Contrary to the popular misconception, the properties in Rent-to-own investments are not different from everyday traditional homes. The difference lies in the way they’re sold. These types of houses offer a reasonable alternative to bank mortgagees. Rent-to-own houses offer benefits to both the buyer/investor and the seller/landlord.
Before you rush to get yours, you must know your financial status, acquire professional legal advice, and have an innate understanding of the local housing market near you. You must handle these very important issues as either a buyer before you consider investing in a Rent-to-own home.
What Does “Rent-to-Own” Mean?
“Rent-to-own” means that the buyer/investor is given a period of time to purchase the home. Normally, the transaction starts when the buyer pays an option premium. The option premium provides the buyer with an option to buy the home at a particular in the future.
Typically, the option premium is valued at about 5% of the home’s purchase price. A part of the rent-to-own contract dictates that the buyer and seller will agree on a lease term, including the monthly premium payments, and of course, the sale price of the home.
The agreed Sale price for the home must be listed within the contract. This price must be honored no matter what the home’s value becomes at the point of the sale.
How does Rent-To Own-Work?
A typical Rent-to-own transaction is beneficial to buyers who will most likely be in a stronger financial position in the next few years. The transaction is as follows:
- A contract to start the lease option
- The two parties (buyer and seller) enter negotiations and agreements (based on the contract).
- The buyer then pays the option premium.
- Monthly payments are made throughout the lease term. (By the buyer)
- At the end of the lease term, the buyer decides if they want to purchase the home for the agreed-upon sales price.
Is rent-to-own worth it?
This is a point to this article, and also, it’s a question that most real estate investors must ask before they begin to explore the rent-to-own options. A good way to decide if it is a good investment or not is to weigh the pros and cons.
We’ll start with the pros:
- The tenant will most likely take care of the property. By owning something, it is assumed that you are more likely to take care of it better than anyone else. This idea also applies to rent-to-own homes. Instead of the typical “wear and tear” that properties experience during a lease period, tenants who rent-to-own are likely to treat the property better.
- Longer-term leases.
The beauty of a rent-to-own home is that it often comes with a longer lease term, which could be up to 46 months. If you’re familiar with the Real Estate game, know that “longer lease terms usually mean lower overturn which translates to lower maintenance and management costs.”
Cons: The most common challenge that an investor will face is that the Clouded title will make it harder to get an investor loan. In most cases, it’s hard to get equity out of the properties, especially if you want to fund another deal.
A challenge that you’ll most likely face is that many financial companies won’t offer a loan on the property because it has a clouded title. A “clouded title” means that the seller has leased out the property (with the option to own). This means that you (the tenant) have an equity stake in the property. In this scenario, many financial lenders cannot offer a loan.
Understanding the rent-to-own pros and cons for investors is a crucial step in deciding if this is the right investment strategy for you. Bear this in mind, rent-to-own transactions can be beneficial for investors in the right market conditions.
Seek the advice of trusted industry professionals. They will help you determine if the pros of rent-to-own homes outweigh the cons and risks.