The Rent-to-Own Strategy: 20-24% Passive Returns Without Landlord Headaches

Introduction with David Pereira

Hey everybody and welcome to another episode of CRESI’s Ontario Landlord Series, where we are bringing investment strategies, tips, tricks, education, information for you, the Ontario landlord. And today we’re going to talk about something not all landlords understand and are aware of. It’s a different investment strategy where, technically, I guess you’re not still a landlord, but you are investing in real estate and you are working with kind of a tenant — we have to figure out how this all works out.

They are renting it, but it’s rent-to-own — a strategy I’ve heard about over the years, talked to a few people about, but we’re bringing in a specialist to make sure you guys understand everything about it. David Pereira, how are you today? Thanks for joining us. Hey, Kevin, I’m good.

I love the Blue Jays hat. The split wasn’t exactly what we wanted after we ran that first one, but we’ll take it. Hopefully we take some in LA and wrap it up in six or seven back home. I’m normally wearing a CRESI hat when we’re doing this.

This is probably the first episode where I’m wearing a Blue Jays hat. But yes, it’s a big game tonight — game three of the World Series. Just so you understand the reference there, we’re one and one heading out to LA.

But yeah, I’m going to try to catch the game tonight and let’s get a big win — a series win — and we can celebrate. But let’s talk about how we can celebrate with your rent-to-own strategy. Why don’t we start with a little bit about who you are, how this came about, your background, and why rent-to-own is the strategy you landed on.

David’s Background: From Buy-and-Hold to Rent-to-Own

Sure. My name is David Pereira, living in Mississauga, Ontario. I’ve been a real estate investor with my wife since 2013 — so we’ve been doing it now for 12 years.

We first started with a triplex in Hamilton. The realtor we used to buy the triplex literally wrote a book on rent-to-own back in 2010 or so — his name is Mark Loeffler. He wrote a book called Rent to Own Investing in Canada.

I loved the book. I loved the idea of win-win-win. But I didn’t take any action back then.

I was more focused on the triplex and growing our buy-and-hold portfolio. And that’s what we did for seven, eight years. We still have buy-and-hold properties. But in 2020, COVID had just kicked in.

I was listening to a real estate investing podcast, and I heard this woman who’s a rent-to-own operator. It jogged my memory back to the book I’d read. I called her that night.

And within a couple of months, we had basically become rent-to-own investors. What that means is we own the property — I have the mortgage on it, we own the asset.

We are renting this property out to a tenant buyer. For three years, we have a contract that says they’re going to pay this much rent every month plus an extra savings amount. And that savings amount goes toward their down payment, and they use that to buy the house back from me at a price we’ve already agreed upon.

So everything is set in stone. Everything is predictable. Everything is consistent. And as someone who had been a buy-and-hold landlord for eight years up to that point, I’d gone through my share of repairs, unexpected maintenance, tenant turnover, and cops being called once because there was a problem, right?

It’s the stuff people don’t talk about often enough, but that happens on a fairly regular basis when you’re a buy-and-hold landlord. None of that happened when I was the rent-to-own investor. Literally, all I had to do every month was log into the bank and deposit the e-transfers.

There was no visit to the house. There was no communication from the tenant, because the operator dealt with all that stuff. So as an investor, I loved it. It was passive.

I knew exactly what I was going to make. And everything worked out the way it was supposed to. So about a year, year and a half into that investment, which was a three-year investment, I decided I loved this model. I’m just a huge fan of the win-win-win model.

Everybody gets what they’re looking for. Everyone gets a piece of that pie. So I wanted to be the operator. I wanted to figure out how to create a business where I’m the operator and I do it the way I want to do it.

There were some things I would have done differently. So that’s what I did — I hired a coach and launched the business about three years ago.

The Win-Win-Win Model Explained

Nice. No, I agree with you — the win-win-win is definitely key here, especially if you’re looking for no headaches, right? As you’re going through this and giving tenants an opportunity —

everybody needs a roof over their head, and there are reasons why people can’t buy, different at different times. I really think this is a good strategy for the right person. I don’t think people should stop from buying today, thinking this is a better strategy — if you can buy today traditionally, I think that makes more sense.

If you’re paying somebody else’s mortgage by paying rent, and you can get into something like this, I definitely think it’s a win-win. It makes a lot of sense for both the investor and the tenant, because they’re going to become an owner. You mentioned — let’s talk about profitability. You were saying something about a very high return with it being passive.

So obviously every project is different, every situation is different, but on average, what are people looking at putting into something like this, and then getting back from it?

Profitability Breakdown: Real Numbers

Sure. So there are a lot of rent-to-own operators out there and we all have slightly different models. Some people do joint ventures — it’s literally a JV with an operator, and you’re co-owners of the property.

The way I do it, I’m a property manager. My role is property manager — I take care of the tenant, I take care of the property.

So I’m really a vendor to the investor, and the investor owns the asset. Using an example: let’s assume we buy a house for $500,000. We’ve vetted the tenant, given them a budget of $500K, they found a house they like with a realtor, and the investor is going to sign the APS at, let’s assume, $500,000. So the investor is in for 20%, right?

20% of $500K is $100K. Now the tenant buyer has to put in a down payment — we want skin in the game from that tenant buyer. On a $500K house, we’ll usually do about $15K as their down payment.

So they’re in for $15K upfront, which is offset from that $100K. But then you add in legal, land transfer tax, and I charge an upfront fee of typically about $3,000 for tenant vetting and everything else. So once you balance all those things out, the investor is in for $100,000. If they’re in for $100,000 over a three-year term, the way I structure my deals is that the investor is getting at least a 20% annualized return.

So over a three-year period, 20% times three is 60. I’m basically telling the investor that at the end of three years, they’re going to get their $100K back — because we’re selling the house to the tenant buyer — and they’re going to make $60,000 in profit. The way the investor gets that profit: some of it is through monthly cash flow. Each month I’ll send an e-transfer to the investor of, let’s say, $500.

And that’s on top of the mortgage, property tax, insurance — all those expenses are already covered. On top of that, the investor is getting additional cash flow — let’s assume $500, which is fairly standard for an example like this.

36 months times $500 is $18,000. And if I’m promising $60K, that means at closing, the investor is getting the remaining $42,000. All of that we determine before anything is signed, on day one. All of this is very predictable.

Nothing changes in the model. So from an ROI perspective, it’s 20% annualized. However, now that interest rates are below 5% — you can do a three-year fixed at close to 4%, slightly below — we’ve been doing 22, 23, even 24% annualized return.

Again, the split is cash flow and then the proceeds at the end of the sale. The other thing is, the way I make most of my money is at the end as well, right?

I do have a fee upfront, and a monthly property management fee, usually $100-150, but the bulk of my profit comes at the end when the transaction closes. And of course the tenant buyer is motivated to get to the end because they want the house. So going back to the win-win-win heading we have here — the reason we call it win-win-win is all three of us are incentivized to make it to the finish line.

I think you mentioned, just to circle back in case people didn’t catch it — I think this is great, the tenant actually gets to be involved in the house selection, because they’re going to be the purchaser, right? It’s not just, “hey, we have one property, who wants to buy it in three years.” It’s the other way around. It’s, “You qualify as our future buyer, our rent-to-own tenant — go out there. You have this budget we’ll work with you on.”

Go pick the property you like, that you want to live in. You have three years — do you ever do a program longer than that, or is it typically just three years for an exit? My preference is three years.

The reason for that is if I did six, seven years, life changes in six, seven years. There’s a lot of unpredictability you’re introducing to the equation. My job as property manager — and you know this, Kevin — is risk management.

I’m doing whatever I can to remove risks that could enter the equation. So standard is three years. If we have to extend a year for a variety of reasons, that’s okay, we can do that — we can add a year to the contract. If we have to roll one more year, we’ll do it. But I don’t want to start with five, six, seven years, because so much changes and I think you set yourself up for failure. Kevin, you touched on a really important point about tenant-first rather than property-first. I do want to get into that, because it’s a core detail.

I don’t own an inventory of properties.

Tenant Buyer Vetting Process

My job upfront is to vet the tenant. For every hundred applicants I get, there are probably two or three good ones that I think will make it to the finish line. So the very first part of my job is making sure we get the good ones. That means they have the income — right,

the stable jobs they’re going to have in three years, so they can qualify. Their credit score is probably damaged, but what we have to figure out is why it’s damaged — is this a long set of habits we’re probably not going to fix, or is it a one-time, explainable event? So we look at their credit pretty carefully. Their down payment — they need to have skin in the game. I won’t do zero down, I won’t do $5K down.

It’s not enough. I need them to be serious. I need them to have enough skin in the game. I also need to know they’re capable of saving $10,000 or $15,000.

If they’re not capable of doing that, they’re probably not going to make it successfully to the end. And then there’s all the usual reference checks — all the usual stuff you do as a property manager when you’re vetting a tenant, checking out social media profiles, all that. Once I’ve done that, my broker comes back and says, here’s the budget they can safely afford.

They may have aspirations of a $700,000 home, but the reality is, if we project three years out what we think they can safely do, we then have to back that up, because the price today — let’s assume, going back to our example, $500,000 today. We’re agreeing that in three years the tenant buyer is going to buy that back from the investor at a price closer to $575,000-$578,000. We assume the market’s going to go up 5% per year.

And that’s how we create the profit — we’re agreeing today to buy at $500K and in the future at $575K. So we have to make sure they can afford $575K in three years, and that’s the math we have to do.

Once that’s done — and that’s the hardest part, I’d say — then they work with the realtor and find the house they want to buy. They’re emotionally invested because they chose the house for their family. There’s a reason for them to care now.

And as you said to me before, Kevin, they have an owner mindset, not a tenant mindset. They’re emotionally invested, financially invested. They care about taking care of their house.

They care about getting to the finish line and becoming owners. In every deal we’ve done, when I go visit them, they’re happy to show off — hey, here’s what I’ve done to the house lately. We allow tenants to make changes to the home as long as it doesn’t hurt the value. They want to put in a fence,

they want to install a bedroom, paint the place — I ask them to let me know, and if they need a permit, get a permit, because ultimately it’s still the investor’s asset. So we don’t want electrical work or anything that’s going to potentially damage the property, but it’s incredible what people do to beautify their home.

And the nice thing is, they’re putting in money to make their home better — it raises the value, and that’s equity they get to realize in the future. Everybody needs a roof over their head, we say that all the time — that’s why I think real estate is the best investment in the world. This is a really great way, like you’re saying, win-win-win, especially with the market today. Prices are going to increase. I know that. I don’t know how quickly, I don’t know at what rate.

I don’t have a crystal ball, but I do know they’re going to go up. And I think looking at 5%, that’s traditionally something we’ve always cleared or been above, right? We’re right in that range. I think that’s still a benefit to the tenant there.

The investor is making a little bit of money for sure, but I still think the tenant is going to have a better win at the end, traditionally, over the course of time, as things have averaged out. So you mentioned you have some long-term hold assets — I know you have other investments as well. Diversity is king, for sure.

But again, let’s share some of the real estate pros and cons out there between the long-term hold program versus the rent-to-own. I know we’ve touched on them, but we’ll give it a once-over here as well. Yeah, so I think there are some differences.

Again, I’m not anti buy-and-hold — as I mentioned, we’ve got properties, we are long-term buy-and-hold investors and landlords. But there are some core differences. Number one, it’s great returns, as I mentioned — 20% annualized with a lot less hassle, right?

You’re not dealing with tenant turnover. You’re not dealing with the usual property management or landlord headaches. It’s truly passive, right?

My investors don’t hear from the tenants. I’m the one, the operator in the middle — it’s my job to make sure the rent’s paid on time, the savings credit is paid on time. And I’ve got someone who visits the properties, or I visit the properties, every three months.

And if someone’s going to be late on rent, my general rule is, look, if you’re going to be late, let me know in advance so I can prepare for that. Communication is very, very important.

And that’s what I tell my tenant buyers before they sign a contract. If you pay on time and communicate well and take care of your house, this is going to work wonderfully for you. That’s the expectation. From the investor’s perspective, there’s no communication to them except for what I tell them.

Each month they’re getting e-transfers from me on the sixth of the month. They don’t hear about any repairs. They don’t hear about a toilet issue, because they don’t have to deal with it. We have two contracts.

We use the standard Ontario lease, but we have a second contract called the option-to-purchase contract. That contract states the expectations of the tenant buyer. In order to exercise their option to purchase, they have to take care of maintenance, utilities, snow removal — all of that.

This is now the tenant’s responsibility. It’s like they’re a homeowner. So all of that goes away, and that’s what makes us passive. There’s a built-in exit strategy.

So the investor knows, this is a three-year investment, I’m going to get my cash in three years and I can redeploy it into whatever I want, right? Whereas with buy-and-hold, our cash is tied up.

We can refinance, we can pull out equity. A rent-to-own investor is doing this because they’re trying to grow their cash reserves over a three or four year period. They know exactly what they’re going to get back in three or four years, and they can redeploy it into whatever they want. Tenant quality —

I mentioned the process I go through vetting my tenants, and that’s a huge differentiator, right? Because if I do my job of getting a great tenant, everything else goes very smoothly. And we never run into LTB issues — if we had to, I’ve got a paralegal I can reach out to, and we could go through that process.

I’ve never had to do that, because the tenants have this owner mindset, like you said earlier. The last part I really like about this, and it’s the win-win-win — there’s a social impact. We are literally putting a roof over a family’s head. We’re allowing them to own — we’re giving them a path toward home ownership, and we’re not sacrificing

profit to do this. Yes, we’re taking a little less profit potentially — maybe I could make 30% in my buy-and-hold. In this case, I’m taking 20%, but I’m helping someone earn a home.

So those are the core differences between rent-to-own investing and buy-and-hold investing.

Credit Score Strategy: Front Lobby + Credit Coaching

I love it. And again, I think this helps people out, right? It makes a lot of sense for people when you find the right person who can actually do it and qualify, because people have their reasons why they can’t buy today, but to do this in advance, in an appreciating market and so on, is a benefit to them. One thing you mentioned about their credit score — I’m sure you’re probably familiar, but Front Lobby is a great program, because since it’s an automated recurring monthly bill you track through their system, your tenants or rent-to-own people can actually increase their credit score simply by paying their rent on time.

That’s part of my process. I have all my clients on Front Lobby, so we let them know, hey, this is part of what we give you — you’re trying to raise your credit score, and Front Lobby is one way we do that. The other thing we do is I pay for them to be with a credit coach.

There’s a credit coach I work with, his name is Richard Moxley. He literally wrote a book called The Credit Game. On YouTube he’s got a ton of resources. My credit is in good shape,

but when I read that book, I learned a ton of stuff, like utilization rates and how many errors are often in your credit report. Over the course of a term, at the very beginning, my tenants meet with Richard. They give Richard their Equifax and TransUnion reports. He goes through and looks for errors.

Then he writes up a plan they need to follow for the next three years. We touch base every six to twelve months to make sure they’re on track. That way, when we get to the three-year mark, I know their credit score is 700 or above. So there’s no reason they shouldn’t be able to get the mortgage, right?

The components are the credit score, the down payment, and the income. I can’t control their income, but for the down payment, they already have some saved, and now we know they’re contributing rent plus this extra savings amount, so I know exactly how much down payment they’ll have in three years. The credit score I help control by putting them with a credit coach, and it goes up.

So at the end of the three-year mark, I know they’re ready. Then I work with them and the mortgage broker to get their paperwork together. It’s an easy transaction. I like that

you’re setting them up for success there, even providing a coach to help guide them through it. We do something similar with first-time home buyers and a financial planner when they’re a ways away from being able to secure that first home — how do we get there, and having a plan. I do what I do, I know what I know, but there are other professionals out there we want to connect you with, and I like the way you’re doing that as well. CRESI is an acronym for Complete Real Estate Solutions and Investments, and it’s about being the complete solution for people through their real estate and their investments, whether it’s through us or through connecting them with professionals like yourself or anybody else who’s an expert in their field.

So David Pereira with Rent to Grow Homes, folks — we’re going to get you his contact information. If you’re looking for someone to guide you, advise you, or partner with you to help you rent-to-own homes, David can definitely assist you with that. Is there anything you want to throw out there, a tidbit to leave our audience with today?

Using Rent-to-Own to Exit Properties in Down Markets

Yeah, so one of the things I’m looking into now is helping existing landlords who want to rent-to-own their properties. It’s a difficult time right now to sell, right, because the market’s down. It feels like we’re near a bottom.

We’re not quite sure. So I’m starting to get approached by realtors or investors who say, look, I’ve got this property in Brantford, I can’t get market value for it right now, but I’d be interested in rent-to-owning it so I can get a higher valuation in three years — is that something you can help me with?

So it’s not necessarily the tenant-first model I typically do, this is more property-first, but it’s actually something I have a model for now. So it’s something I can help with. If any of your listeners who are investors are interested in that, feel free to reach out — or if you’re looking for the traditional tenant-first model, I’m happy to talk about that too. I don’t want to use one of my existing properties, that’s obviously kind of our bread and butter, but I’d be happy to answer questions or talk to anyone and provide information. No, I think that’s a good alternative for people right now who are trying to figure out what to do, because it’s a tough market to sell, and depending on what type of property it is or what’s going on, a lot of people are just lowering the price to whatever they can to unload something if they need to.

If you don’t need to sell and can hold on to it but you’re just wanting to avoid vacancy or thinking about a different way — because even with Bill 60 being talked about right now, and what’s coming, which we’ll get into another day — this is a good alternative as a real estate investor to help out these tenants, potential future owners. David, thank you so much for joining us today. I greatly appreciate you sharing your experience, your wisdom, your knowledge.

So folks, rent-to-own — this is the guy you want to talk to for sure. He’ll work with you the entire way through, which I think is great, as well as being the operator — it keeps your investment passive, which is something people don’t think is often true in real estate — that there are ways to have a passive investment. This is one.

Thanks again, David. I appreciate it, and we’ll talk to you soon.

Take care.

Disclaimer and Wrap-Up

Please remember, while we are professionals, this podcast is for informational and entertainment purposes only. The advice shared may not apply to your unique situation. Always seek personalized advice from a qualified professional before making any investment decisions. Hey everybody, thanks so much for joining us this week.

I hope you enjoyed the episode. If you’re finding it informative and useful, make sure to like, subscribe, share with a friend so that we can keep getting the information out there to Ontario landlords and keep on joining us. We’ll see you next time.