One of the more ingenious processes to invest in Washington Corridor rental real estate is to offer tenants a lease that includes a rent-to-own option. Rent-to-own agreements, also called lease options, are at times provided to help tenants purchase a home they might not otherwise qualify for. It is furthermore an approach for the property owner to sell the property without listing it with a real estate agent.
In certain ways, presenting your tenants the option to rent to own your rental property looks as though it’s an excellent deal for both sides. But in actuality, there are both benefits and risks for everyone involved. Because of this, it’s vital to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most evident benefit for a tenant is that a rent-to-own agreement generally allows them to apply their rental payments toward purchasing the home. Under such measures, the tenant is building equity in the property each time they make a rental payment, which may help them secure better financing terms when the time comes to qualify for a mortgage. Concurrently, several rent-to-own agreements do not require the tenant to buy the home, especially when they leave the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Extending a rent-to-own option can likewise hold some benefits for property owners. This is correct if you’ve tried to sell your property through more conventional means however you haven’t had many successful outcomes. Under various rent-to-own arrangements, the tenant typically pays a large down payment to get the option period rolling. That can put a lump sum of cash directly into your pocket. You’ll also continue to receive regular rental income, many times at a higher rate than what your property would mainly bring. Irrespective of what your tenant decides, the majority of agreements permit the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants however also encounter several risks. The monthly payment under a rent-to-own option is oftentimes higher than an average rent, which may leave a tenant strapped for cash down the road. Those payments, plus the option fee, are forfeited if plans change and the tenant decides to walk away from the deal. The tenant equally takes on all of the cost of maintenance and repair on the property, which may be nice for property owners but add to the tenant’s financial burden.
Risks for Property Owners
There are several processes that a rent-to-own agreement can hold risks for property owners, additionally. Unlike a conventional sale, you may wait years to receive the full price for the property. If you need the money before that, you won’t have access to it. That can badly impede your ability to invest in future properties or fund a retirement account.
Another potential risk develops if or when your tenant cannot secure financing at the end of the option period, even with the added advantage of the rent-to-own agreement. If that takes place, you will face certain difficult decisions regarding your property and the tenants occupying it.
One final matter, what if the market drops during the option period. In this case, your tenant may not be able or willing to buy it for the price you originally agreed upon, leaving you stuck with a devalued property. Dependent on how much the market drops, the option fee may not compensate for the lower price your property is more likely to bring.
As you can very well see, ascertaining whether or not to offer your tenants a rent-to-own option is an important decision that needs prudent consideration. In cases like this, it can be helpful to have the advice of a local market expert like Real Property Management Heritage. Our Washington Corridor property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 832-449-5263 or contact us online to learn more!
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