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Rental Programs, A new way out for Homeowners?

by Ryan Yates

Get out of your house and into a new one. As I was looking through the Sunday newspaper, I came across a article titled Lease it and leave it. It talks about a company that offers to rent your current home, allowing you to purchase a brand new one. The article was interesting so I began to investigate it. Below are some of my findings and thoughts.

How’s it work

The program will take your current house and place it onto the rental market. Your house will be rented for the going rate and the company will pay you monthly. The amount the company pays you will be completely dependent on the market rate for the house, less any management fees. The company will handle all aspects of the rental; finding a tenant, collecting the payments, and even miscellaneous house maintenance. All you have to do is continue to make the mortgage payments on the house. Every 2 years the company will work with you to decide if the market is right to sell, if not you’ll continue to rent the house. There is a limit of 6 years on the program. The bet is that the housing market will make a comeback and you’ll be able to sell the house at a much better price.

Who pays?

The company only works with builders of new homes. These builders are having a terrible time selling brand new home here in Michigan. The builder hires the company to provide this rental service in an effort to get people to purchase their new constructions. The company receives money from the builder and also takes a small cut from the monthly rental payment.

Why take on 2 mortgages?

The company states that moving into a new home will provide a location in a better community; which is safer, has better schools, and a house with extra bedrooms. The main idea behind the program is to provide customers the opportunity to purchase homes that are currently priced below their “real” value. The biggest problem for buyers is the inability to sell their current homes. The only catch is the amount of risk you are willing to be exposed to. Are you willing to carry two mortgages? Are you willing to absorb a loss if the housing market does not increase in 6 years?

What do you think?

Is it worth the risk to take on two mortgages (assuming you can get a second one)? Would you be willing to pay extra on your “rental” house to be able to make the mortgage payment? Do you think you’d really be able to turn a profit after 6 years?

If you are curious about the company here’s a link Market Place Homes

{ 10 comments… read them below or add one }

Heather April 15, 2010 at

This is scary to me! We actually carry 2 mortgages right now. We used the above scenario to get out of our home when we transferred across the state many years ago. The only difference is we leased it ourselves. The problem? The market actually went down and now we can’t sell the place to save our lives.

Maybe this is less scary, if the 3rd party has any guarantees. We’ve had tenants *trash* the house – requiring all new carpet & drywall plus no rent for the 2 months of renovation. We’ve also had tenants ditch in the middle of the lease – only we didn’t know it until the rent check didn’t arrive.

These all add up, and we still have to pay the mortgage.
.-= Heather´s last blog ..FREE Carvel Ice Cream: April 29th =-.

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Jeffrey Kosola April 15, 2010 at

@Heather, that sounds scary to me. According to this company’s info, they make a payment every month you, even if it’s not leased. I’m just not sure it’s a gamble I would take just to get a bigger house. I understand the route you guys took, you didn’t have a choice 🙂 I wish you the best in selling soon.

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Jesse April 15, 2010 at

Great find there Jeff, and that’s actually very similar to the process of buying a rental property. I own a rental home as well as the home I live in, and a management company takes care of my rental just like you stated here. The only real difference is that I never lived in the rental home and I can keep it forever if I so choose, not just 6 years.

I also plan to do the same thing with the home I currently own, rent it out if we so choose to move. I will find a management company where I live to take care of everything like my other rental property. There is risk involved for sure, but it is a great way to hold an investment as well as collect some passive income.
.-= Jesse´s last blog ..How To Avoid A Traffic Ticket =-.

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Jeffrey Kosola April 15, 2010 at

Great point Jesse. I guess I still have my debt reduction blinders on didn’t think about the investment option. Thanks for bringing it up. How much does the management company take off the top? 10%? Just wondering if I should start a management company here in Detroit 🙂

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Jesse April 15, 2010 at

The management companies takes an 8% cut plus a fee for new leases as well as lease renewal, every three years. They are a bit steep, but just like this company, they take care of everything uncluding rent collection and eviction.

One thing I noticed while checking out this company you found though, they are actually more secure than a traditional rental and management company. They garantee rent, so if the renter doesn’t pay, they still pay you. They also cover all maintenance, repairs and utilities. That’s pretty good if ya ask me.
.-= Jesse´s last blog ..How To Avoid A Traffic Ticket =-.

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Cathie April 15, 2010 at

It seems to me that the people who would benefit from something like this are the people who wouldn’t qualify. Just sayin’. I understand the underlying idea, I just don’t see how it would work. For instance, before we lost our home (we were in the building industry and lost our business first) our mortgage ballooned to $2600 a month. Even though we live in a desirable town, there is no way that our home would have fetched that much in rent. So we would have had to make up the difference between the rent and the mortgage, which would probably have been in the $600-$800 range, on top of a second payment of who-knows-how-much. If we’d had the money, wouldn’t it have made sense to stay put? Besides, before we lost our home, it had depreciated somewhere in the neighborhood of $100k. That’s a lot of equity to build in 6 yrs. (Although it didn’t take it that long to lose that much!)
.-= Cathie´s last blog ..Welcome, welcome, welcome!!! =-.

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Jeffrey Kosola April 15, 2010 at

@Cathie I agree that the people who would benefit the most probably would not qualify. Those that are upside down on their mortgage (I’m in that group) would seem to benefit the most, but who the hell would loan the money. We can’t even refinance. Oh well, as Jesse pointed out it could be a great investment for someone in the right spot. I’m sorry to hear about your business and house 🙁

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Jolyn@Budgets are the New Black April 15, 2010 at

I simply w/never carry two mortgages unless I was able and mentally prepared to not only cash-flow two different mortgages at any given time but also to weather any home maintenance and repairs for two different houses.

Like Heather above, we are also the proud owners of two homes. If we weren’t able to carry the two mortgage payments with our one household income, we would have gone under water long ago. In other words — if we relied on a rent check to make ends meet. There are just two many variables: empty months between tenants; tenants who bail; repairs and maintenance on both houses…
.-= Jolyn@Budgets are the New Black´s last blog ..Creating an Allowance System for My Teenager: Part Deux =-.

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Forest April 16, 2010 at

It could be a good investment if you really have the spare cash but it is a risk on par with investing in the stock market, I think!

I vowed to never take credit again and am looking to buy outright one day, not opposed to credit, it’s just not for me.
.-= Forest´s last blog ..A Helping Hand For Fellow Yakezie Members =-.

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Double My Net Worth April 20, 2010 at

You could always rent out your home and live in a rental yourself instead of taking on a second mortgage. It would only work as long as you can turn a profit that would at the very least, cover the cost of your rental. That’s my plan anyways.
.-= Double My Net Worth´s last blog ..Comparing My Net Worth =-.

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