Buying on Rent to Own

If I were to buy a property on a rent to own, what expenses could I omit when figuring out what I could pay a month. I'm figuring I would not have to pay taxes, insurance, and capital expenditures. So instead of figuring 50% expenses, what could I figure my expense ratio would be?
Thanks,
Lance

Edited: 06/26/2010 at 06:24AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost Nov 17 '08, 03:10 AM

Lance,

It just depends on the specific lease-option contract. You can sometimes find a desperate seller who is willing to allow you to "buy" their property with terms that are actually causing them to lose money. An example of such a deal would be that you might have a lease payment equal to their mortgage payment and they pay taxes, insurance, capital expenses and maintenance. In this case, if you were to rent the property, someone else would be paying a significant part of your expenses for you and they will lose a LOT OF MONEY.

On the other hand, if the owner sells the property to you so that they will make money, then you would have the normal 50% expenses and a higher lease payment than their debt payment, meaning that you would be paying MORE (and making less) than simply buying a similar rental.

So, the answer is that "it depends".

Mike

Edited: 06/26/2010 at 06:24AM

Lance H.

Real Estate Investor · Woodbury, Minnesota

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Icon_minipost Nov 17 '08, 07:03 AM

Thanks Mike,
That makes a lot of sense. So I gues that brings me to another question. If the owner is paying for capital expenses and I'm paying everything else, what portion of my normal 50% expenses could I add back in.
Would 10% generally be a good estimate? So I could figure 40% for my expenses if owner pays for cap expenses?

Thanks, I appreciate your time.
Lance

Edited: 06/26/2010 at 06:24AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost Nov 17 '08, 07:38 AM

Capital expenses are usually more like 5%. However, capital expenses aren't spent on a monthly basis. They are put into a capital expense account to be used when a capital expense item occurs. So, unless the owner is giving you this money each month or puts it into a capital reserve account or does a major capital expense project while you have the property, then you can't really deduct the capital expenses because you're not receiving them to build up your reserve.

Mike

Edited: 06/26/2010 at 06:24AM

Lance H.

Real Estate Investor · Woodbury, Minnesota

80 posts
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Icon_minipost Nov 17 '08, 08:56 AM

Thanks,
I didn't think about the fact that I still want the reserve built up for when I exercise the option. That makes sense.
Lance

Edited: 06/26/2010 at 06:24AM

Lance H.

Real Estate Investor · Woodbury, Minnesota

80 posts
492 Influence
2 Awards

Icon_minipost Nov 17 '08, 08:59 AM

Hey Mike, if you get a chance would you mind replying to my other post "price vs terms". Its also in the landlord forum.
I'd really like to know your thoughts on this.
Thanks.

Edited: 06/26/2010 at 06:24AM