My Personal Finance Blog

Rent-to-own real estate might sound like a great deal – start making rent payments now and have it all go toward the purchase price of your new house. What advocates often don’t tell you is that many rent-to-own tenants never wind up owning their homes but instead lose their hefty options considerations (also known as a down payment). If you want to learn the real truth about the down side of rent-to-own real estate, keep reading.

Your Entire Rent Doesn’t All Go Toward the House

A common misconception about rent-to-own arrangements is thinking that your entire monthly rent payment will go toward the purchase price of the house. That would the imply the owner of the home isn’t charging you interest or earning interest on your options consideration.

You Have to Pay Money Up Front

Many rent-to-own schemes offer no-credit, no-money-down houses, but it’s simply not true. Most rent-to-own arrangements require what’s called an “options consideration.” This is typically between 1 and 5 percent of the final sale price of the home.

Your “Down Payment” Doesn’t Entitle You to A Piece of the Property

It’s a common misconception that your options consideration is a down payment, but that simply isn’t so. A down payment implies you’re putting money down on a house in exchange for a piece of its equity. An options consideration does go toward the final purchase price of a house, but if you don’t wind up buying the house, you will lose the funds.

Many Renters Never Own

Rent-to-own is great for people who have almost good enough credit or just want to get into a house, but don’t have sufficient fund for a down payment. Unfortunately, rent-to-own arrangements are typically marketed to renters with bad credit, low incomes and little hope of ever obtaining the financing needed to purchase the home before the option deadline.

Scams do Exist

Rent-to-own scams exist. If a rent-to-own agent is asking you for up front money, a finder’s fee or money to “fix your credit,” you should walk away. Also, to protect yourself from poor deals, always hire an attorney to review a rent-to-own contract before you sign it.

Yes, an attorney will cost you a few hundred dollars, but his or her services could be saving you thousands and your own possibilities for future home ownership.

Finding a home that you can rent with a future option to buy it can be a great opportunity for individuals or families that do not yet have sufficient funds to purchase a home outright. However, caution is important when considering this option.

I love investing. Why do I love investing? Because from personal experience I can see it works. The source of our wealth is investing. Yes, the incomes we received from our jobs enabled us to invest, but we would not have become wealthy because of our jobs. Why? Because we always spend what we earn. let me explain using one property as an example.

I purchased a property in 1997 for $165,000. By the end of 2007, the property was re-valued at $410,000. That is a capital increase of $245,000. In ten years, I would have found it impossible to save that amount: over $20,000 per year. Over those ten years, I was on an average salary of approximately $50,000 per annum. It would have been impossible to save an average of $20,000 per year.

To me, investing has been a form of forced savings.

As much as capital appreciation on an investment is very exciting, it also brings with it a level of risk.

The risk is the access you have to the capital appreciation. Loan products are available that allow you to re-finance your property to the current market value and you can access a portion of the capital growth for your purposes.

This access to the capital growth can either be a risk or an opportunity.

Let’s look firstly at the risk. Let’s say your Mortgage Broker tells you you can gain access to $100,000 on your property. You get very excited and buy a new car and a boat for your family. Let’s look at some of the downsides of this decision:

- Increased expenses: you now have to pay interest on the $100,000 loan. This is a personal expense you did not have before you purchased the car and boat.
- You purchased items that will decrease in value over time (depreciating items). The depreciation rate on a new car can be as high as 25% per annum. On the $50,000 car alone, without even considering the boat, you could lose $12,500 in the first year on depreciation.
- You purchased items that are unlikely to generate income for you. It is more likely they are going to increase your expenses. For example registration, petrol, insurance, mooring fees.

Going into debt to purchase depreciating items that do not generate income is not a strategy for financial independence. Cash flow and wealth are going backwards.

Let’s now look at the opportunity. Once again, your Mortgage Broker tells you you can gain access to $100,0000 on your property. Again you are excited but this time you use the $100,000 as a deposit on an investment property. Let’s look at the positives of this decision:

- You purchased an item that will increase in value over time (appreciating items).
- You purchased an item that will generate income for you in the form of rent. Property will also incur expenses in the form of interest on the loan, property management fees, rates, depreciation, insurance, etc. However your Accountant will be able to advise you on the expenses that you can claim as a tax deduction.

Going into debt to purchase appreciating items that generate income is a strategy for financial independence.

Now you might say that you also want to enjoy life and buy some lifestyle items for example a newer car or a boat. Yes, I agree with you. Life is for living. I believe it’s all about balance.

Financial independence is when your passive income covers your living expenses. If your goal is to become financially independent, you need to work on increasing your passive income, not your expenses. If your living expenses are going up but your passive income is not, you are on the path of working for a living rather than financial independence. My philosophy is to buy luxury lifestyle items when passive income covers expenses. Until then, we live within our means.

Our property investment strategy is to build a property portfolio and then just basically hold it for the rest of our lives. You can never say never, so along the journey some properties may be sold, however they are sold with the intention of buying another property that better fits with our strategy.

Given we are passive investors, it is important that we buy property in an area with high potential for capital growth and manage our cash flow well so we can afford to hold a property portfolio, without the need to sell.

One of the results of the recession has been to reinforce the tendency to opt for term insurance as the first life policy. With the disappearance of credit and the pressure on employment, people have decide to switch to prudence. That means paying down the debts and cutting back on discretionary spending. Is this financial puritanism sensible? There are a number of factors to consider. First, a definition. A term policy is life coverage for a fixed number of years. Think of it as like a bet. If you are still alive at the end of the term, the insurance keeps all the premiums, and you and your dependents get nothing. Now, let’s focus on the psychology of the young. Most never bother thinking about insurance or, if they do, it’s a very low priority. Why bother worrying about something that’s unlikely to happen for decades? Statistically, this is a reasonable view. Just as many young people back their health and refuse to buy an individual health plan, the majority see no advantage in life insurance. Life expectancy has been rising steadily over the last 50 years. This calm confidence lasts until they enter a stable relationship. Until children appear. But, by then, the cost of living has gone up and, potentially, what was two incomes has become one. Then, buying term insurance is the cheap option.

The real question is whether buying a whole life policy early is always the right answer. The argument goes that you take on the higher premiums when, as a young single, you have the most disposable income. Inflation and pay increases slowly make the higher premiums more affordable. If you do become a two-income family, this really takes the pressure off. Hopefully, by the time children come along, you have already produced a financial situation in which the premiums are now affordable. Hmmm. Back to definitions: this policy insures your life, but also has an investment element that builds up a cash value over time. If you keep up the premiums, this provides security during retirement and for your dependents. Except, people do not make rational financial decisions. The young prefer to enjoy their youth rather than stay home and save for their retirement. Worse, the reality of most of the investment elements is that they represent poor performance. If you bought term insurance and invested the balance of the premium saved in regular investments, you would almost certainly do better. The hard reality is the insurance companies charge commissions for setting up your account and then impose management fees for investing your money. This slices the top off the investment returns.

So the conclusion is slightly bad news. The decision on what to buy is not directly related to the life insurance quotes you receive through a site like this. The best value is buying term insurance and having the self-discipline to invest a growing proportion of your income. If you do not have that self-discipline, the whole life, universal and variable policies represent compulsory savings. In effect, you are paying the life company to do the work of investing for you. The perfect choice starts with the life insurance quotes and diverts through the office of an independent actuary who will give you an educated guess on the quality of the investment returns from the whole life policy as against managing your own investments over the next thirty years or so. Now you can decide whether you want to trust yourself or accept a low but guaranteed yield from the insurance company.

Are you always wondering where your hard-earned money is going? Do you feel like it’s always disappearing so fast and you just feel helpless in controlling how your monthly expenses are sucking away your seemingly insufficient income? Well, you’re not alone in feeling this way. Millions of people all over the world suffer from the same dilemma of trying to make ends meet with their meager incomes.

However, there are people who are more organized in budgeting their monthly income. They are able to determine the best way to allocate their money and thus save more money by avoiding unnecessary expenses. But making a detailed plan of one’s budget is not as easy as it sounds. A lot of people who have tried this only ended up frustrated because they could not get it right.

Fortunately, there are available options now for people to achieve the effective budgeting they need to take better control of their finances. For example, there is the personal budget planning system called Mvelopes that is offered online. This is said to be the simpler, smarter and more accessible way of controlling your finances, having the peace of mind of knowing where your money is going, and enjoying financial freedom.

You can choose a computer software from Mvelopes that best suits your budgeting needs. There are also Mvelopes coupon codes that offers various trial versions to let you determine which online personal budgeting system you’ll be most comfortable with.

By using the Mvelopes promotional codes that are available online, you can find the best deals that work for you. You can sample Mvelopes’ budgeting e-course, budget calculator, budgeting worksheet, debt calculator, budgeting e-book, among many others. Availing of an Mvelopes coupon code will make it easier for you to determine which online budgeting system will best achieve your financial resolutions.

Mvelopes also offers 12-week program that provides a blueprint for total achievement of financial fitness and long-term financial wellness. You can find the right Mvelopes discount code for this program, which will help you live comfortably with the least possible spending and guide you into understanding the true impact of your every spending decision. This program will also help you stop accumulating debt and help you through the process of debt elimination.

With Mvelopes’ financial fitness program, you can implement a personal budgeting system that will let you save for financial emergencies, prepare for future purchasing needs and determine long-term financial goals. Seeing a visual representation of your finances also lets you spend with confidence because you know what you can afford. It is indeed a great way to transform your financial life and have the peace of mind you truly need. Mvelopes provides an educational resource that will guide you through the process of achieving financial fitness and securing your personal long-term financial freedom.

There is no better time to start taking better control of your finances than now. By availing of Mvelopes’ online budgeting system, you will never again wonder where your money is disappearing to. You will have full control of your budget and make the necessary modifications to achieve your own financial goals.