Recent research on doing a rent 2 own on a commercial property reminded me how diverse the rent 2 own landscape is. There are so many different kinds of properties—and people—out there.
The rent 2 own model fits best for what some would call “vanilla” properties: basic, single-family homes within a not-too-small city. That’s sometimes not what people want. Which doesn’t mean a rent 2 own won’t work on other properties but the challenges are greater. Sometimes you just can’t “fit a square peg into a round hole.”
Here are some unique situations:
While it is possible to do rent 2 own on commercial properties, they have to be evaluated entirely differently because a commercial loan is based on entirely different criteria than a residential loan. It’s not even the same department at a bank.
For commercial loans you usually need more down, at least 25%. Thankfully, that means no CMHC involvement. But, the interest rate will likely be considerably higher than for a residential loan, which, of course, means much higher rent to our clients. Also, there will be some up-front fees for getting the mortgage, which adds to the costs of acquiring the property.
The lending qualification standards are also different: they depend not so much on your income or credit score but on the property’s ability to return sufficient income to pay the mortgage. And finally, property appreciation, while somewhat related to general land value changes, are more tied to the income that is produced by the property. Raising income potential raises the property value.
We get quite a few applications from people wanting acreages. These are challenging for a few reasons. First, the acreage needs to be small to qualify as a residential property. If larger than the threshold size, then only the area around the residence that falls within that limit will be used to appraise the property. So, for example, if the threshold is 5 acres and we are asked to purchase a 10-acre parcel, we’d have to get the additional five acres for free because only the first five can be used for appraisal purposes.
Second, we have to make sure it is not too rural as we have to evaluate it from the standpoint of what we are left with if the deal fails to complete in the end. It is generally harder to dispose of a rural property at a value level we need to get from it to return our investment.
Finally, there are often utility challenges with rural properties, such as wells and septic fields. The latter is especially problematic. Unless the field is relatively new, demonstrated to be working well and to have a long remaining life, we could not touch such properties; septic field replacement is simply too costly.
People fall in love with specialty homes: log cabins, unique
designs, distinctive features.
But the problem is: Everyone’s taste is different. And many people
who “love” these homes, love them only as a showpiece but wouldn’t really want to live in them permanently.
When you’re looking for a home to live in, you tend to get more practical than when you’re just admiring a showpiece. Which means the “showpiece” has limited resale potential.
As a rent 2 own provider, we’re looking for resale potential, not showpieces. I don’t really care if it’s a property I personally like, as long as the client likes it. But it does have to be a good investment. These homes rarely fit that criteria.
In today’s economy, at least in this corner of BC, we have to deal with condos and townhouses because many people simply can’t afford single-family homes. You need an annual income of nearly $100,000, for example, to qualify for even a basic single-family home in Abbotsford.
But they do present their challenges. First, they don’t appreciate as well as single-family homes. And with a model that requires appreciation, we need to make sure it is an exceptional deal in the first place in order to make the model work.
Second, there is a strata fee to deal with. That is an outright cost to us and needs to be added to the rent the client pays.
Third, many strata property bylaws don’t allow rentals. With rent 2 own, during the lease-option period, you are technically renting, even though it doesn’t fall under the Residential Tenancy guidelines, and those properties that do not allow rentals won’t allow us to do a rent 2 own on them. So the choice of properties is limited.
We can, and do, rent 2 own contracts on strata properties but the choice is quite restricted.