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With life insurance, you can buy it (whole life) or "rent" it (term life). Universal life insurance allows you to not only buy term and invest the difference, but also have the benefit that your term premium is only based on covering the gap between asset values and death benefit, rather than the entire death benefit.
Why can't we do this with housing too? In other words, a rent payment slightly above market rate, and the accrued cash value creates an ownership stake. You'd pay rent on the part you don't own, and only pay taxes, insurance and maintenance on the part you do own. The savings could be re-invested to increase the ownership stake. (There are Riba free ownership programs out there, but why are they so uncommon?)
The options of 1) buy vs. 2) rent and invest the difference, are restrictive and inefficient. If Universal life gives you an advantaged way to buy term and invest the difference, why don't more people want a better way to rent and invest the difference?
(I realize there are some areas where you can have your mortgage plus non-capital costs* amount to less than rent even with zero money down, so this discussion obviously does not apply in such places and you'd be a fool to rent at all unless you were going to move within the next few years).
*Taxes, insurance, maintenance, etc.
What you're describing does sound very similiar to rent to own, but coming up with the exact preimium over normal rent to charge would be very complicated from a mathematical pespective.
The full formula for rent to charge as a landlord
Rent = [Costs*] + [Risk Premium] + [Value of your time as a property manager]
So, you now not only need to figure out what the Rent should be based on all that, but now add in an equity percentage that they buy back per month? That concept alone sounds insanely complicated to figure out. How long do you stretch it out over? Do they buy 100% over 5 years or 50 years?
To put this in financial terms, assume a $300k house. That means that the rent premium for this if we spread this out over 30 years would be an additional $10k/yr in "rent" ($833/month).
That's not exactly an insignificant rent increase.
I get what you're going for, but I honestly don't think it's realistic simply because you're putting the capital expense and risk on the owner while giving the renter the flexibility.
Not to mention... what happens if the renter moves out after 5 years? Do they still own part of the property and if so, do they now get a share of the rent?
You could wind up paying rent to 15 people who all own a small share.
It would just be chaos... and that's before we bring taxes into play.
(I realize there are some areas where you can have your mortgage plus non-capital costs* amount to less than rent even with zero money down, so this discussion obviously does not apply in such places and you'd be a fool to rent at all unless you were going to move within the next few years).
*Taxes, insurance, maintenance, etc.
Nicole,
Right now, November 2014, the situation described as occurring in "in such places" is occurring in the vast majority of the country for any family that does not have their rent costs limited by having access to an apartment that is under extremely strong rent control laws (NY/SF).
In many places the cost of ownership from year 1, even at 5% down with private mortgage insurance, is less than the cost of renting. That is the case even if we include the money going towards principal as an expense. This does assume that the owner has a solid credit rating and I am using a 30 year mortgage for the example.
What you're describing does sound very similiar to rent to own, but coming up with the exact preimium over normal rent to charge would be very complicated from a mathematical pespective.
The full formula for rent to charge as a landlord
Rent = [Costs*] + [Risk Premium] + [Value of your time as a property manager]
So, you now not only need to figure out what the Rent should be based on all that, but now add in an equity percentage that they buy back per month? That concept alone sounds insanely complicated to figure out. How long do you stretch it out over? Do they buy 100% over 5 years or 50 years?
To put this in financial terms, assume a $300k house. That means that the rent premium for this if we spread this out over 30 years would be an additional $10k/yr in "rent" ($833/month).
That's not exactly an insignificant rent increase.
I get what you're going for, but I honestly don't think it's realistic simply because you're putting the capital expense and risk on the owner while giving the renter the flexibility.
Not to mention... what happens if the renter moves out after 5 years? Do they still own part of the property and if so, do they now get a share of the rent?
You could wind up paying rent to 15 people who all own a small share.
It would just be chaos... and that's before we bring taxes into play.
There are landlords that do this. If the renter moves out they forfeit the extra money they had paid. In 99% of cases the landlord is successful in ensuring the renter moves out at some point. If the landlord lost the property, he would have a fairly bad investment and would have to stop being a landlord and go work in a factory or some other blue collar occupation.
If someone wants to build equity in a property, they should buy it and finance it. That exposes them to realtor costs, but this theory of "rent to own for the sake of the renter" just pushes those costs onto the landlord. As a landlord, I would tell the tenants to **** themselves when they wanted to hand me the bill. I would not go about buying properties, financing them, insuring them, and being the middle man so the renter could have the option to have my property if they decided they liked it. I'm not a landlord yet, but within 2 to 3 years I will probably buy my first investment property.
The issue with this v.s. mortgaging a property, is the lack of consistency that is likely to create all sorts of financial and legal issues.
- Financing The Property Itself: With a mortgage you have a consistent payment each month and each year in terms of what is going to equity and what is going to mortgage interest/fees. It's clear, doesn't change, and allows for one to properly plan out the payments.
How is an adjustable rate mortgage not equally problematic then? And if it mattered, you could create the agreement with a fixed payment, you'd just start out with it a bit higher to compensate for anticipated rent inflation, or you could index it to inflation.
Quote:
Originally Posted by jotucker99
- Maintaining The Property: This is your taxes, insurance and property main. expenses. With a mortgage, you should have a particular "budget" for these items and any overcharges you would just add to them each year with additional monies from savings.
How is this an issue? Just split by ownership stake.
Quote:
Originally Posted by jotucker99
- Tax Incentives: These would be clear to deduct, manage and take advantage of with the mortgage.
The tenant would not have a mortgage, and the landlord could at most owe 80% of his/her share but I think the idea is really more suited for landlords that own the property outright. This would avoid a lot of the headaches.
Quote:
Originally Posted by jotucker99
Okay, with your proposal ncole, you mentioned that the rent payment would be slightly above market rate, and the accrued cash value creates an ownership stake. Okay, but unlike the mortgage payment (which is consistent for the 15-30 year term), rent payments are NOT consistent. They change and can change every year. What if the rent has to go up to a point that's not appealing to the tenant any longer?
And they want to leave the property? Would they be legally STUCK in the contract without being able to leave even though they are not technically mortgaging or the owner of the property?
They could sell their share either to the landlord or another tenant if they wanted to move out, or sublet it, or they could sell it jointly with the landlord and split the proceeds by share of ownership. Lot of ways to do it.
Quote:
Originally Posted by jotucker99
In relation to maintaining the property, what if YOU the owner of the property believe that something needs to be updated but the tenant doesn't? How do you make the determination on doing the update or not? What if you (seeing as though you are still technically the owner and your tail is still technically on the line) believe that something needs to be updated to maintain or increase the value of the property, thus protecting YOUR investment.....but the tenant doesn't believe it needs to be updated because they are trying to save money on the property maintenance expense percentage that they are responsible for. Would they be legally STUCK in paying higher property maintenance expenses if they don't want to?
Doesn't make sense. If it is financially worthwhile to pay for maintenance to preserve the value of your property, then it stands to reason, it is also worthwhile to pay for 20% of maintenance to preserve the value of your 20% of the property. As long as the proportions are consistent, this should not be an issue. The lease/purchase contract could specify the normal maintenance, and disputes could be handled the same way they are currently when there are joint owners of a property.
Quote:
Originally Posted by jotucker99
In relation to tax incentives, how in the world do they take advantage of those when from a legal standpoint, they don't own the property?
This is a tricky one, although there are already such things as jointly owned properties now, so why can't this just be treated the same way?
Quote:
Originally Posted by jotucker99
You said if they stop making their payments, you would take it from their "equity share" in the property, but what if the value of the property decreases based on surrounding factors? Wouldn't that decrease their equity? What if there's not enough equity to extract from?
Naturally, you would require a fairly large deposit (2 months' rent) at the beginning. Even if the property value falls to 75% of what it was, it's still worth 1.5 months' rent. In this regard it is not any riskier than a normal landlord with a 1 month deposit.
Quote:
Originally Posted by jotucker99
And why would you want to extract illiquid assets (equity) for liquid assets (lack of cash) when again, the value of the illiquid assets could change based on factors beyond either your or the Tenant's control?
There are Rent To Own agreements out there, but they are literally Rent To Own. The Tenant pays ALL of the costs until the end of the term (pay off of the asset) and then they own the asset. But these agreements are stupid at best, for any asset including a house, a washer/dryer, furniture, etc. Just finance the damn thing the regular way.
Well, there are advantages to equity only financing, especially if there is no debt on the property, as it does not require bank approval and carries no risk of being underwater.
Yeah! We should call it a "mortgage". This is revolutionary....
But it's not a mortgage. The distinction is the same as the distinction between equity and debt financing of a corporation. With this system, you only gain or lose in proportion to your ownership share. With a mortgage, you gain or lose the entire change in property value, even if your equity is miniscule.
Right now, November 2014, the situation described as occurring in "in such places" is occurring in the vast majority of the country for any family that does not have their rent costs limited by having access to an apartment that is under extremely strong rent control laws (NY/SF).
In many places the cost of ownership from year 1, even at 5% down with private mortgage insurance, is less than the cost of renting. That is the case even if we include the money going towards principal as an expense. This does assume that the owner has a solid credit rating and I am using a 30 year mortgage for the example.
"Vast majority" is an overstatement especially when dense urban cores are factored in and older homes with higher repair costs.
With any down payment at all, even 5%, you need to factor in the opportunity cost.
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