BiggerPockets Real Estate Podcast - High Cash Flow and Low Risk by Turning Tenants into Homeowners (Rent-to-Own)

Episode Date: September 2, 2024

Rent-to-own real estate can make you more cash flow, with less risk and fewer expenses, all while helping tenants become homeowners. But if it’s so good, why isn’t everyone doing it? Simply put, most investors have no idea that rent-to-own real estate is even possible! So today, we’re talking to an investor, sharing the ins and outs of this lucrative strategy, and showing you how she scaled from zero to over fifty units, half of which are thanks to this strategy. Maura McGraw and her husband quickly realized that being active-duty military members wouldn’t lead to the stable family life they dreamed of. They needed a way out while still making enough money to provide. So, they pivoted and began formally studying real estate. After a first deal left them with a $30,000 loss, Maura did what most wouldn’t and got back out there searching for another deal. After dozens of flips and numerous rentals, she stumbled upon rent-to-own investing—a strategy that would fuel her real estate portfolio’s growth. Imagine getting monthly rent checks without repair and maintenance expenses or insurance costs. That’s what rent-to-own can provide! We’ll talk about analyzing a market, screening tenants/buyers, profit margins, and how YOU can start investing in rent-to-own real estate in your market! In This Episode We Cover: How to make more cash flow with less risk by providing rent-to-own options to tenants The four major ways to make money from a rent-to-own real estate deal  Who makes the perfect buyer/tenant when offering rent-to-own opportunities  What happens when a tenant defaults on the loan, leaving you with the down payment  Screening tenants/buyers before you offer them a rent-to-own opportunity  Why losing money on your first real estate deal does NOT mean you should give up And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Find Your Perfect Investing Strategy with Dave’s New Book, “Start with Strategy” Find an Investor-Friendly Agent in Your Area See Dave at BPCON2024 in Cancun! What Are Rent-to-Own Homes? Connect with Maura Connect with Dave Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1012 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

How do you bounce back when everything goes wrong on your very first deal? And how do investors, like the one we're talking to today, take some of those learnings from mistakes that they've made and turn them into benefits? Today, we have a guest on who stumbled onto the most profitable part of her business, which is the rent-to-own strategy, following a couple mistakes she made early in her career. Hey, everyone, it's Dave. Welcome to the Bigger Pockets Real Estate. podcast. Today, we're bringing you a conversation with an investor out there in the wild,

finding and making deals work in today's market. And for this episode, that investor is Mora McGraw. Mora has done a ton of different things in real estate, to be honest. She's flipped. She owns long-term rentals. She's still buying them today. But today, we're going to go all in on a little bit of background in how she got started in real estate, but also how she's pivoted her strategy in today's market to a very profitable, but less talked about strategy within real estate, which is again, rent to own. In the episode, we're specifically going to talk about what Mora started doing differently after her first deal didn't go as expected. We'll talk about how her military background influences her approach to investing and how she thinks about

offering rent-to-own contracts in a mutually beneficial way. I'm excited. for this conversation, I think you're all going to learn a lot. So let's bring on Mora. Mora, welcome to the podcast. Thanks for joining us. Thanks for having me, Dave. It's a bit of a dream come true to be here. I love hearing that. Well, I'm happy to have you on. I'm eager to learn a little bit about your background and what you're up to today. Let's start with just the basics. Tell us all a little bit about who you are. Where do you live? What was your life before real estate? So I live in a place called Fairhope, Alabama, which is on the Gulf Coast here in Alabama.

And before I got into real estate, I was an officer in the Marine Corps for 10 years. Wow. And so I made a hard pivot in 2017 and 18 from active duty military service into real estate investing. And we can get deeper into that if you want. is a real quick snapshot of my background. Yeah, I'm curious. I'd like to learn more. So you were active duty and were you thinking about real estate while you were still in the service? Sadly, not. Not enough. I was lucky that my father and stepmother are both real estate investors and developers. So growing up, I had an awesome example to watch. But as most young people, I

wanted to go off and totally do my own thing. And so right out of college, I joined the Marine Corps. We were at war during the time. So it was like very prescient at the time. And that was the best job ever as a young person. I got to travel all over the world, do the absolute coolest stuff. No regrets. But I did meet my husband in the Marine Corps. And there came a time where we we had to decide if we were going to continue our careers in the military or be able to have a family in a life because while some people do it, being dual active duty military and trying to raise a family, to me, looked like kind of a nightmare. So we both decided that we were going to get out. We were going to transition. We both went to business school. And actually,

we both ended up in different facets of real estate. So for me, I think having that example growing up brought me home to real estate. And then my husband also got into new home construction. Wow. It's quite a story. Well, first, thank you for your service and your husbands as well. And it sounds like you had quite a cool experience that you really valued and learned a lot. And then went to business school. You've done a lot before you got into real estate. Very impressive. Do, were you, when you were in the military, were you able to save up some money to start investing in real estate? Because I think that's, you know, for our audience, it's just a common question is like, hard pivot military to real estate.

Like what happened in between there that allowed you to buy or get into real estate? Yes. So I was pretty strategic about it. I knew probably a year to two years out that I was going to be making this transition. So I started saving up money. I saved up probably like $60,000. And then also was intentional. I went to a, I went to Georgetown for graduate school.

And they have a real estate specific program. So I studied real estate finance. And that was through the GI Bill, which was amazing. So I was pretty strategic about saving money and knowing that this was the career path I wanted to go on. And yes, saving that money was definitely. important for funding my first projects. All right. Let's hear about that first project. What was the first thing you did after all of this other life experience that you got? Okay. So my father, he is,

he is a mentor to me, but he's not a hold your hand and tell you how to do things type of mentor. He's a throw you into the fire type of mentor. So in my second semester of graduate school, I wrote my business plan for my business, which very simply was we were going to flip houses and every couple flips, we would pick up a rental, you know, not too dissimilar from what a lot of other people do. But my dad, he was like, I have this piece of land down in Birmingham, Alabama, and I need you to go build a spec house. I knew nobody in Birmingham, Alabama. I never built a house, never flipped anything, but I did it. I went down there. He introduced me to the general contractor, and we built a house from the ground up and sold it. And that was a crazy experience. I made every

mistake in the book. We lost $30,000, a lot of painful lessons. But honestly, those lessons have been priceless. From then on, I've never, I don't think I've ever lost that much money ever on a projects since then. And we've had a lot of really great successes since then. But yeah, the first project was really rough. Yeah, that's not, it's not a common way to get started. Did you ever ask your dad why that was what he recommended? I didn't, but I think that he was wise and knew that I just needed to get started. And he probably knew that doing that would teach me so much about construction. it would force me to learn a lot about a construction, force me to make all the connections that I would need to make in the industry

from the contractors to lenders to realtors to property managers to vendors, to vendors. I think he probably just knew that, yes, it was going to be a challenge. But he always believed I could do it, you know, in hindsight, maybe. I don't know if he thinks it was the best decision or not. But I think he just knew, like, it's going to be a hard, but fast way to really learn a lot.

Well, it sounds like he was right that you learned a lot. Can you tell us maybe one of the top lessons that you took away from that challenging but informative experience? Market analysis. You know, I didn't do the correct type of market analysis going into the project. So we had a piece of raw land in this area of Birmingham. And what I should have done is I should have got with some local realtors and done some good analysis of the right product, the right level of finishes, the right price point

going into the project. I did that on a very broad level, but not to the level of detail that I should have. And my father and stepmother, they do really, really high-end houses. So we ended up building an absolutely beautiful house, but it was finished at too high of a level and way too expensive for the area. We could have done a lot, you know, more builder grade, less custom house, and it would have fit perfectly and we wouldn't have lost as much money. So right off the bat, I think if I had done a more thorough analysis of the market and walked through some of the competition, that would have set me off on a better foot. It's a great lesson, Moran. It's one I've definitely learned personally, and I know a lot of people do as well. And I know a lot of people do as well.

is you want to create something of true value, but you need to make sure that there's product market fit. And I always encourage people to think about real estate in the same way you think about any sort of business, where you have to really think about your customer and who's going to be buying this, whether if you're flipping it, you know, who's going to be buying it? Or if you're doing a burr or renovation on a rental property, who's going to be renting that property? And, you know, are you spending the appropriate amount of money to attract and retain those people? but it's sort of this fine line where you don't want to, you don't spend too much money so that you're not actually getting a return on that particular investment. Absolutely.

So more, one of the questions I always want to ask people is, because inevitably everyone's like, oh, my first deal, it was terrible. You know, but I learned so much and I kept going. What about that experience encouraged you to keep going? Because it sounds like a lot went wrong. And I don't think anyone would have blamed you for maybe reconsidering real estate. as a career. What helped me was my 10 years in the Marine Corps because, you know, in the Marine Corps, when you're given a mission, there is no option to just give up or not accomplish your mission. You have to find a way to accomplish your mission. And I think those 10 years of

overcoming other much different types of obstacles had taught me that, yes, they're going to be obstacles, but you cannot give up. You have to find a way to keep going. So I think it was just never in my mind at that point. It wasn't an option to just stop or give up. That was like not ever a thought that crossed my mind. And I attribute that to all my military training. All right, we got to take a quick break, but stick with us. Morris shares the deals she did right after that rough first project. and the changes she made based on what she learned right after this. There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have.

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hire one that manages your investment like an investment. Hey, investors, welcome back to the Bigger Pockets Real Estate podcast. I'm here with investor, Mora McGraw. Well, good for you. It's very impressive that you were able to apply all the lessons you learned to the military to your career. And it seems like things have gone well. So what did you do next? How did you take these lessons and go on to scale your portfolio? So after that, we did two flips. And after, you know, blowing our timeline and budget on the first project, we were super conservative on the budget and timeline for the next projects. And they went

relatively smoothly. We came in under budget and under timeline on the next two flips, which thank God that gave me a little bit of confidence that I wasn't going to be a total failure in this industry. And I was able to have a private investor on those projects. Everybody was able to exceed their projected returns. And we were able to make enough money to buy our first rental properties. So finally, like, the business plan, proof of concept started to get rolling at that point. So was the main difference that you were able to keep the project in better scope, in sort of control costs? Yes. I mean, I learned my lesson about market analysis. I did a much better job selecting a property, making sure that we were very thorough and very conservative with budgeting

and making sure we had our materialist down. We were just very careful and put in a lot of cushion into both the budget and the timeline so that we would meet it. And we ended up exceeding it. So that was a good application of some of the lessons I learned on the first one. Can you tell us just specifically how you did that market analysis?

Because I'm sure there's people wondering, you know, trying to avoid some of the mistakes that you made earlier in your career. What are the sources of that information? and are there any practical tips you have? A really good one is finding a really good realtor. Sometimes you can find this with wholesalers, but I find more that a really good realtor can help you a lot with this.

So the first thing I did was determine my budget for the next two flips. So finding a house where the median price point met my budget and making sure that there was demand for housing. in those areas. So I worked with a couple local realtors to kind of identify some areas that met that criteria. And then one deal was brought to me by a realtor and one was brought by a wholesaler. And so I did thorough walkthroughs with my general contractor to put the construction budget together. And then from there, it's like a pretty simple analysis of, you know, purchase price plus rehab equals. Yeah.

And there it's pretty simple. Yeah, but the hard part is actually, you know, finding that team, building out the specific scope of work, figuring that all out. So it can take time with different members of your team. I think there's different levels of complexity there. At Bigger Pockets, we help match people with real estate agents. So if you want an investor-friendly agent, you can get matched for free at biggerpockets.com slash agent.

But I know that, you know, you have to interview a couple. Same thing with contractors as well before you find people that you trust. And I'm glad to hear that you were able to do that in just your second or third project. So, Mara, let's fast forward a little bit. What does your portfolio look like today? Because this was back in 2018, six years later, a pandemic, crazy market conditions have all happened. Where have you found yourself in 2024? So since then, I've flipped well over 100 houses.

So that's still a main line of business. we flip between 10 and 20 houses a year. We have a rental portfolio of 55 properties, and about half of those are traditional long-term rentals, and half are rent-to-own properties, which I think could be an interesting thing to talk about. Yeah, I would love to talk about that, and we will. But can I just ask you a little bit about the long-term rentals? Yes.

55, that is a lot of properties, mostly single-family homes. So when did you buy them and are you still buying long-term rentals in current market? So we did roughly stick to the business plan of, you know, we tried to buy a rental property for every one or two flips that we did. But then we had a couple opportunities over the years to buy small portfolios. And that really helped get our numbers up. So I was able to do a great seller finance portfolio acquisition. of nine duplexes and the triplex in 2019, which obviously helped us scale our portfolio a lot.

And then later, I did another portfolio acquisition to kind of to bump things up again. So it wouldn't say it's exactly linear progression over the years. And we are still buying long-term rentals. But I would say that we have a much bigger emphasis right now on purchasing rent-to-own properties because in the current market conditions, we've just seen that our rent-to-own portfolio is outperforming our traditional long-term rental portfolio by a pretty significant amount lately. Interesting. Can you explain for our audience who might not know what rent-to-own is and what the

difference is is buying a rent-to-own property? So rent-to-own basically is you have a client or a buyer. that is interested in buying a property and maybe they don't qualify for a traditional mortgage with a bank. There are private companies like my company that will help finance the purchase of a home. You are typically going to pay maybe a little bit higher interest rate. At some point in the transaction, you probably have to put a down payment at the beginning and that can either be a down payment that's contributing towards equity. Some people will structure it as a lease option. We do it as equity. And basically, you have an agreement over a certain period of time. And at the

end of that period of time, the client will become the owner of the property. That's the end goal for everybody. People do these deals differently. There's not just one way to do it. But that's kind of in a nutshell what it is. Yeah, I'd like to ask more about how you do the operations. But before we do, I just want to clarify some things. So you as the investor, you buy the property, let's call it a single family home, either way. And then you decide whether you want to rent it out as a long-term rental or you can give a prospective tenant this rent-to-own option. Is that right? Exactly. And so I just want to ask about the buying and targeting deals. So when you go out and look for deals in today's market, you're seeing that when you underwrite a

or analyze a deal that if the rent-to-own option is better than a long-term rental. Is that across the board in terms of cash flow? What metrics are you looking at that inform that decision? Yes, it's better in terms of cash flow, ROI, and even delinquency. So in our rent-to-owned deals, the buyer client is responsible for all the maintenance expenses. So that's adding significantly to your cash flow in ROI every month, whereas for the long-term rental part of our portfolio, we have seen an increase in maintenance and construction costs that have significantly eaten into our cash flow, especially in the past two years.

Wow. Okay. And can you just explain how that works? Because to me, I'm thinking, you know, you're renting it out either way. and eventually you're giving up ownership of the property. So how does that increase your return? You mentioned the expenses are handled by the tenant, but what else is driving those improved returns?

So the way that we do it is our company purchases the house, and then we have a contract with our buyer client. So we have a certain interest rate that's charged to us from the bank for the loan that we're paying. we charge a few points higher to our end client. So you're making that money. The spread on the interest, that's the first amount of money that you're kind of making. The second thing is we buy it for one price and we sell it for a higher price to our buyer

client. So you're making additional money that way. For us, how we do our deals, we require a down payment at the beginning of the loan term. And we require 10 to 20 percent down, which is. is usually enough, if not more than enough to cover the down payment that we have to put on the long-term loan. So often there's some additional return that you get on the front end. And then on your monthly cash flow, yes, the buyer client is buying this property with the knowledge and expectation that this is their house. They have a loan term set up just like they would with any bank for

us. It's anywhere from 10 to 15 years. And they are expected to take care of the house like it's their own, just like any other homeowner. And so we aren't getting the monthly maintenance calls like we are with our traditional long-term rentals. So we don't have that expense. So and because the buyer client has put that non-refundable down payment down, they have a very high incentive not to become delinquent on their rent. So we have very low to know delinquency for our rent payments. Wow. So there's just a few of the ways that the returns are higher. So it's just it's it's a couple of different things. So it sounds like I imagine different companies do this differently. You said that. But like this your model in particular is super cool because you're making what was that like four different ways. So you're,

you're getting money on the the spread between the interest rates. You're lowering your costs. And you're able to resell the property at a higher valuation. If the if the tenant is renting the property for 10, 15 years. How much more are you selling it to the tenant for than what you purchase for on average? A typical deal would be maybe buy it for 80 or 85, sell it for 115. Okay. So yeah, you're putting on, what is that, like 20, 25% appreciation. Yes. Which honestly, over 15 years is, you know, you would probably actually see more than that. So if the tenant is sort of faced with this decision of, do I do a rent to own now or wait 10 or 15 years? years. I don't know if that's the calculus they go through, but, you know, that's not an unreasonable

thing to do to think if you as the investor were to hold it and sell it 15 years later, probably close to what the price might actually be. Can you run us through the rest of the numbers there? So like, just tell us, like, you buy a property for $85,000. You are taking out a long-term loan. What does that financing look like? So we work with local portfolio lenders and they love this program. So we, it's like a traditional investment property loan right now, just like everybody else, we're paying relatively high interest rates in the 7 to 8% range. So we then have to charge our clients, you know, usually in the 10 to 12% range for their interest. But hopefully rates will come down and we will drop that as well. But that's kind of where it is right now.

We don't have a million clients. You know, we've done probably about 25 to 30 of these deals. So we work with people on an individual basis, but they usually structure their loans over 10 to 15 years. So we'll just go through kind of a standard amortization chart and talk about their loan payments, which, by the way, do include taxes and insurance. So the tenant pays those? Yes, the tenant pays those as well. Okay. We hold the insurance policy with our company, but their payment covers those expenses also.

Wow. So I just want to make sure everyone understands this. So basically what's happening is more and her company are buying a property for 85 grand. They're getting a traditional mortgage, not a conventional mortgage, but one from a portfolio lender, which just means it's not bundled and resold in the ether of mortgage-backed securities. It's just a lender who offers a loan and then holds on to that loan for the lifetime. And then Mora goes and basically sells this property, you know, or creates a contract to sell the property. And as part of that, a lot of the tenants finance get a mortgage from Mora at a higher interest rate

because, you know, Mora needs to compensate for the risk that she's taking. And so there's a spread between the two financing. And that is profit for Mora. So that is the first way she mentioned that she was generating returns from this rent-to-owned strategy. And the second part of this is if you're unfamiliar normally during a mortgage, Mora would be paying taxes and insurance if you were doing a long-term rental. But under this model, the tenant is paying for taxes and insurance. So that's going to reduce her expenses on top of reducing the maintenance expenses that she was mentioning earlier.

just want to make sure everyone fully understands that. And then there's the other benefit that for the way we do it, our company holds the deed to the property until the final payment is made, at which point we transfer the deed to the client. But that whole time, that whole 10 or 15 years, you also get to reap all the tax benefits that you would for a regular long-term rental. Wow. Okay. So you're getting the depreciation and all the tax benefits. Wow. So that's super beneficial. Uh, So that's great. Can we talk about a little bit about the tenant side? Because I want to understand why they would want to do this. Because it sounds to me, they're paying, you know, a 10 to 15 year mortgage is shorter than normal. They're paying a higher interest rate. They're paying taxes and insurance. Like where does the payment come out? Would it be, is it more than it would be if they were just renting? I'm looking at a traditional deal over here. I would say their usual monthly payments are in the range of $12 to $1,500. dollars. Okay. That would be a typical range for us. But your question about who our clients are is a really good question. We have a very niche target client. We cater kind of specifically to the Hispanic

community in Birmingham, Alabama. And this happened really organically. As I mentioned, we were flipping houses and doing construction. So we had a couple Hispanic crews, and they knew we were in real estate. And so a couple years ago, a couple of them approached us about helping finance the purchase of their homes. And so we did it. These guys were great guys and we worked with them for a long time. So we did that for them. And then the word slowly started to get out that our company did this and could help, you know, members of the Hispanic community purchase a home, even though that was not like a formalized line of business for us at all, but we started to get more calls and realize that there was a demand for this, especially within this niche population in

our market. I mean, you kind of alluded to it. Yes, our clients are definitely paying a premium. So the obvious question is, why would they want to do this? Well, for the majority of our clients, they don't qualify for a traditional mortgage. And there's a lot of barriers to them to working with a traditional lender. The first one being a language barrier. So we have four members of our team are bilingual. They speak fluent English and Spanish. Not me. My Spanish is not very good. But we have four team members that speak fluent English and Spanish. All of our contracts are written in both English and Spanish. And someone is holding your hand and walking you through this whole process. And then there's other reasons. A lot of them are

contractors or maybe they do cash businesses or they're individual business owners. So they might not qualify for a traditional mortgage. Some of them are just, you know, they're just not trusting of banks or they're worried about the, you know, legality of certain family members. There's all sorts of reasons that they don't want to work with a traditional bank. They want to work with a small company like ours. And also, trust is pretty important in this community, like knowing that they can trust us, that we are going to do what we're going to do, live up to our side of the bargain. That trust has been built slowly over the past few years. So there are just a couple reasons that our clients like to work with us.

Yeah, that's great. I think that's really important finding a niche like that. sounds like you're providing a great service to people who need and want this. I think on a higher level, I'm trying to understand why they want this. You know what I mean? Like why? Because I'm imagining a $15, $1,600 payment is higher than you would rent this property for, right? Yeah, it probably is a little higher than a rent payment would be for the property. There's a few reasons. So I think there is there is just the psychological reason of they come to this country and it's kind of part of the American dream to want to own your own home and this is a way to do it. That's definitely part of it. Another reason is a lot of them are contractors. So they have the ability and skills to make

changes to the property and make it the way that they want. And we are totally let them do that and are very in favor of it. So I think that's another reason that they might want to own the property instead of rent it. And sometimes they're just looking for a specific product. Some of them like to have, you know, multiple generations in one household. They want a certain amount of land and other specific things. So I think those are a couple reasons that I know that they choose to work with us.

Got it. Okay. Great. So, yeah, I think there's obviously. people who want to be able to afford a home. And for whatever reason, maybe you're able to make a higher payment, but not able to, you know, get together the 20% for a traditional down payment. Or they, you know, can't get a loan at a traditional bank for, you know, having a 1099 job. I just wanted to make clear to everyone, like why certain people might want to do this.

Okay. So it's time for our final word from our sponsors. But when we come back, we'll hear more about what's working for Mora today? There are two kinds of real estate investors, those who have reviewed their insurance, and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC-held properties. These gaps surface only when filing claims. That's why investors work with NREG.

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and get a $100 Amazon gift card. That's bill.com slash bigger pockets. Welcome back to the show. Let's jump back in. Now, Maura, you know, I have never done rent-to-own, but I've encountered it quite a few times, and there is this stigma about it that I want to ask you about. Sometimes there have, let's just say historically,

there have been cases where investors do this strategy, and they don't necessarily underwrite the deals in a great way. And they find tenants who put down a non-refundable down payment. And if those tenants, for whatever reason, fall behind on their payments, the investor can cancel the contract. So they basically get the property back. And they get to keep that down payment, which creates this sort of weird, you know, bad incentive, I think, for it. And I'm not accusing you of having poor morals or anything. But like, I've heard of this situation where people do rent to, oh, own and it doesn't actually work out for the renter in the way that it intends to. So can you just

tell us a little bit about that and how you personally avoid those types of situations? If you do. Yes. I think that's a great question. So I think maybe the first part of my answer would be that real estate is a very small business. So if you do business in a bad way, you have a bad reputation that will get out there. And what may work for a short-term gain usually will not work for long-term success. So I think that has certainly happened where there's kind of predatory business practices that are aimed to take advantage of people. That is certainly not what we want to do. Like I mentioned, especially with our clients, the trust is extremely important.

And especially we cater to kind of a niche small community. So a word of mouth and reputation are extremely important to having success in future deals. For us, we want our clients to be successful. We want to transfer the deed at the end of the loan turn and then to have their house. Like that is a win-win for everybody. Like I've already mentioned, for the investor, there are a lot of wins. But for the client as well, Like, these are good people. We know them. We work with this community. We want them to get what they want.

And I think a big part of the process is just transparency. So not just reading the contract in their native language, but having it explained, we go through the amortization chart and show them the interest payments. And it's all there in black and white. We walk them through that. So, yes, it's, you know, sometimes there is a conversation that happens. around the interest rate. And sometimes that is hard for people to understand. And it might not be for everybody. This program certainly isn't for everybody. But we just have to explain like, yes,

interest rates that we're getting charged are X. We have to charge a couple points higher. That's just kind of how lending works. And some people are okay with it and some people aren't. But as long as they know up front what they're getting into and they're good with it, you know, that's good for us. I don't know. I don't think there's a perfect answer to your question, but just trying to be honest and transparent and wanting your clients to have a good result, that is going to be important to having long-term success in this business. Yeah, there is no right answer. I was just curious how you think about it because, and I loved your answer, to be honest, because I personally am just a very big believer in the concept,

an idea of mutually beneficial investing. And just think that for investors to win, tenants, communities, service providers don't have to lose. Like, there are ways where everyone can benefit. And I love that. What you said is like there is a mutually beneficial win-win for everyone. And just for our audience, it sounds like there are great ways in this strategy within rent to own that you could do that and create really beneficial situations for everyone.

I did just want to call out that there are ways and there are instances, examples of people who have not been super ethical about this practice. So thank you for sharing with us more. I'm curious as you were talking, though, does this make underwriting deals and screening tenants really hard? Because we always advocate doing a thorough job screening for a long-term tenant. But even when I do my best job screening a tenant, comparing that to how I get screened for a mortgage, totally different, right? So how intensive is your screening process? It's fairly intensive. And I will say I did. I was a managing partner in a property management company for three years. So I didn't mention that up front. But I did have that background in property management.

I know what you're saying about you can try to screen so carefully. And sometimes you can't catch everything. So we took all the practices that we learned from running the property management company. We applied all those to our screening process, and then we have some additional screening that goes into the process. We, I mean, it's a in-person process. We have, you know, people, a select person on the ground that's showing the clients, these houses that is getting to know them intentionally the whole time, asking them questions about, I mean, they've already applied and submitted, you know, their work history, their pay stubs, all this information. and then our person on the ground as they're going through and showing properties is verifying this, talking to them about their family. We do our internet research about all of our clients. We also require that they provide several references.

We call all the references or meet the references. And usually these people are referred to us from a network that we've created in the community now. So if they're getting referred to us, it's from someone. we already know or work with, which helps a lot. Yeah. So we do, yes, have a pretty rigorous screening process. All that being said, though, there is no perfect screening process. But I think also the way we structure our deals is very helpful.

When they're putting down a significant down payment, they have a significant downside, you know, if they fall delinquent on their rent payments. So that really helps with keeping everybody in line. Yeah. I mean, it sounds like a great process and totally agree about referrals. It's such a great way, whether it's long-term rentals, buy-down, whatever. That's just a great way to build your business relationships. Do you have any delinquencies? You've done this, what's said about 20 times now? We don't have any delinquencies. We did have one deportation. So we had someone, we did have someone get deported. So then we had to go through the whole legal kind of foreclosure process. It wasn't. relatively quick because the property was abandoned. And so from an investment perspective, that deal still ended up being a win. Obviously, I mean... It's out of your control. Yeah. Yeah, it's out of my control. That's been our only real delinquency so far in about 25 deal. That's impressive. The screening process seems to be to be working well for you. Yes. That's great.

Moria, you've done a great job advocating the many benefits of rent to own. And I'm sure people listening are eager to get into it. My curiosity is rising. How would you recommend people get started with this sort of strategy that's a little less commonly heard of? If you want to apply this to your own properties or in your own market, it's not that difficult. It's really just a matter of finding your customer base of people that have demand for this. So like I mentioned, we have a pretty niche community that we realize there's a need for this, but they're out there all throughout the United States. Another kind of obvious one is people who are self-employed. If a lot of your listeners are self-employed real estate investors and you know that you have to have a few years of experience

and track record before you can qualify for a lot of traditional loans. So sometimes business owners or self-employed people might be good clients for a rent-to-own program. Does it require a lot of legal? It seems to me like you would need a lot of contracts and legal vetting on top of what you would do for a long-term rental. We do have a lawyer on our team that helped us draft our initial contracts. However, after drafting the initial contracts, they're all very similar. So I wouldn't say that it's after the initial part.

I wouldn't say that it's too intensive. We have a preferred title company and real estate attorney that we do our closings with. So that's just like any real estate transaction. So I wouldn't say it's like particularly rigorous apart from maybe setting up your initial contracts. What about deal analysis? Because all these complicated, not complicated, but it's, You know, there's different benefits to this type of investing beyond just rent minus expenses equals profits. So how do you underwrite these deals? The underwriting is pretty simple.

We try to buy and the 80s sell in the low 100s and we pay a few points above whatever interest rate were charged. And if we hit those basic three markers, we know that the deal is probably going to work. Now, I mean, from there, that's just the numbers part, the financial part. Now, finding the right properties, that takes a little bit more time. Now, over time, we've really realized, like, there are certain neighborhoods where these numbers work. There are certain neighborhoods where our client wants to buy, and that came from years of analysis and talking to clients and searching for properties that match their criteria. Now we know to look in these, you know, two to three specific neighborhoods and areas for certain types of houses. And that will depend

a lot on where you live and your market. Got it. Well, thank you for that practical advice, Moore. And thank you so much for coming on the show. This is a lot of fun. I learned a lot. I think this is a super cool strategy. And congratulations on building such an interesting and successful business and finding a way to make deals work for you and your community in the current market conditions. Thank you so much. It's been a dream come true to be on the podcast. And I hope that this strategy is something that will help other people.

If you're finding that your long-term rental isn't cash flowing as well as you wanted to, this might be an option to consider. Awesome. Well, thanks again, Mora. If you want to connect with Mora, we will put her information. below. You can connect with her on biggerpockets.com as well. Thank you all so much for listening. I hope you learned a lot from Mora. I know I did. For Bigger Pockets, I'm Dave Meyer, and we'll see you for the next episode of the Bigger Pockets Real Estate podcast in just a couple of days. Thank you all for

listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe Content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com.

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