In certain ways, providing your tenants the option to rent to own your rental property appears like a perfect deal for both sides. But in fact, there are both benefits and risks for everyone involved. That’s why it’s relevant to know as much as you can about rent-to-own agreements before offering one to your tenants.
Benefits for Tenants
The most perceptible benefit for a tenant is that a rent-to-own agreement easily allows them to apply their rental payments toward purchasing the home. Under such terms, the tenant is building equity in the property each time they make a rental payment, which may aid them to secure better financing terms at any moment the time comes to qualify for a mortgage. Furthermore, the majority of rent-to-own agreements do not require the tenant to buy the home, leaving them relieved and free to break off from the deal at any time without negatively impacting their credit.
Benefits for Property Owners
Giving a rent-to-own option can equally hold multiple benefits for property owners. This is definitely true if you’ve tried to sell your property through more conventional means but sadly haven’t had many good results. Under quite a lot of rent-to-own arrangements, the tenant, in many cases, pays a large down payment to kick off the option period. That can put a lump sum of cash directly into your pocket. You’ll moreover continue to receive regular rental income, always at a higher rate than what your property would mostly bring. Whatever your tenant decides, quite a lot of agreements grant the property owner to keep the option fee and the rental payments.
Risks for Tenants
Under a rent-to-own agreement, tenants likewise suffer various risks. The monthly payment under a rent-to-own option is typically 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 moreover faces all of the cost of maintenance and repair on the property, which may be an advantage for property owners but add to the tenant’s financial burden.
Risks for Property Owners
There are various ways that a rent-to-own agreement can hold risks for property owners, likewise. 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 extremely stall your ability to invest in future properties or fund a retirement account.
Another potential risk takes place 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 transpires, you will face a few difficult decisions regarding your property and the tenants occupying it.
The last point to seriously think about is whenever the market drops during the option period. In such a 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. On the basis of how much the market drops, the option fee may not compensate for the lower price your property may bring.
As you can very well observe, opting whether or not to offer your tenants a rent-to-own option is a crucial decision that calls for thorough consideration. In such situations, it can be helpful to have the advice of a local market expert like Real Property Management Legend. Our Richardson property management professionals can help you maximize your monthly cash flows while protecting your property’s value. Give us a call at 214-227-2404 or contact us online to learn more!