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Should You Offer Rent-to-Own Options?

Model Houses Next to Stacks of CoinsA creative way to invest in Stockbridge rental real estate is to include a rent-to-own option in leases you offer to tenants. Rent-to-own agreements, also called lease options, are sometimes provided to help tenants purchase a home they might not otherwise qualify for. This is one way, as well, for a 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. But, like many things, it comes with benefits and risks for everyone 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. With this arrangement, the tenant builds equity in the property each time they make a rental payment, which could help them secure better financing terms once the time comes to qualify for a mortgage. Most rent-to-own agreements also do not require the tenant to buy the home, so they are free to walk away from the deal at any time without fear of a negative impact on their credit.

Benefits for Property Owners

Offering a rent-to-own option can also hold many benefits for property owners. This is a great option if you’ve tried selling your property through more conventional means but haven’t had much success. Under most rent-to-own arrangements, the tenant often pays a large down payment to begin the option period. That means you receive a lump sum of cash directly into your pocket. Not only that, but you will also keep receiving regular rental income, often at a higher rate than what your property would normally bring. Also, most agreements allow the property owner to keep the option fee and rental payments, regardless of what your tenant decides.

Risks for Tenants

Under a rent-to-own agreement, tenants also face some risks. The monthly payments under a rent-to-own option are usually higher than the average rent, which means a tenant may be strapped for cash down the road. The payments made, including the option fee, are usually forfeited if the tenant decides 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

Rent-to-own agreements can hold risks for property owners, as well. In contrast to a conventional sale, you may have to wait several years to receive the full price for the property. If you need the money before that, you can’t demand it. That can impact 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 much the market drops, the option fee may not compensate for 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 a Real Property Management Anchor. Our Stockbridge property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 770-506-1237 or contact us online to learn more!

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