Table of Contents - Rent to Own in Real Life with Kevin McHardy
Dave Debeau [00:00:09] Everybody, welcome to this episode of the Property Profits Real Estate podcast today, zooming in with us all the way from beautiful Bradford, Ontario. We've got a rent to own specialist and an airline pilot. Pretty interesting combination. Kevin McHardy, how are you doing today, Kevin?
Kevin McHardy [00:00:27] How are you?
Dave Debeau [00:00:28] I'm fantastic. Fantastic. So, Kevin, how the heck does an airline pilot get into doing rental deals?
Kevin McHardy [00:00:36] Great question. So in 2011, I started investing real estate and a realtor friend of mine sent me a rental deal that looked pretty intriguing, like the return site, like the whole structure of it. And I read a few books, did a little studying and research on it, go right into my first rental by myself. Yeah.
Dave Debeau [00:00:58] So for folks that are watching this, who aren't familiar with or who aren't all that familiar with rent to own, can you maybe give us kind of a big picture of the there's a few different ways to do it. Can you maybe kind of give us a big picture of what is rent own and then how you structure your deals, how you do your deals, if you don't mind?
Kevin McHardy [00:01:17] Absolutely. So, again, when I started writing them all my own. So there was no partnership. I'm now doing a joint venture structure. So 50, 50, 60 40 partnership split. We do a 10 first program that the tenants actually choose the home and the price point that they're approved for. So it's a bit of a range, but I will prove them for the final value, so make sure they're aware of that. So, yeah, right now we're doing joint venture structures with the Tenant Fireproof program. I've been reading a little bit of leasebacks, but for now we're sticking to that and also doing some wholesale principles, which it's actually been quite possible to do a number of deals as well. Give you one hundred percent profit to the investors.
Dave Debeau [00:01:56] All right. So just just so folks are watching this, if you're not familiar with Rent to own and basically big picture rental deal is where you find somebody who can't qualify for a normal mortgage right now because of whatever credit challenges usually might be. Lack of a down payment could be a whole variety of different reasons. And you get them into a house right now, which they rent from you, but typically with an option to purchase that property two or three or four years down the road. So this gives them time to a build up their their credit over that time frame and B, usually most rental programs to pay in their down payment over time. So it's a it's an awesome double whammy for the tenant buyer because, A, they're able to live in the house now, sooner rather later, be able to get into the house without having great credit right off the get go and see it gives them the time to pay and then build up their down payment, kind of like a forced savings account and get the credit cleaned up so they can qualify for financing down the road. So, Kevin, you touched on a few interesting ones, other ways of doing rent own or what are called sandwich leases, which is basically where you start the house for several hours first and then you find somebody who wants to rent on that house and you're kind of the intermediary there between the homeowner and the buyer. And you make a little bit of a profit in the middle there. The other way that you're talking about, which is also something that I did for a number of years, is tenant first or client first rent own where you find the tenant buyer first and they they fit your criteria. And then you go out and you buy them a house, you buy them the house that they like as long as it fits your criteria and then they live in it and you rent it to them for two, three or four years kind of thing right now. Tell me, what is the wholesale version of a rental deal? What what does that look like? Because that's how
Kevin McHardy [00:03:59] we typically will charge. It starts off usually it's one percent of the approved purchase price or in some cases we've been offering a flat fee, which we find works a little bit easier that way. We know exactly the amount that we're going to get as well as the investors. So we'll do a flat fee. Typically, they range from five thousand eight thousand dollars, depending on rent to own it again, the time, the land and such. So we have a full mortgage scheme that we use for our company and myself now. So we'll get a whole process from the beginning to rent to the end. Basically we the entire package. So the summary of the applicants, we'll collect your payment. You're referring to the initial down payment. I will have everything in place. Investors, this just in turn to invest in the same as we move with the joint venture. But essentially this is just one hundred percent. So little ability to manage it themselves. We can also do an option. We'll manage it for them because we do get some investors, some northern Ontario and such, and most of the rentals that we do typically in southwestern Ontario. So we still offering to essentially across the province. But there's kind of two parts that own wholesale deal in the sense that we'll manage it or they can choose to take it all. So the most. These, again, range from the start around one percent, but sometimes there are some we have to do a flat fee, up to five thousand dollars.
Dave Debeau [00:05:15] All right, that's pretty cool. That's if if somebody says, hey, you know what, I don't want to do a 50 50 split, I'd rather do the whole deal myself, but I really don't know what I'm doing. Can you can you can you find the buyer for me? Can you find the house for me and create this package and then even manage it for me?
Kevin McHardy [00:05:34] So, yeah. And that's sometimes often the hardest part of any single state deal. You want to find a beginning that makes your money at the end. So we find that a lot of people reaching out to us lately looking to sell us.
Dave Debeau [00:05:46] That's cool. That's an interesting service that you're offering their covid. So I kind of went over it briefly. But why don't you kind of tell me in your your own words, what are the the big benefits to a tenant buyer for doing a rental deal? Because obviously, you know, in order for you to make money, typically the way it's working and correct me if I'm wrong, is you're buying the property at today's price and you're selling the property to your tenant buyer three or four years down the road at an inflated price, obviously, because that's you've got to make some money somewhere to buy at today's price. You're selling it to them at a future price that's set today. So what are some of the big benefits for your tenant buyer for doing this?
Kevin McHardy [00:06:32] A great question. Obviously, there's a lot of frustration with people that rents are increasing and they're last terrors. That's what we focus on, the benefits for a tenant by our program. First, we were actually buying that. They're taking the house and buying it for them at the beginning. Obviously, they'll know their asset purchase price and that's a great scenario. The rents won't increase. And again, they get to choose that. That's a lot of times when people are moving from the GTA Square to Bradford Hamilton area of London, again, southwest Ontario. So we'll find that they want to put their family in an area with great schools and now they will find a lot of people are working remotely. So things are really shifting. He's five percent annual appreciation rate. So we're getting the stability and security of knowing that, a, they have a house, that they feel that they're a part of the whole process so they can choose the home. They can find the school district often of people that are renting in areas that they either want to stay in or maybe just to get moving from the GTA. So the benefits would be picking the house is a great role. And I find that with this with the amount of down payment of ten thousand dollars. So it's a good chunk of change to have in the program. And that extra little bit of having them choose the home gives them a cell. They feel like it's their own property. And we treat it as such as well in a way we're managing for two, three, four years and we are the landlords. We really want to not micromanage and let them feel part of the whole process. So I find that that's a great benefit. And then choosing a home as opposed to doing the opposite way. We were talking about the sandwich, which which is a great option as well. But again, we just stick to what we kind of know best and it seems to work well.
Dave Debeau [00:08:09] Yeah. Awesome, Kevin. So that's what's in it for a buyer, what's in it for, let's say yourself as a rental operator? So somebody said they're looking at different real estate investing strategies, trying to figure out what they want to do. Why would somebody want to do what you're doing, for example?
Kevin McHardy [00:08:27] Yeah, obviously, great. They return monthly cash flows if they want to rent or wants, you know, the highest amount of monthly cash flow. So, again, that was appealing to us to get involved with it and also the the sale price. So there's a good amount built in appreciation. So we know the sale price at the end. So it's a good amount of money with a mortgage pay down and the cash flow, the two components really and then that appreciation. So it's it's very good about.
Dave Debeau [00:08:54] So it back in the day when I was doing rent to own deals here in Kamloops, sounds like price points on the properties are kind of similar. Looking around the three fifty range at that time, what kind of price point are you guys looking at as a typical entry level type house in your area and the areas that you're focusing on?
Kevin McHardy [00:09:15] Yeah, pretty much four hundred and up. We are doing some now. We're finding a lot more down in the Windsor area. We're underwriting a few deals right now in that area. And so we're going to get home for two seventy five thousand dollars in the parts of Windsor and Chatham in that area. So and even in London, some starter townhouses. So primarily, I would say the majority of people, four thousand four to five hundred thousand seems to be the sweet spot for us.
Dave Debeau [00:09:41] Cool. Very cool. And your typical terms are, what, three years? Four years,
Kevin McHardy [00:09:47] typically three years, I would say again. Ninety percent of the three year we've got a few two years, but yeah, sometimes, ah, for the average two years
Dave Debeau [00:09:57] and just as a as a compare and contrast. So let's say you've got a a four hundred thousand dollar house that you're doing a rental deal with versus that same four hundred thousand dollar house as a rent. Property, what's the difference in the cash flow to you as the active investor partner? Would you say
Kevin McHardy [00:10:16] extra cash flow would be on top of me? So we turn
Dave Debeau [00:10:19] the cash flow? Yeah, I mean, so, for example, a single family home, what, if anything, would that cash flow,
Kevin McHardy [00:10:26] as you say, cash neutral maybe. Yeah. So we typically see between five hundred two thousand dollars in cash, one rental, and then we'll split that up with our joint venture partners. We usually do 100 percent of first time investors give it all the cash flow, so we just make the money at the end.
Dave Debeau [00:10:42] All right. So the way the way that you're I mean, when the smoke clears, the way that you and your investor partners really make your profit is the difference between what you paid for the property, what you sell it for, the five percent annual appreciation. Is that is that cumulative? So is it five percent? You're one then five percent more of that?
Kevin McHardy [00:11:04] Yes.
Dave Debeau [00:11:05] OK, so it's gone up, give or take 17 or 18 percent over the three year time frame. Plus, the mortgage has been paid down a bit over those three years. Is that by the time the smoke clears where your profit is?
Kevin McHardy [00:11:18] Yeah, and then again, the built-In cash flow component. So we'll will build that into it as well. So yeah, I have four hundred thousand will sell back to around four hundred sixty three thousand would be five percent annually for three years.
Dave Debeau [00:11:31] OK, and then the cash flow. But a good chunk of that cash flow probably goes back to your buyers as a rental credit,
Kevin McHardy [00:11:38] which is what the cash flow. And then we'll have the monthly auction payments consideration that we'll get back on top of their initial backing.
Dave Debeau [00:11:46] Yeah. Makes sense. Yeah, yeah. Yeah. Very, very cool. I love how you got the wholesale component involved as well. So some of the big benefits for rent on that that I'm aware of is a lot less property management per say because that gets shuffled off to your tenant buyers. So if the toilet starts leaking, it's their job to get it fixed, not your job. So all that kind of maintenance and repair is pushed off to your tenant buyer because it's the really living in their own house. Yes. So that's that's a big benefit. What are some of the dangers or pitfalls to the strategies? Because nothing's perfect. So what would you say to somebody?
Kevin McHardy [00:12:26] Yeah, so for the tenant buyer to start there with some of the concerns would be obviously if we go bankrupt or something, it happens to us financially without payment. If they don't finish the program at the end, we do have some things built into it. We'll give them an automatic six months at point five percent appreciation for those six months. And that's all described and given to them at the beginning with their purchase contract. And if you go to the lawyer, so that's one of the downfalls obviously are concerned about, which we're very transparent about. So they can forfeit that. And as well as all the monthly bills, monthly cash components that we stay for them each month would be forfeited as well. If they can't execute a purchase at the end of the term, we will work with anyone and everyone to try and help them out, obviously. But you have investors. So after the three to three year, six months of extension, we may extend it to another six months to get the full year again. We'll consult with the investors in order to see what's the best situation and opportunity to help the buyer up. So that would be a concern. And then things happen in life, death, divorce, things happen. So we'll deal with that on a case by case basis. So, again, we've covered everything. You've learned a lot. So just trying to be open and honest, transparent and work with people to try and help them out. But we are running a business essentially. So you do need to be conscious of that. And that's kind of what I learned along the way as well, trying to help people with maybe helping others.
Dave Debeau [00:13:49] Yeah, there's a brutal sometimes I know this came true for me a few times with my red donor experience experiences. Sometimes you just can't fix stupid.
Kevin McHardy [00:13:59] Yeah, yeah. Yeah, that's right. Yeah.
Dave Debeau [00:14:05] So, yeah, it's it's a great, great model. But again, it gets back to really picking the right people in that case as your buyers. Right. Because I remember my biggest, stupidest mistake was the red flag went off. I was interviewing this ten buyer couple and you know, they're kind of disastrous looking, but they had the option for you. But I can remember the the ladies saying something like, oh, yeah, I must be Tim Horton's best customer. I spend about six hundred dollars a month at Tim Hortons. My first one, it went sideways and I always remember names if they're stupid with their money, it's very, very difficult to turn those people around.
Kevin McHardy [00:14:46] So or leasing a vehicle three months before the rental in terms come and do it or financing a vehicle.
Dave Debeau [00:14:52] That's why that credit coaching is so important to use outside credit coaches. That's smart.
Kevin McHardy [00:14:59] Yeah. So we have a third party company work with outside of our mortgage, depending on their credit score. We'll set them up and we'll build that cost into the programs to help them out to really. Make sure that we can achieve ownership of the answer.
Dave Debeau [00:15:11] Yeah, that's all right. I mean, that's where everybody really wins. You know, unfortunately, rent sometimes has a has a bad connotation of this churn and burn. However, that typically is with folks that are doing the property first method where they got a a junker of a rental to get that. That's where you get the scam artists in there turning and burning down. Your your math is very, very different because you're actually buying somebody a house and owning it to them for the next three or four years. Right. That particular property as a standalone rental probably doesn't make very much sense. So in your joint, venture partners best interest to make sure the whole deal works at the end. Otherwise, you've got to figure out what to do with this house. Right.
Kevin McHardy [00:16:02] And people can actually do it early, too. So they're not stuck to that two or three years, which is another great component of the program that I mentioned earlier. So you have
Dave Debeau [00:16:10] some sounds like work as well for you, for your particular area. The appreciation rate that you guys are basing it on is fairly conservative, fairly optimistic.
Kevin McHardy [00:16:21] Right? I mean, things are pretty competitive right now. Even in this area, you're still going into multiples or some very quickly. So we always try again with the buy. We always try to get a little bit under market value to help them as well, to have that appreciation sort of already factored in, hopefully within the first two years of the three year rental terms. So the last extra year, sort of just equity gain for that.
Dave Debeau [00:16:43] Some awesome. Kevin, time flies when you're having fun, especially when we're talking rental and people want to find out more about you and what you're up to with rent on what should they do.
Kevin McHardy [00:16:54] And you can visit our website. It's coming up. Waypoint Property, Stazi. And we're also on Instagram quite actively. It's just waypoint properties Dossie. It's a great video story out there and some links for investors and stuff. So that's the best way.
Dave Debeau [00:17:09] Gavin, thank you very much.
Kevin McHardy [00:17:11] Thank you, Dave, and pleasure.
Dave Debeau [00:17:12] All right, everybody, take care. We'll see you on the next episode. All right. Thanks. Well, hey there. Thanks for tuning into the Property Profits podcast. If you like this episode, that's great. Please go ahead and subscribe on iTunes. Give us a good review. That would be awesome. I appreciate that. And if you're looking to attract investors and raise capital for your deals, that may invite you to get a complimentary copy of my newest book right back there. There it is, the money partner formula. You get a PDF version at investor attraction book, dot com again, investor attraction book, dot com ticker.