Is Rick Otton on the Level – Or is He Just Another Property Huckster?
From time to time I see articles or watch something on the internet or TV, which suggests that Rick Otton belongs to the white shoe brigade – a sort of a throwback to another era when get rich quick schemes seemed to flourish.
Detractors such as Neil Jenman, a self styled consumer protection king, claim that Rick Otton’s positive cash flow strategies are somehow morally suspect (he’s ripping off tenants etc), or worse.
If you’re unfamiliar with Rick Otton, in a nutshell he made his name by promoting strategies such as Rent to own, Wraps (aka vendor finance), and sandwich lease arrangements. All of his strategies are designed to create an instant positive flow outcome for the investor, whilst at the same time (supposedly) providing value for the tenant or the intending buyer.
So to answer the question as to whether Rick Otton is a scam or not, let’s look at some of the individual objections raised about these strategies:
The Strategies Don’t Work
What can I say? The strategies DO work. I’m living proof of that. From my first Wrap style deal in 2001, I KNEW they worked. Since then, I’ve done heaps of them.
The Strategies Rip Off Tenants
Critics say that tenants will pay too much interest with a rent to own or vendor finance arrangement. This is because interest rates are typically pitched 1-2 per cent above the rate paid by the investor (for his loan). So it is true that the tenant buyer will pay more than would be paid for a standard variable rate mortgage. But here is the point: the tenant chooses to do vendor finance precisely because they cannot qualify for a standard bank loan.
Some critics say that the tenant would be better to save their deposit and then get a standard loan. But if the tenant has credit problems or is self employed, they wil likely need to save a 20 per cent deposit. How long will it take the average person to do that? Years and years. Will house prices have increased markedly during that period? Probably.
Another criticism is that property title is still retained by the seller until the tenant buyer qualifies for their own finance. This is true, and it is also true that there is a risk factor for the tenant buyer to consider. Whilst risks can be minimised, they can’t be eliminated. Therefore it is important that the tenant buyer does his/her own due diligence to satisfy themselves that the seller is solvent, and will remain solvent for the duration of the arrangement. Other protections such as lodging a caveat can also be installed.
In summary, tenant buyers need to determine if the benefits of doing something are greater than the benefits of doing nothing . The anti rent buy squawkers willfully disregard this one reality: there are no black and white answers.
You’re Better Off Buying For Capital Growth (rather than cash flow)
There is no doubt that many investors have prospered as a result of buying for capital gain. However, it is not always a smart way to operate. For instance, if you buy at the top of the market, chances are it will take you a long time to even return to break even.
Assuming that you have borrowed to the max, you will likely have negative cash flow to contend with for many years. That may work fine now but if your financial circumstances were to change for the worse, you may find yourself an unwilling forced seller of the property.
On the other hand, a positive cash flow property deal using a rent buy or vendor finance (wrap) strategy can produce hundreds of dollars of positive cash flow per month – sometimes more. A well constructed rent buy arrangement can produce positive cash flow for you, whilst at the same time, give the tenant buyer a unique opportunity to gain a toe hold on the home ownership ladder.
Whilst the overall profit from one of these deals will often be less than it would be for a very well performing capital gain deal, the point is that the positive cash flow takes the financial pressure off. And don’t forget that if you have enough capital or equity for deposits (and if you don’t, there are ways around the problem), you can do many more positive cash flow deals than negatively geared capital gain deals.
So are Rick Otton’s strategies scams? Of course not. It’s a nonsense question.