One way to invest in South End rental real estate is to offer tenants a lease with a rent-to-own option. For tenants who want to purchase a home they might not otherwise qualify for, rent-to-own agreements– also called lease options– can be a helpful alternative. It is also one way for a property owner to sell off 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. But, as in all things, there are benefits and risks for both parties involved. This is why it is important to be knowledgeable about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most obvious benefit of a rent-to-own agreement is that the tenant is able to apply their rental payments toward purchasing the home. Under such arrangements, the tenant is building equity in the property each time they make a rental payment. This could help them secure 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. This could be a feasible alternative if you have tried selling your property through more conventional means but haven’t had much success. 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. One of these is the higher-than-average rent. The monthly payments under rent-to-own options are usually higher than average, possibly leaving a tenant strapped for cash down the road. Those payments, including the option fee, are forfeited in favor of the property owner if the tenant should decide to walk away from the deal. The cost of maintenance and repair on the property also falls on the tenant. This may be good for property owners but could 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 if your tenant cannot secure financing at the end of the option period, even with the rent-to-own agreement. In case that happens, you could face some difficult decisions regarding your property and the tenants occupying it.
Finally, suppose the market drops during the option period. Your tenant might change their mind about buying it for the price you have agreed upon, leaving you with a devalued property. Depending on how low the market drops, the option fee may not be enough to cover the losses from the lower price your property is likely to bring.
Clearly, offering your tenants a rent-to-own option is a big decision that needs careful consideration. In such cases, it can be helpful to have the advice of a local market expert like Real Property Management Commonwealth. Our South End property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 617-299-2342 or contact us online to learn more!
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