know what, at the same time-
Tom Karadza: And like we literally, we rented it out later that day or the next day.
Nick Karadza: Yeah. Do you remember what we were doing in that property?
Tom Karadza: No.
Nick Karadza: We did the best thing ever. Here’s the number one thing not to do when you’re trying to rent a property quickly, is anyone that came to the property, as they walked in the door, before we would even let them see the property, we made them fill an application to rent to own it. They had to fill application seen number-
Tom Karadza: We didn’t see the property.
Nick Karadza: It was awesome.
Tom Karadza: And we got people to do it.
Nick Karadza: All sorts of people did it.
Tom Karadza: I don’t know why people did that.
Nick Karadza: No. On top of that being a huge mistake, it was a huge lesson because we realize, we were like, “Holy cow, you can make people fill out the application form before? That’s how much demand there is for this type of stuff, that people are willing to give you all their personal information?”
Tom Karadza: And if you speak with conviction in your voice, because we were pretty … I think we were convinced. “Yes. You fill out this application or you can’t see the property.” That’s obvious.
Nick Karadza: We thought we were very smart.
Tom Karadza: Yeah, we thought we were smart, and looking back, that was just ridiculous. So yeah, we rented out that first property-
Nick Karadza: In hindsight though, the guy that was telling you it was crazy and this rent to own thing was nuts, the buyout price for that home was probably, who knows. Like let’s say 250. The home might be worth 450 or 500 now.
Tom Karadza: Well, he could also qualify to buy a property, and that was the problem. Rent to owns don’t make sense for people who are able to qualify to buy with best interest rate financing, it didn’t really make sense. And he thought like I was trying to convince him that this was better than buying the property, which I wasn’t. And just the whole thing just had a downward spiral to it.
Nick Karadza: The benefit is, it’s a bridge to home ownership. The goal is to deal with the top, whatever, let’s say the top … Used the 80/20 rule, the top 20% of the rental market that is looking to make the transition into home ownership and for some reason they still can’t do it. Often it’s a credit issue. Could be down payment, maybe with their credit, they need a larger down payment than they have available. Maybe they can only qualify at B lenders for higher interest rates, whatever it may be. But that’s ultimately the way we look at it, is it’s a bridge for those people.
And for a number of people, they’ve been … It’s worked out well for a large number of people.
Tom Karadza: And the key is, is that they have good income, they have good income. I think people misunderstand rent to own is that, it’s proper … it’s for someone who has good income, but temporarily has bad credit for some reason, either a personal reason or a business reason. But that’s basically it. In exchange for accepting them as tenants with bad credit, we take an option fee, or accept an option fee, which goes towards them buying the property at the end of the lease if they so choose.
They don’t have to, but if they choose, that money then goes towards the down payment of them buying that property. So in exchange for the bad credit, we get first and last month’s rent just like a regular lease, but in exchange for bad credit, we get this option fee right up front.
Nick Karadza: I don’t think the same stigma’s associated with it like it used to be.
Tom Karadza: I think it still has a bit of a bad stigma to it.
Nick Karadza: When we started, people were so-
Tom Karadza: Oh my God.
Nick Karadza: Neighbors, when we put up the rent to own signs in the yards, we had multiple occasions when neighbors would come and rip the sign out, stole it.
Tom Karadza: Remember in Oakville? Somebody ripped it out and left us just a nasty message.
Nick Karadza: Oh no, I forgot that.
Tom Karadza: Not in my neighborhood you’re going to be doing this.
Nick Karadza: Oh really? I forgot that.
Tom Karadza: Oh yeah. It was a town home in Oakville.
Nick Karadza: Did we do it?
Tom Karadza: We did it.
Nick Karadza: Oh, we did it. Now I remember it. Now I remember that time. It was a nice town home.
Tom Karadza: It was a nice one.
Nick Karadza: Apparently, we were going to do it. I remember it. It worked out well.
Tom Karadza: That’s the key. Good income, they have to have good income. We’re just like the banks in that way. When you do a rent to own, they must be able to qualify for the monthly payment of the rent.
Nick Karadza: Oh totally. Yeah. We’ll ask for bank statements or pay stubs to try to clarify. We have done ones with people that were contractors, and they said they had they made a lot of cash, they had cash jobs, so they had other income coming in, and sometimes we did a little bit of a gut check based on other factors, but the best practice is definitely we ask for all that stuff; credit score. And if someone has like repeated bankruptcies and that’s the reason for that bad credit, then we’re not interested in those people.
We’re interested in the people that have like some event in their life, maybe it’s health, maybe it’s a relationship breakdown, maybe it’s health of a family member, maybe it’s a big move. Who knows what happens, everyone’s got different stories. But when when they have one big event, it’s something. Now, if it’s a repeated pattern of bad credit and consistent late or bad payments, those people we don’t want.
Tom Karadza: We don’t want.
Nick Karadza: Yeah, we don’t want those people at all.
Tom Karadza: Or anyone with a judgment on their credit report.
Nick Karadza: You always use like child care
Tom Karadza: Like child support. If someone has child support payments that they’re missing and that’s on their credit report, that doesn’t sit well with me.
Nick Karadza: Yeah, that’s probably something. I guess this type of stuff … the child support, I don’t know if that’s discrimination and officially, if we should be able to say that. That’s not why we’re accepting them. But anyways, just so people know, I’m not sure if we can say that or not. But the repeated bad credit, we can say, I think. Everything is like discrimination now, you can’t say anything with tenants.
I’m scared to ever say a reason why we don’t accept someone.
Tom Karadza: Just for context, how many rent to do you think either us directly or through Rock Star we’ve-
Nick Karadza: I don’t know. I lost count. I know we got years ago, like many years ago, we had a thousand.
Tom Karadza: And then I think we kept counting up to 1,300, and that was years ago.
Nick Karadza: Yeah. I don’t know, probably a couple of thousand dollars?
Tom Karadza: We are at 2,000 mark? That’s what I feel as well.
Nick Karadza: But after a thousand, we were very confident about the system’s processes, and that it worked and we started losing count. You are right, I remember going to 1,500.
Tom Karadza: After a thousand, it just became like clockwork.
Nick Karadza: Yeah. And still today, it’s just different market conditions but with different demand. We’ve had to educate a lot of markets too, that’s something people have to be aware of if they’re going to take this type of approach and go into an area where it hasn’t been done on a regular basis before. Like when we started doing these in a variety of different areas around Toronto, we had to educate the market.
Tom Karadza: People had not heard of it.
Nick Karadza: No, they were clueless. Now if you’re doing rent to own, often people will walk in, say, “Okay, well, let me just see the numbers and how they work on this one.” They’re totally familiar with the process.
Tom Karadza: We’ve had family members do rent to own. Part of the families has done a rent to own, and then they’ve recommended a rent to own to other members of their family, and we’ve done rent to own with them as well.
Nick Karadza: Yeah. Friends, same thing.
Tom Karadza: I think the key with this, just on this note, is sometimes some real estate investors, because this topic is taught at a lot of different real estate wealth books, boot camps and so forth, people sometimes overstretch what we think is good practice with these things. Like, how many times have we seen somebody do a rent to own and charge some abnormal, just astronomical rent? It just doesn’t make sense for the person living in the property. Generally, when we do a rent to own, we’re talking about a few hundred dollars more than typical rent in the area.
We’re not talking like a thousand or $1,500 or more a month. It’s tough for the people moving in to be able to support that payment. It just doesn’t work.
Nick Karadza: Well, it’s unrealistic. If the person was going to buy the property at the end of the day for whatever the number is, $400,000, and the monthly rent that they’re charging is like $3,000 a month, you know what, they don’t need to pay 3,000 a month to carry the property afterwards, so it’s completely unrealistic. They don’t need to pay that much. A lot of people will set people up for failure. We’ve seen it. Sometimes it gives people a bad name, like we’ve had people come through properties that were in bad rent to own agreements from the tenants perspective that we’re looking at getting into one of ours because it was a better setup.
But it’s like any industry, it’s just unfortunate-
Tom Karadza: Yeah, don’t get too greedy with it. Stop.
Nick Karadza: Some investors, we’ve worked with a large number of them, I never like to see the ones that are just grasping for every last penny. There’s enough profit in there, you can be fair to everyone involved. Every industry is the same way, you have excellent people in the industry and you have some poor people in the industry and everything in between. So it’s no different than that. But in our opinion, there’s definitely a way to it win-win.
Tom Karadza: Yeah, if you’re fair to tenants moving in, they’re fair to you, and the property works beautifully. Everybody’s happy. There’s enough profit for you, for the investor. They get a beautiful home to live in, likely before they thought they could live in such a home. It just works out.
Nick Karadza: Yeah, to your point about the ones that were paying really a price that was too high on a monthly basis, we’ve actually never seen one of those work out. Those ones always end up breaking down. Maybe there is one that I can’t recall, but I think every one that comes to mind ended up breaking down, so you got to be fair.
Tom Karadza: I want to break this out for anyone listening, it’s a standard lease agreement, standard Ontario least agreement. There’s a second agreement, which is your option agreement, which is the agreement that the people moving into the house would sign that gives them the option to buy the house at the end of the lease, typically two years, three years, that’s the sweet spot. We tend to do a lot of three year stuff. And that works out really nice. We have seen a strategy where people use occupancy agreements and other agreements to do these things, those never seem to really work out well.
And from what we can tell, there’s legal issues with that stuff too, because if someone’s moving into a property in a occupancy agreement, from my understanding, if they make payments over a certain amount of months, they might have legal authority or an equitable stake in the property, meaning that you really can’t go to the tenant board very easily if they stop paying you monthly rent, and evicting them from the property. It just gets all messy.
Nick Karadza: Well, some people will say that’s the reason that they structured that way, with this occupancy agreement. And we looked into that. We’re like, “Okay, that makes sense.” They want to avoid the tenant board, let’s pretend that that is the case with that. We’re like, “How do you get people out of the property?” We called the police, remember? We called the police, sheriff. We’re like, “Sheriff, hey, how do you …”
Tom Karadza: Yeah, I remember investigating this.
Nick Karadza: So, how are you going to get the people out of the property? And they said, “Well, without a judgment, we’re not going to get the people of the property.” And if you’re not going to landlord and tenant board, that means you have to go to small claims, small claims or superior court. And that process is substantially longer-
Tom Karadza: Than going to the tenant board.
Nick Karadza: And the police said, “Without the judgment, don’t call us.”
Tom Karadza: I think most investors have a mistaken fear of the Tenant Board. The Tenant Board, if you have just a nice lease agreement and you’re managing the property properly, there’s nothing to be scared of.
Nick Karadza: No. You know what? For non-payment of rent, sometimes if it’s like a he said-she said, the disturbing neighbors or something, that can be like a little … it can drag on a little bit. But for simple nonpayment of rent stuff, I agree with you, it’s pretty straightforward. There’s a lot of myths that they can’t be evicted at certain times, or if they’re certain status, they can’t be evicted, or all this demographic, all of this stuff. We’ve never seen that be true.
We’ve seen people say, “Okay, give them an extra two weeks to find someplace,” but there’s nothing about like, “No, we can’t do anything about it.”
Tom Karadza: No, that’s the best setup for it. And then the option fees that we’ve seen over the years are standard, in between the range of 5000 up front up to 20,000 it was the most common range. Maybe more 10 to 20 now, and we’ve seen higher.
Nick Karadza: Up to 50?
Tom Karadza: 81.
Nick Karadza: 81. But that was with a year’s worth of rent, wasn’t it?
Tom Karadza: Was 81 with a year’s worth of rent?
Nick Karadza: That’s what I thought. Maybe it was like 60 or something. We’ve seen 50 a couple of times. We’ve seen 50 plus a few times.
Tom Karadza: Those are like those are so high that that could be more than the profit at the end. So you actually have to keep some money aside to like a refund depending on the terms of the option agreement. The very first person we did, I thought, “If we got first and last month’s rent and we got like $3,000 as the option fee, I was going to be ecstatic.”
Nick Karadza: That was a big win.
Tom Karadza: First and last month’s rent and 3,000 bucks. That first one, I think we got seven and a half thousand in first and last month. It was over 10,000 before our first mortgage payment.
Nick Karadza: You’re right, I think it was seven and a half.
Tom Karadza: I remember it was like a light bulb moment. I’m like, “Oh my gosh, we have this much money coming back to us before we make the first mortgage payment on the property?” That was a huge deal. And the nice thing, everyone’s going to have their own opinion, but the nice thing about rent to own is that typically, you’re dealing with a single family home, where there is a fully detached home or a town home or a semi-detached. And it’s just a nice property. It’s not like a duplex or a triplex.
And if you’ve ever managed duplexes or triplexes, you’re always dealing with tenant issues and that kind of stuff. They’re just very simple nice properties to deal with.
Nick Karadza: Yeah, they’ve been good. We’ve seen people, because there’s a couple of people that have had duplexes, or like homes with a second unit that they were renting out two units, they did a rent to own with one person, they let that person collect the rent from downstairs, so they like made it a little more complicated. And remember, you’re dealing with someone with not the best credit to begin with, so they started collecting rents and then they didn’t really manage it properly, then they weren’t remitting enough of the rent.
I’ve seen that problem occur. If you haven’t managed one on a single family place first, whether it’s condo, town home, family, detached, whatever it is, I wouldn’t complicate things and start doing it with things that are duplexes and stuff. It can work, but stick with the basics first.
Tom Karadza: I think a single family is what … easiest to get financing on, easiest to refinance. I remember on one of our duplexes, somebody recorded the couple downstairs having sex while they were eating breakfast with their child upstairs. And I guess they could hear the noise and they sent me the video of the floor. Like they had just pointed their phone to the floor , and recording the audio, and I got this audio thinking-
Nick Karadza: I keep thinking, thank God I wasn’t having dinner at that time. It was breakfast.
Tom Karadza: We’ve had a lot of people also do lots of rent to owns and then think they were going to quote unquote ‘graduate’ from rent to owns and do like buildings and bigger properties, and then they got some hassles with those properties and went back to rent rent to owns.
Nick Karadza: There’s a downside to everything. So the downside is, you’re giving up control of the property because once you do a rent to own, they have the right to buy it legally during that time period, so if the property appreciates more, you might be stuck selling it for a lower price, that’s definitely a downside. The upside to that is that if you set the price in advance, then you protect your downside risk if the property doesn’t appreciate. That’s the upside to it. So there’s always a flip side.
But there is a little bit of like giving up control of the rights to that property to someone else. And that’s essentially what they’re buying. So for that down payment, that five, 10, $20,000 they’re giving you, that’s what they’re buying, they’re buying the rights to purchase that property. So if you want that money upfront, it can be a fair exchange.
Tom Karadza: Yeah, and one of the nice things I think that I’ve always appreciated about rent to owns, we’ve always done them outside of the city. We’ve never really done rent to own, just because of the cost thing, so we’ve always gone around like 905 area around Toronto and beyond to do rent to owns. But always in population centers that if we ever had a vacancy, we could always fill it as another rent to own or change it to a straight rental. But we’ve always done communities with good population sizes around Toronto.
Nick Karadza: That’s a big point because a lot of people have been bringing us deals from other areas in Ontario, and other areas in Canada.
Tom Karadza: Small towns.
Nick Karadza: Small towns, saying, “Hey, this person wants to sell their house, maybe rent it back?”
Tom Karadza: On a rent to own.
Nick Karadza: Yeah. If that doesn’t work out, then what? You are going to have this property where? What’s the area like? Is there demand? Is there in-migration, are population trends increasing or decreasing? Are there jobs? All this stuff. I think when it comes to rent to own, sometimes people … we’ve seen people get caught up in the numbers, and they’re so focus just on the numbers, they’re like, “Man, this is an opportunity.” You’ve got to be really careful.
Whenever we’re buying a property, rent to own or anything else, we’re prepared to own it over the long term because if that doesn’t work out, we want options with the property. So if the property isn’t something that’s going to be in demand, it doesn’t matter on a spreadsheet what you think the numbers are going to be if you think they’re going to cash flow so much for a certain number of years and they’re going to buy out and you’re going to hit this windfall of this rent to own property.
If those people take off, which they very easily can do, they just walk away from the house, then you’re going to be left with that house, so it’s better be a good piece of real estate. If you’re investing in real estate, make sure you’re picking the right property in the right area to invest in, irregardless of who you think is going to live in and do a rent to own from.
Tom Karadza: That’s why I always disagree with investors who say, “Hey, it’s all about the numbers. Just show me the numbers on the property,” because I can show you great numbers on a property, but if it’s in the middle of nowhere … Remember that one time someone did a rent to own in the middle of nowhere? I think along the banks of Fort Erie somewhere? Do you remember this?
Nick Karadza: Yeah.
Tom Karadza: And the property went vacant. Then they were stuck because it was a rather large home out there, and the numbers worked while that person was doing the rent to own, but then the person took off and didn’t complete it.
Nick Karadza: And there was no demand for it.
Tom Karadza: There was no demand for such a big property that required such a high rent in some of these communities out there. And they were stuck for months with vacancy.
Nick Karadza: We’ve heard those stories from a number of people in different areas.
Tom Karadza: Countless. It’s one of the reasons, and maybe we’ll talk about this a little bit, it’s one of the reasons we like to lead with or initially do pick the property first in the community we want to own property in, versus doing rent to own in like where you find the tenant and then get the tenant to pick out the property they would like to do a rent to own on and then you buy that property for the tenant.
Nick Karadza: When we do that, we guide them to a property that we’re comfortable buying in the area and the type of property that we want to buy.
Tom Karadza: And the price point.
Nick Karadza: Exactly. That’s the biggest difference. Instead of giving them a blank slate, saying, “Whatever, the bigger property most of you buy, the more money I’ll make.” There’s no way, because then those other things can happen.
Tom Karadza: Yeah. And the property, and I don’t know if we made it clear, but typically, starter homes work really well. That’s starter home category. And the reason I think, for that is beyond rent to own. It’s just starter home categories always work … Up markets or down markets, a starter home is really going to always have demand, the starter home category for rent to own specifically works really well, but we typically don’t do them with condos.
Nick Karadza: The condo fees can make the numbers more difficult. We have people that have done them. We haven’t ourselves.
Tom Karadza: We’ve done some like three whole town homes that have like a small condo. You know these town homes that have like road clearing and include some insurance like on the exterior only or something like that?
Nick Karadza: Yeah. There are those. Officially, those are condos, but they’re just low, super low fees because of the way the condo’s structured. It’s like that place I have up here in Oakville, the condo fee’s super, super low.
Tom Karadza: Yeah, a condo like that.
Nick Karadza: It’s a detached home, but officially, it’s a condo.
Tom Karadza: But in general, the condo fees don’t make it work. Just the carrying costs are too high. Whatever you would have to charge in rent to cover your costs; the mortgage, the insurance, and the property taxes, and then the condo fee, typically it’s cost prohibitive usually.
Nick Karadza: Well, yeah. You know what, I think it’s been really partly that, but then when we show investors some other areas and the options in some other areas and the return you can get for a similar investment, I think people jumped on that as well, because they would look at the condo numbers and then for similar price point, they would look at some other numbers, and they would be like, “Well, I’m going to go there. I’m willing to go outside of the city a little bit because I’m getting a better bang for my buck.”
So I think it’s a combination of both, because truly with the rent to own, one of the ways we’ve always explained to people, because people didn’t … Remember people were like, “Well, I don’t get it. The rents aren’t that high, how can you ask for $2,000 when rent’s only $1,700, it doesn’t make sense, it only rents for $1,700 dollars. And we always explain it like, it’s not about the rent, these people are buying it, so, if the carrying cost-
Tom Karadza: If they can’t afford $2,000, they’re not going to be able to buy it.
Nick Karadza: Exactly. The kind of a price of the condos too, where you have to route that in. If they can’t afford to pay the increased amount for the condo fees, it doesn’t really work, but then from the investor standpoint, often you’ve got way better bang for your buck without those condo fees.
Tom Karadza: And I think a nice single family home even … I think both of us always plan for worst case scenarios, like we’re a little kind of like, “Hey, if we’re going to buy property … ”
Nick Karadza: For sure.
Tom Karadza: And the nice thing on a nice starter home, single family starter home is that we always think, “Okay, if the market changed entirely, and nobody wanted to do a rent to own ever again, could we straight rent this property out?” And because there’s no condo fees on a starter home and we’re buying starter homes in good communities-
Nick Karadza: Yeah, we’re protected.
Tom Karadza: We’re protected because we know worst case, we’ll do a straight rent on this property-
Nick Karadza: Straight cash flow. I keep cutting you off.
Tom Karadza: A minimum, in a worst case scenario, we’ll cover our costs, but likely still create cash flow, but worst case, we’re going to cover our cost. And that comes from just when our family almost basically went bankrupt in 1990 having a property we had to rent out where we were losing hundreds of dollars a month. It was almost a thousand dollars a month on that property, even while it was rented out during the recession that started in 1990, so that’s where that comes from. That’s why I think just started … I don’t know. I always lean to start a home especially on rent to own.
Nick Karadza: While still in our area, the starter home, up until this point, where it’s been shifting, but in most areas here, the starter detached home has still been the starter home. But as demographics change and housing stock changes, the starter home might change to a stacked town home with condo fees or a condo.
Tom Karadza: That’s a good point.
Nick Karadza: And that will change it.
Tom Karadza: And it’s something we tell everyone, “Look, if you’re going to do … you have to match the starter home to the starter home of that community,” because for a while, we were doing a lot in Burlington, Ontario. And the Burlington, Ontario, we actually did fully detached homes really briefly in Burlington, Ontario.
Nick Karadza: We did, yeah. Bungalows, some of the older bungalows.
Tom Karadza: And they were great.
Nick Karadza: Actually, we did some, there were two stories too.
Tom Karadza: We bought some in Burlington. I want to say like $285,000, fully detached home in Burlington, Ontario. I don’t know why we didn’t get-
Nick Karadza: I don’t remember that. I remember town homes are like 260, 250.
Tom Karadza: We did one at like 255, but fully detached. We did one, I helped an investor way back.
Nick Karadza: I believe you, I just don’t remember.
Tom Karadza: I couldn’t believe it, and even looking back now, I just don’t know why we didn’t buy all those properties. But anyway, many lessons learned over.
Nick Karadza: I do, because we-
Tom Karadza: We had no money.
Nick Karadza: We invested so much money into the business. Yeah, less capital to invest in properties.
Tom Karadza: We had no money.
Nick Karadza: Looking back, I don’t know if that was good or bad, maybe we should’ve just bought properties instead of starting the business.
Tom Karadza: It’s been a good ride. Single family homes, you have to match them to the community that you’re in. So when we were doing a lot in Burlington, it was typically town homes, even though in Hamilton or on the east side of the city, when we were doing Ajax, and some on Oswal, and still in Clarington, and that kind of place, it could be detached homes. So you match the starter home to the community. That’s a really important point. You can’t just take the same property and consider it a starter home right across the…
Nick Karadza: And now in Burlington, even though the town homes are still the low rise starter homes, where prices have gone, the starter home, a lot more of them are condos and then you have to-
Tom Karadza: Condos, or those stacked towns … they’re like back to back or against each other.
Nick Karadza: So you can look at those things and that’s where your point about the condo fees come into play like, you know what, sometimes the condo fees just don’t make the investment make sense anymore. So it can or can’t … it’s really, to your point, community by community, you have to have an understanding of it.
Tom Karadza: Yeah. And I just want to touch back on that, like getting the tenant first and then finding him a property. One of the reasons that we steered away from that, not that you can’t do it and it’s not possible, we know tons of people that do that kind of strategy.
Nick Karadza: Oh, we’ve done it.
Tom Karadza: Yeah. One of the things that it often lead to is having a discussion where it was difficult to convince people. Remember, when we were trying to meet people in like Tim Hortons, donut shops?
Nick Karadza: Yeah. That’s the biggest challenge.
Tom Karadza: Back then, that was the really tough a chunk, people couldn’t believe what we were going to do for them.
Nick Karadza: Because to try to qualify them, we were asking them to give us money, because want to spend our time with someone who was not serious. And then they’re looking at you like, “I’m meeting you at Tim Hortons.”
Tom Karadza: You are like shady … “Tim Hortons, and you want like a $1,000 as a deposit?” And we’re like, “No, we’ll give it back to you if we can’t find you a property.” Which we did and we would.
Nick Karadza: But you know what, as soon as we started doing that in the property … so if they came to the property-
Tom Karadza: Yeah. And that was the big change.
Nick Karadza: Even if it wasn’t right for them, we were like, “Hey, we’ll go buy you a property, let us know what you want.” And then they trusted us in a whole different manner because we were in the property.
Tom Karadza: Countless investors have now shared stories, now, how many investors have we helped do this, where are they pick the property first, then they go to advertise that property as a rent to own?
Nick Karadza: And they get a second one on top of that.
Tom Karadza: Second property, third property-
Nick Karadza: Or more.
Tom Karadza: From tenants that don’t want that property and then we tell them, “Hey, go and ask them what they want.” And then we go and help them find the next property. And it’s really easy because they believe you because they were in a property that you owned, that you were doing as a rent to own. Now, to convince them to do another property, and not only that, not only do they believe you, they’re in the area that you likely want to own property. Because if you have one property in a city for example, Kitchener, Ontario, and then you meet someone there, they likely want a property in Kitchener.
Now, you’re grouping your properties together and you’re not like all scattered all over Ontario with all these different properties everywhere, you’re buying properties for people who are looking in Kitchener, and you can get … How many times have we seen investor buy one property, find two tenants who wanted some other properties, they found a tenant on a rent to own for their first property, and then the next two, they took around, bought the properties, signed leases, collected auction money and then on closing date, they just handed over the keys? And then one property turned into three properties.
Nick Karadza: Here’s here’s the thing though, a lot of people, I shouldn’t say a lot, some people will say in that type of scenario, where the person’s picking out their own specific property ahead of time and then you’re buying it for them, the chances of them completing their rent to own program are greater. With some people-
Tom Karadza: If you do it right, I can see that. We’ve seen a lot of people not do it right.
Nick Karadza: It never materializes. I had someone look me in the eye and said, “You know what, it’s 100%. When you do it that way, it’s 100%.” And I was like, “Okay, I’m not going to laugh right at the person because I don’t want to offend them,” although it might that much, but I didn’t laugh right in front of them. And I think it was a good show of self-control.
Tom Karadza: You will laugh in someone’s face if you want to.
Nick Karadza: Yeah, but that was a good show of self-control, I didn’t really get, and I’m really proud of myself.
Tom Karadza: You’re growing up man, You’re growing up.
Nick Karadza: But you know what, nothing’s a 100% and plus we’ve done thousands of these, like legitimately, thousands. There’s no 100%.
Tom Karadza: We don’t know anyone in the country of Canada who has done more.
Nick Karadza: And we’ve seen like these things, it doesn’t work out 100%. And of course, I had also have experiences where people had done things like that and they told me that, “No. It didn’t work out a 100% as well.” Here’s the reason, the number one reason these rent to own things, if they don’t buy the property, is not because they don’t like the house. That is by far, I don’t know how far down the list that is, but it’s not even an issue. The number one reason that we see, is some sort of domestic issue.
It’s usually of relationship breakdown and then they go their separate ways and then they walk away or something like that. There’s been other issues and sometimes it’s hard with stuff like that.
Tom Karadza: Relationships or job change or moving to another province or other side of the city.
Nick Karadza: Yeah, but those are different reasons, but I think the one reason that triumphs them all is the relationship one.
Tom Karadza: You’re right, because do you remember that one nice rent to own where we had a guy move in-
Nick Karadza: I remember. I remember his truck, it was a new truck, a nice guy, nice girl.
Tom Karadza: He was going to buy the property then he gets a new girlfriend, she moves in and we started getting emails that clearly were not written from him, but came from his email account on how like, they wish the family room could be bigger and they were going to renovate. all these things changed and his whole attitude on the property changed, and then we get notice, like he’s moving out, doesn’t want to complete the rent to own. Do you know the one I’m talking about?
Nick Karadza: I know the one you’re talking about. I’m talking about another one.
Tom Karadza: Which one?
Nick Karadza: I’m talking about the guy. You can finish the story.
Tom Karadza: It was just a relationship change. He was fine, loved the property for two years. Gets the new girlfriend, all of a sudden, emails come from his email account, written totally differently that he doesn’t like the property anymore and he’s not going to complete the rent to own, which we were fine with, but it will change everything.
Nick Karadza: Yeah. It was coming from somewhere else for sure, but then this one was, I don’t think it was one of our properties, I think it was one that we filled for someone. And it was a young couple, they weren’t married yet from my understanding, they were moving into the house. I’m trying to lead you on because you’re the one that dealt with the phone call.
Tom Karadza: Oh my gosh, pregnant girlfriend?
Nick Karadza: Yeah.
Tom Karadza: That one?
Nick Karadza: Yeah.
Tom Karadza: Oh my gosh. I forgot about that one.
Nick Karadza: You got to share it now.
Tom Karadza: You’re talking about the one where the guy moves in with the pregnant girlfriend, three months later, he calls-
Nick Karadza: He calls and says, “You have my deposit … I’m not paying you.”
Tom Karadza: This was when an investor that we helped on the particular property. He moves in, three months later and says, “I’m not going to be completing the rent to own and actually I’m moving out.” And the investor, good guy, we still work with him today, freaked out a little bit, I would too. Calls us and says, “What shall I do?” We’re like, “Well, hey, call the guy back and see what happened.” Calls the guy back and the guy tells him, “Do you remember when you saw my pregnant girlfriend? Well, I found out that the baby wasn’t mine.”
Nick Karadza: That’s a good story.
Tom Karadza: He was gone. He decided to take a new job in another part of the city, start fresh, wanted out. So we said, “Well, you know what, just negotiate where you can show the property while he’s still living in there.” The guy said, “Hey, I fully understand what I got myself into, I’m going to be walking away from this whole situation.” He walked away. The investor got another rent to own tenant in there 30 days later and he was, you know. Yes. That’s why we buy good properties in good areas by the way. That’s the key.
Nick Karadza: That’s exactly, yeah.
Tom Karadza: Because we trust the property more than we do the people.
Nick Karadza: Sure. Because there’s no emotions on the property.
Tom Karadza: Or maybe we’re not nice people.
Nick Karadza: No. Life happens. If you remove the emotion from everything, it would be easier, but when the emotions are involved … That’s what I was going to, as you were telling the story, that’s what I was going to ask, that’s probably one of the questions that comes to people’s mind, is like, “Okay, so what happens when they don’t buy the property?” And exactly what you said, often, you can end up in a better situation. For someone-
Tom Karadza: Not that you want to. That’s not even the intent.
Nick Karadza: No, no, no, no. Some people feel like, “I’m happy when they move out because I get to rent it again and get another upfront payment.” That’s not the intent at all. But what happens is, if they decide to not purchase the property, they default on the option payment, so that option payment is yours to keep. You can do another rent to own, get another option payment. And you can rent it out again. Sometimes you get a higher rent and it works even better financially.
Tom Karadza: Or if it’s a property that you just love, you could still rent it.
Nick Karadza: Totally.
Tom Karadza: There are a bunch of people who’ve done that where a rent to own has not bought out, then they’ve said, “You know what, I think I want to keep this property forever.” And they do a straight rent, just add it to their portfolio.
Nick Karadza: We’ve found, I think you found the same thing, but rent to own is a nice way for investors to kind of dip their toe on the market, because there’s a little bit of insurance upfront-
Tom Karadza: Especially for busy families. Yeah, totally.
Nick Karadza: But then often, once all those fears that a new investor has, which is something that we should probably … It’s like a whole separate episode. It’s like all the fears they have will counter those things. But once all those fears subside, because you have all these preconceived notions about all the bad things that can happen, once you have your first investment property for a while, you realize that all those things might not happen or they’re not that hard to deal with, then you start looking for other options.
A lot of people have started saying, “Okay guys, I’ve got a couple of these properties or one. What else do you got for me? Because I don’t want to let these properties go, I want to buy a few properties, I want to hold onto them for a long period of time.” And so, to your point, if they move out, a lot of people will decide to keep the property and change approaches.
Tom Karadza: That’s the beauty of the whole thing, it’s a little flexible. It’s flexible in that way.
Nick Karadza: It’s like a bridge into investing.
Tom Karadza: And I think a lot of people misunderstand real estate investing, if they haven’t got into it before-
Nick Karadza: I just had another thought though, because I got so many comments about the cocaine analogy with the rent to owns. Rent to own is like a gateway drug into investing. Is that another good analogy? Will we get comments to that one too? Because that’s what it is. Rent to own is like the gateway drug-
Tom Karadza: For investors.
Nick Karadza: If you’re looking at investing and you’re not sure about how to get into it and what you want to try first, it could be like the gateway drug for it.
Tom Karadza: It works out…
Tom Karadza: No, no, it’s good. You can go for all the gateway drugs that you want.
Nick Karadza: I Know. I’m all about the-
Tom Karadza: Gateway drugs are legal in Ontario soon. So it’s not like you’re talking crazy.
Nick Karadza: You’re right.
Tom Karadza: What I was going to say is that, a lot of investors think that bigger properties mean more … You know how people just automatically think, “Well, I’m not going to go with single family. I’m going to start with big properties because big properties naturally will mean big money.” And I think that’s one of the biggest things investors don’t realize is that, big properties, and what I mean by that is, let’s say you’re going to get like an eight unit, or 10 unit, or 12 unit building. It doesn’t necessarily mean more money.
In fact, the return on investment on a lot of single family home rent to own style investing, is way more annually than on a building. Bigger doesn’t just mean better, getting into a nice single family home … And the reason I tell everybody, start with … Like if you’re on the fence, if you’re a busy family and you’re not sure what to start with, start out with a rent to own because if you want to get out of real estate investing, they are the easiest things to sell.
A single family home at the end of the day, it’s considered the most liquid piece of real estate in Canada. So if you’re sick of it, you can sell it at a moment’s notice, you can refinance it. It’s the easiest properties to refinance. For example, versus a student rental, student rentals can be hard to refinance because a lot of banks don’t like dealing with student rentals, even in Canada. There’s only a couple of banks, like right now, I think I’m pretty sure, it will be like RBC, CIBC. RBC sounds about right as two of the banks that are going deal with student rentals. The other banks-
Nick Karadza: Right now, it’s moving target.
Tom Karadza: It’s a moving target, but other banks don’t want to deal with student rentals. We even had a bank initially lent to us on a student rental property. I won’t mention the banks name, but they lent to us-
Nick Karadza: Mention them, throw them under the bus.
Tom Karadza: Then they wouldn’t refinance. When we wanted to refinance the property, their words were, “Hey, our auditors know what the property is and we’re fine renewing your mortgage as it is, but we won’t refinance it.” And it took us about 10 months of work to try to refinance and pull out, we had a lot of equity in that property to pull it out. So that was difficult, versus a single family home. If you want to refinance a single family home, you’re going to find a lender all day long that’s going to do that. Not that it’s the easiest thing in the world, but it’s going to be possible.
Even selling, refinancing, other mortgage programs. There’s a lot of flexibility to it. It’s one of the reasons that it’s … Yeah, it’s fine, it’s your gateway drug property style. I want to cover one other thing is, what we noticed is that buyout rates on rent to owns, tend to fluctuate mostly, from our experience, with what’s going on in the economy. If property prices are going through the roof, buyout rates, and what I mean by a buyout rate is the rate at which tenants will buy or rent to own, will increase sharply.
Over the years, what do you think if we were to generalize over a 10 year period? Tough.
Nick Karadza: You know why? because we don’t get all the-
Tom Karadza: The data.
Nick Karadza: Like I know investors their buyout rates are like at 80%, I know some that are…
Tom Karadza: Some investors are great, they show the credits every month.
Nick Karadza: They work with their tenants, they extend leases. There’s all sorts of variables. So it’s impossible to characterize it.
Tom Karadza: One general theme we have noticed is that, when the economy is going really … When property prices are going up really high, buyout rates increase. If there’s any negative press in the real estate market, then buyout rates decrease. That seems to stay true amongst most investors. But you’re bringing up a good point, some investors work really closely with mortgage brokers really well. We have mortgage brokers who do this all day long, and there are tenants to every month share with their tenants, how many credits they’ve earned.
That’s something we didn’t talk about yet, the credits. But how many credits they earned that goes towards helping them buy the property, to show them how close they’re getting murky with mortgage brokers to qualify to purchase the property. And some investors just take a total hands off approach. And that really makes a big difference in the success and buyout rate of these properties.
Nick Karadza: There’s a lot to them, there’s a lot. We’re trying to put 10 years of experience into whenever an hour or so. So it’s just not really going to work. But yeah, there is the credits as well, which is, any time the tenant pays their rent on time, we give them monthly credit to go towards the down payment the purchase price. Usually it’s anywhere from about two to-
Tom Karadza: A sweet spot is two to 400.
Nick Karadza: … 400 bucks, probably is the most common depending on how much they’re paying. And that’s the other benefit for them to do a rent to own property. And the buyout prices too, you can you can set the buyout prices, which is most common for us as we set the buyout prices ahead of time because we like to protect the downside. It does limit upside potentially, but you can also have the property appraised. You can put the wait until the prices get an appraisal on the property or two, when you take the average of the two or something like that, at the time they’re supposed to buy the property. And that can be good as well if there’s additional upside in the property increases faster than the prices you would have set, that’s good for you.
If the property doesn’t, that can be bad for you. There’s two ways to look-
Tom Karadza: There’s a million ways to slice and … We started doing two year rent to owns, then we changed to three year rent to owns. We started appreciating, I think at 5% a year from when we bought it to the coming out with the buyout price.
Nick Karadza: We still do on average roughly-
Tom Karadza: Roughly 5% a year?
Nick Karadza: You know what, if you look at that time, I guess it was a few years ago, the last few years might have skewed it slightly, but the majority of the Toronto area, the real estate prices on a very long term trend. I remember looking at a number of different graphs they kind of-
Tom Karadza: The CMHC had that data.
Nick Karadza: Roughly at about that price for year over long time.
Tom Karadza: Yeah, but like a 30, 40 year window.
Nick Karadza: We just justified it that way. So that was an easy answer for us earlier.
Tom Karadza: And it leaves you with a lot of profit, 5% compounded a year, is really good.
Nick Karadza: Totally. And it’s compounded on the purchase price not your actual investment amount. So you’re not paying 100% for the property, you’re paying whatever the down payment is. If you’re bringing 20% down, but you’re compounding 5% on the larger amount, then your return on investment is really solid. But it also gives us a very easy answer to tenants because it was like, “Hey, here’s the long story short.” And that’s what we’re taking.
Tom Karadza: And what we found is that, that’s the easier component in the whole thing. Most tenants are concerned with the monthly payment they’re going to have to make, as most people are. What are my monthly recurring costs? So the buyout price wasn’t as big of an issue. We’ve seen both sides of this, we’ve seen where properties have appreciated more than we’ve agreed to sell, which is fine, we’re all going to be happy with the return. If the tenant has some built in equity when they go to buy the property, we’re not upset with it.
We have seen people who have been upset with it, but we’re not upset with it.
Nick Karadza: But if you’re getting 170% on your money, as an example-
Tom Karadza: Whatever it is.
Nick Karadza: Because one of ours is somewhere around like a 200% return on our money over, I think it was like three or four years even. But that ROI is huge.
Tom Karadza: You’re not going to complain.
Nick Karadza: We left money on the table, but who are we going to complain to? Look at how much … The profit we made, we can’t be complaining, people are going to be like, “Guys, shut up and go away. There’s bigger problems in the world.”
Tom Karadza: We haven’t seen it often, but we have seen a few situations where the appraiser didn’t appraise the property high enough for the tenant to buy it out at the price we had agreed to. And in those cases, we agreed to honor all the credits and wait about six months to see if we can get it reappraised at that point, at the buy out price, which it did.
And then we did the whole deal then, and they were great tenants and that’s why we did it that way. But there is that kind of situation you have to be aware of as well, which is why you can’t buy the property for one price and then appreciate it like 15% a year, because the banks still have to appraise the property at the buyout price. You can’t get too aggressive, even if you can get a tenant to agree to some crazy buyout price, you just have to do the right thing in general, all the time.
Nick Karadza: There is one investor we worked with where I explain … After he bought the property and he signed it up for a pretty aggressive buyout number.
Tom Karadza: You told him it was too high.
Nick Karadza: And I said, I go, “The risk is, the bank is not going to appraise it for that number.” And he said, he goes, “That’s fine.” He was aware of what he was doing. He’s like, “I’d rather look like the good guy and pull the price down than leave money on the table.” So I said okay, he knows what he’s doing, he knows what he was getting himself into.
Tom Karadza: He was in control.
Nick Karadza: So if you could go into it eyes wide open like that, that’s perfect. You have an understanding of it. I think that’s the most important thing.
Tom Karadza: I was just thinking of another thing when we started doing this, how no lawyers or no banks understood how to deal with the paperwork, remember that whole era?
Nick Karadza: Oh man, if you said rent to own to a bank, they-
Tom Karadza: Even a lawyer, anyone.
Nick Karadza: You know what, I would still never say rent to own to a bank for-
Tom Karadza: That’s true.
Nick Karadza: If I was qualifying for a mortgage, I would say, “Hey, it’s an investment property or rental property or something like that.” You say rent to own, and it goes to the wrong person at the bank-
Tom Karadza: They give you the confused look.
Nick Karadza: They go like, “I don’t understand, what does this mean? We don’t know if we deal with this type of property.” It’s crazy. It’s no different to them. it’s an income property to them.
Tom Karadza: It’s basically a rental property, it’s just that you have also sold an option to sell the property if the tenants wish to exercise that option, there’s no obligation for them to. That’s what it is, they have the option to buy the property at a set price, but they don’t have the obligation to buy the property. That’s what an option is.
Nick Karadza: What do you say about the morga … Speaking of the banks, what do you say about the mortgage option? Because there’s penalties to break the mortgage. What do you say to people when they say, “Well, what kind of mortgage should I go with if it’s a rent to own property?
Tom Karadza: Even if we’re doing a three year term on the rent to own, we still always, I think five year terms have always got us the best rates. We’ll just usually anticipate the penalty that we’re going to get when we break that mortgage and build it into our numbers. If we have to increase the buyout price a little bit to cover that cost or just be aware that we have that, we’re fine with it, there’s enough profit to deal with it.
Nick Karadza: Yeah. There’s a few things. There’s that, and then typically, if we’re going with a five year term, it will be a variable rate because with low interest rates right now, the penalty to break a variable rate mortgages typically three months interest, so it was a pretty small penalty in the grand scheme of things. There’s a number of people that we’ve seen do one year, they just do one year, just constantly renew it as well. If they want to, so you can do that.
Tom Karadza: Or if you can’t get an open-
Nick Karadza: Yeah. If you can’t get an open depending on what the rate you were paying for it being open, but trying to line up like a three year mortgage with the-
Tom Karadza: Disaster. With the buyout? Because if the buyout happens, usually there’s a delay of one or two months or they’re going to buy it one month early or whatever.
Nick Karadza: Or they want to extend it for a year, or whatever. So, it’s either you just go and calculate the penalty like you said or you go super short term and hope that you can push it or arrange it.
Tom Karadza: And that’s a good point. We didn’t talk about extending it. But extending it does happen. Two months they need to extend it, three months. You can extend it a year, but once you go beyond a year, we kind of have like a frank discussion with the tenants like, “Hey, are you going to buy this property or not? Because we can’t extend this thing for like 10 years. We’re not going to let the credits that you earn every month, on this property add up to the value of the home.” So there is this window where like a three year rent to own is really nice, you can extend it maybe for another year, maybe even another two years. But then after that, it’s like-
Nick Karadza: When you extend it, you also don’t have to give credits. You can change.
Tom Karadza: That’s true.
Nick Karadza: Legally the way it works once that the option date passes, as long as you’re not doing anything, check with your lawyer. That’s the disclaimer that we officially have to give. But what the lawyers kind of explained to us in the past is like, “As long as you’re not doing anything malicious to prevent them from buying the property, like trying to sabotage their building to get financing on the property or something. Once that date passes, then they don’t have the right to buy that property anymore at that price.”
but like you said we’ve often done things that extend, we’ll sit down and have a conversation with them and see where they are. And we’ve extended it and continued with credit and increased the buyout price or not given them credits and not changed the price or done one and not the other. We’re just negotiating at that point to figure out what the scenario, what their best scenario going to be and then we can carry over their down payment or not or whatever you want to do, because we control the numbers and we know our profit numbers we’re willing to figure out something that works for all sides.
Tom Karadza: You’re bringing up a good point, that’s why they’re kind of so flexible. We’ve seen this kind of stuff happen, we’ve seen people pay for one year upfront on rent to owns, two years. We’ve seen people give like a $20,000 option fee and pay for two years upfront on rent to owns. Another thing we didn’t discuss on rent to owns, there are the number one properties where tenants will take the best care of the … Not all the time, but in general, they are getting much better … not only will they take much better care of the property usually, but they may even do improvements on the property that no regular tenant in a regular rental would ever do. I’m talking like paving driveways, renovating inside. We’ve had people put up fences around.
Nick Karadza: Yeah, hardwood floor, finished painting, all sort of stuff.
Tom Karadza: Everything that you would just never see. And it’s not perfect, it’s not like all … there has been rent to own where people walk away and leave you with their vacant property that you are going to have to deal with.
Nick Karadza: With garbage that you have to empty out and stuff, whatever.
Tom Karadza: We’ve seen people drive by their properties, in the property they left all the furniture in the property, everything.
Nick Karadza: Listen, in everything there is a superstar tenants and the not so good tenants and the terrible tenants. On average in our experiences is, we’ll bring a little bit higher caliber tenant on average than on a lot of other properties
Tom Karadza: Just because of the income also required to get into one.
Nick Karadza: Yeah. The income, and they’re viewing … The key also is they view it as their own property. So, when they hand over money, they’re now financially committed to the property because it’s a nonrefundable option fee. So, they’re financially committed to the property and they’re emotionally committed to the property because they view it as their own. So that can be a plus. It can work out that way. I’ve had numerous people cry when we hand them over the keys, because to them it’s home ownership to them.
And they’re crying, they’re so emotionally committed to this property. And truthfully, that’s something that we’d like to see. Like with this type of investing strategy, we want them to be that committed to the property, because it generally makes for a better situation overall. Not always, but generally, there’s never anything that’s perfect.
Tom Karadza: I’m always amazed at the demand for a good rent to own properties. Do you remember when there was that one investor that we were working with it that I think basically called you a liar over the phone? Thinking that there was no one in their right mind that was going to rent a property, for more than average rent in that neighborhood. And we were trying to explain that this is different than rent like it’s-
Nick Karadza: He had already bought the property, we had helped him to find the property-
Tom Karadza: And he was already regenerating, but had convinced himself that nobody was going to pay the amount of rent required.
Nick Karadza: And he called me a liar and I got upset.
Tom Karadza: I remember.
Nick Karadza: So, out of spite, I’m like, “Okay.”
Tom Karadza: I remember you closed the door and everybody in the office … Remember we were out of another … that was when we just started. I knew you were going to try to rip that guy’s head off over the phone. But to your credit, we went there, remember?
Nick Karadza: About a week later it was filled-
Tom Karadza: Because why? You went and said, “I’ll go do it for free for nothing. I’m going to find you a tenant.”
Nick Karadza: Absolutely. Well that was-
Tom Karadza: He wasn’t following what we were telling him to do. Remember?
Nick Karadza: Not all. But that was our commitment to people. And we’re big … I mean, to keep your word to us is-
Tom Karadza: That’s still our commitment that we’re going to have everyone’s back.
Nick Karadza: But you got keep your word. So I was like, “Okay. So, this is what I’ll do,” so I did it. We filled it, at no cost and I said, “Hey, listen, it’s done, here’s the agreement, here’s the money, we’re going to part ways now, this is it and we are done.” And he was happy. I met him, I remember, because I went to his house to meet him and-
Tom Karadza: It was right around Halloween it might have been on Halloween night.
Nick Karadza: I remember all that.
Tom Karadza: Yeah. You why I remember? I was filling a property for a friend of ours who bought a property, but didn’t have the time to go find a tenant. And I was getting frustrated that he had a vacant property. So I said, “You know what, I am going to go find you a tenant”. So I advertised that property while you were showing that property. I collected money on his property on the very first showing.
On your very first showing on that guy’s property, who called you a liar, you collected money and signed the deal. That was the one we did seven properties in a row on one showing. And do you remember the time we filled the property with tenants. We forgot the keys. They looked through the window. Do you remember this? It wasn’t one of ours. I looked through the windows and-
Nick Karadza: I want to be clear. Oh, we forgot. I think you forgot.
Tom Karadza: No, no, this is a different story.
Nick Karadza: No, which one is that then?
Tom Karadza: This is the one it was across the street from a high school. And we went go show the property-
Nick Karadza: Oh, yes.
Tom Karadza: You forgot the keys, I think in this case, you forgot the keys. You forgot the keys. Remember? We always remember the story where I forgot the keys.
Nick Karadza: You’re trying to drag me down.
Tom Karadza: No, I forgot. You know what? I’m so happy right now because I always forget about this story.
Nick Karadza: No one listening believes you at this point.
Tom Karadza: You forgot the keys. I think there was even a pool on the backyard, which we normally don’t do.
Nick Karadza: No, there definitely wasn’t a pool on the backyard.
Tom Karadza: No? Okay.
Nick Karadza: I know the house you are talking about.
Tom Karadza: Okay, maybe I’ll give you that, let me give you that.
Nick Karadza: There wasn’t even a backyard, it was a corner lot, it was a side yard.
Tom Karadza: Yeah, that’s the one.
Nick Karadza: Now, no one can believe that I forgot the keys because you’ve already forgot the-
Tom Karadza: No, you forgot the keys.
Nick Karadza: You already forgot all about-
Tom Karadza: You forgot the keys. They looked through the window and decided that they wanted to do a rent to own on that property and we followed up with them over email. You went to go I think show them the property afterwards, but they decided to do it just basically on looking through the window. That was the time when we showed, we filled seven rent to own properties in a row on a single showing on each property, do you remember that? And then, do you remember what happened next? I thought I was hot. “Are we seeing shit?” I thought I was hot shit and I was going to teach somebody on our team, on how do you fill a property.
Nick Karadza: And you couldn’t do it.
Tom Karadza: It’s because like seven weeks we went through like 50 people, And you know what? That’s a big lesson for any real estate investor, beginner or experienced. It doesn’t matter how much experience you have, you’re always going to hit one property that for whatever reason just takes you forever to find it a tenant on. Doesn’t matter the property type, rent to own, straight rental duplex, it doesn’t matter. And you know what’s often the best property, in the best area that you think you’re going to feel the fastest, it’s always those properties.
Nick Karadza: You got to be humbled every now and again. It’s just the way the world works.
Tom Karadza: And I remember thinking, “Hey, you know what?” I think it was JP on our team, “JP, come with me. I am going to show you how to fill this property.
Nick Karadza: Look how great I am.
Tom Karadza: Oh my God. We drove up to that property for I think it was seven weeks. Holy smokes, that was disaster. But we got it done. Wow.
Nick Karadza: Well, it wasn’t really a disaster. When you make it seem like that. Seven weeks wasn’t really a big deal.
Tom Karadza: You know why? It was only a disaster because in my head I had told myself on seven hours, that it was going to be like a one day thing drive up there fill it, find the paperwork and be done.
Nick Karadza: In seven weeks, you probably went to the property ten times in total. It’s not like it was the end of the world.
Tom Karadza: It was very profitable seven weeks there is no doubt. That’s something that you’re always really going to see when you break down how much work you actually do with rental properties compared to what the hustle is over them, and if you divide the profits that you make by the hour, the hourly rate of dealing with them. It’s always the best deal.
Nick Karadza: You know what, that came to mind once. I was in one of the student properties, you were at Disney World.
Tom Karadza: And you like pointing that out, eh? I remember. I know that story. Go on.
Nick Karadza: Because I had to sit on these stairs thinking about you are in Disney world for a while.
Tom Karadza: I think you called me from the stairs. “Tom, that’s where I am. I’m on the stairs.”
Nick Karadza: So I was trying to make sure that during Disney, at the happiest place on earth, you thought about where I was. So, I was sitting on the stairs-
Tom Karadza: Sucking water.
Nick Karadza: With this vacuum, and just against it … because it was laminate floors, so it was underneath the laminate, and the vacuum just ran against that laminate floor-
Tom Karadza: I think I could hear the sucking through the phone.
Nick Karadza: Sucking water, and I was like, “Man. Why am I sitting here?” And I was just to light the barbecue, it was like a Sunday afternoon, I was going to light the barbecue and I got the call that there was water coming in. I’m like, “You got to be kidding me.” So I went down, and I had to empty out. I don’t know how many loads of water from that thing. It was weird, we had never have had water in this property before or after, but it was that really … A few years ago, we got that really cold winter where there was some frost cracks in the ground. It was in the paper and stuff. In the middle the night, it got so cold that the ground would actually shift from frost cracks and I think that it was so cold that it froze underneath.
Tom Karadza: Is this something you just making up on the fly?
Nick Karadza: No, Seriously look it up. That was a few years ago. It’s funny, I was just talking about it last night with my wife. So anyways, water came in this property and I was just sitting there sucking it out. And that’s when I did the math, I’m like, “How much do you think … ” I had hours … I was doing the math, by the way. Like how many hours do you think I’ve been here? I was thinking about the profit of the property over the years. Things like that. I forget the numbers, but I was like, “Wow, wow this is like the most profitable thing … sitting here with this vacuum right now, is like the most profitable thing I could be doing. So, I’m good with it.”
Tom Karadza: I always say that about real estate, it is the most profitable thing you can be doing. The interruptions though, are not advanced, you don’t get advance notice so they’re always a little bit-
Nick Karadza: You just got to remove the emotions. If you remove the emotions from it, it’s really like not a big deal at all.
Tom Karadza: But generally, they think it’s so emotional. Both the investor and anyone living in the property, it’s just an emotional thing.
Nick Karadza: Yeah, but as soon as you can do that … I was ticked off at one of our other properties. I was like, “You know what, I’m sick of this. Why don’t you just sell it?” And you were like, “You know what, just relax, we’ll wait till tomorrow, we’ll see where things lie.” I’m glad we didn’t sell the property obviously, I’m glad we still have it-
Tom Karadza: I think I changed my mind, we should have sold that one. I’m joking.
Nick Karadza: You would have. Again, another time when you were gone is when those tenants left. This is another student property.
Tom Karadza: No. I emptied that property as well. No, no, I know what you’re going to say. And I also put a dumb box and emptied out that property too.
Nick Karadza: No, no. You never emptied…
Tom Karadza: I know the one you did. You know what it is. I handle a lot of shit too. I just don’t record it all in my brain to repeat back to you regularly. That’s the thing, unless I’m doing that.
Nick Karadza: There is less to record. You have to search harder for those two, three stories. I’ll never forget though, the guys that came to empty that house, they were happy. I think we actually…
Tom Karadza: What was it? The students left everything.
Nick Karadza: They left everything. I couldn’t believe how many new pairs of shoes, leaf jerseys. It’s like they literally decided, the last day of the lease came, and they just walked out to the house and they left everything. The junk removal guys were so happy, they went through, they-
Tom Karadza: Was that the one where the guy called us back a couple months later saying … No, that was a different house.
Nick Karadza: That was a different one. That was the guy in the basement. But yeah, I’m still in shock to this day at how much stuff those guys left.
Tom Karadza: I think with real estate though, the whole experience, you just learn about-
Nick Karadza: Though you’re right. But it is not like they we’re hoarders, it wasn’t garbage, it was like good stuff.
Tom Karadza: We should do one of just all of craziest stories we’ve seen over the years.
Nick Karadza: Oh man, will scare … No one will ever invest.
Tom Karadza: You know what we have to do, we have to do a talk about the marketing of properties and stuff because that’s what we’ve learned a lot. That’s basically been the key to the lot of stuff. It’s not been crunching the numbers, it’s how good you are at filling, and marketing, and finding people for these properties. Okay. Cool. We’ve covered a lot of rent to own stuff. Good. Anything else you want to share?
Nick Karadza: No. There’s so much stuff, but well, let’s wrap it up to that, we’ll dive into some stuff in a future one.
Tom Karadza: Cool. Hey, it’s Tom Karadza. So if you enjoyed that and want more information, you can check out, Rock Starinnercircle.com. That website has our blog, it has links to different videos and different resources. There’s a couple of the free books that we offer are linked off that site, a training class that we offer here in our offices, is available to register off that site. A bunch of different resources that hopefully you’ll find useful are available to you there.
And if you have a show idea, you want us to cover a topic or have something that you want discussed on the show, the best email address for that would be podcast@Rock Starinnercircle.com. If you send an email to that it’ll get through to us. And thanks for listening. This is still new to us, so we’re kind of filling our way out in these podcasts. The next few weeks, we already have a few shows booked, next week, there will be two shows. And we have people already reaching out to us who want to be on the show, so I think we’re going to have some pretty exciting guests for you over the next few weeks and months. We’re really pumped about all this. Until next time, your life, your terms.