One creative way to invest in Fairhaven rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements also called lease options, help tenants purchase a home they might not otherwise qualify for. This is also one way for the property owner to sell the property without listing it with a real estate agent.
In some ways, giving your tenants the option to rent to own your rental property seems like a good deal for both sides. However, there are still benefits and risks for everyone involved. For this reason, it is critical that you learn everything you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
One of the obvious benefits for a tenant is that a rent-to-own agreement will allow them to apply their rental payments toward purchasing the home. This means that the tenant is building equity in the property each time they make a rental payment. This may help them in securing better financing terms once the time comes to qualify for a mortgage. At the same time, most rent-to-own agreements do not require that the tenant buy the home, thus they can easily walk away from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Offering a rent-to-own option can also hold many benefits for property owners. If you have tried selling your property through more conventional means but haven’t had much success, this could be a good alternative. Most rent-to-own arrangements require the tenant to pay a large down payment to begin the option period. That is a lump sum of cash directly into your pocket. In addition, you will also be receiving regular rental income, often at a higher rate than what your property would normally bring. Regardless of your tenant’s final decision, most agreements let the property owner keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants also face some risks. Since the monthly payment under a rent-to-own option is usually higher than the average rent, your tenant could have some cash trouble down the road. All the payments, including the option fee, are forfeited if the tenant decides to walk away from the deal. The tenant also bears all the cost of maintenance and repair on the property, which is an advantage for property owners but can add to the tenant’s financial burden.
Risks for Property Owners
There are a few ways that a rent-to-own agreement can hold risks for property owners, as well. Compared to a conventional sale, you will have to wait for many years to receive the full price for the property. Should you need the money before that, you will not have access to it. That can severely hamper your ability to invest in future properties or fund a retirement account.
Another possible risk arises in the event that your tenant cannot secure financing at the end of the option period, even with the advantage of the rent-to-own agreement. In that case, you might have to face difficult decisions regarding your property and the tenants occupying it.
Finally, suppose the market drops during the option period. Your tenant may not be willing or able to buy it for the original price you agreed upon, and you get stuck with a devalued property. Depending on how much the market drops, the option fee may not cover the loss the lower price your property is likely to bring.
As you can see, the decision to offer your tenants a rent-to-own option is one that requires careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Success. Our Fairhaven property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 908-239-7579 or contact us online to learn more!
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